Q1 2023 Capri Holdings Ltd Earnings Call

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Greetings and welcome to Capri Holdings limited first quarter 'twenty 'twenty three earnings conference call.

At this time all parties.

So things are in a listen only mode.

A question and answer session will follow the formal presentation.

Please limit your questions to just one.

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As a reminder, this conference is being recorded.

I'd like to turn the conference over to your host Jennifer Davis, Vice President of Investor Relations. Please proceed.

Good morning, everyone and thank you for joining us on Capri Holdings limited first quarter fiscal 'twenty three 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.

Shipments made on today's call may constitute forward looking statements, which are subject to risks and uncertainties that could cause actual results to differ from those we expect those risks and uncertainties are described in today's press release and in the company's SEC filings, which are available on the company's website investor.

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.

Unless otherwise noted all financial information on today's call will be presented on a non-GAAP basis. These non-GAAP measures exclude certain costs associated with COVID-19 related charges ERP implementation costs pre transformation costs restructuring and other charges to view the corresponding GAAP measures and related reconciliation.

The Asian, Please view the earnings release posted to 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.

We are pleased that the year is off to a better than anticipated start.

Driven by strength across all three of our luxury houses.

Our powerful brands continue to resonate with consumers as evidenced by the 12 million new names added across our databases over the last year. Additionally, consumers are responding to the innovative and exciting fashion luxury products led by the.

Design visions of Donatella, Versace, Sandra Choi and Michael Kors.

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 looking forward, we remain optimistic about our future growth potential based on the strategies outlined.

At our recent Investor day.

While we recognize there are near term macro uncertainties, our confidence and Capri holdings ability to achieve our long term goals is grounded in the proven resilience of the luxury industry.

The strength of our luxury portfolio.

And the talented group of employees executing our strategic initiatives.

As a result, Capri holdings is positioned to deliver multiple years of revenue and earnings growth.

As well as increased shareholder value.

Now turning to the first quarter performance.

We were pleased that revenue gross margin operating margin and earnings per share all exceeded our expectations.

Resulting in record first quarter revenue and earnings per share.

Total revenue in the first quarter increased eight 5% on a reported basis or 15, 2% in constant currency, reflecting better than anticipated results.

All three brands.

Operating margin of 18, 5% was above our expectations.

As a result earnings per share of $1 50.

[noise] was better than anticipated.

Looking at group revenue trends by geography.

In the Americas revenue growth continued to exceed our expectations, increasing 11% on a reported basis or 13% in constant currency.

In EMEA revenue increased 21%.

On a reported basis or 37% in constant currency also above our expectations.

This was driven by strong growth across all houses benefiting from robust domestic consumer demand as well as an increase in pan European travel.

In Asia revenue decreased 14% on a reported basis or 7% in constant currency.

This reflects mainland China revenue down mid 30% parse.

Partially offset by improving trends in Japan, and Southeast Asia.

Excluding mainland China.

Sales in Asia increased 21% on a reported basis or 35% in constant currency.

Moving to first quarter performance by brand.

Starting with Versace, we were pleased with the results, which were ahead of our expectations.

Revenues increased 15% on a reported basis or 30% in constant currency compared to prior year, demonstrating the strength of the brand and the success of our strategic growth initiatives.

All categories performed well as we continued to reinforce and amplify versace's iconic brand coats in women's accessories, which are a key component of versace's growth strategy sales in our retail channel increased approximately 80% versus prior year.

With our three pillars Lama USSA Graca and virtuous, we are gaining traction and accessories.

The category is growing much faster than anticipated.

We are confident in our ability to position versace as a leading luxury leather house.

And expand accessories revenues to $1 billion over time.

Footwear also performed well as we continue to build our core offering focused on our iconic brand codes well also innovating with bold new styles.

In the first quarter women's footwear sales in our retail channel increased approximately 50%.

Performance was driven by dress styles, which increased approximately 75% compared to prior year.

As consumers responded positively to styles, featuring a range of versace codes, including Greco and Medusa.

Additionally, we saw strength across both women's and men's ready to wear.

Donna tell us spring 2022 collection performed well as consumers embraced ornate prints and a celebration.

Although our Graco brand code.

We continue to expand our core lines, which incorporate iconic house codes to broaden versace's reach.

During the quarter. We also saw strong sales across categories from our highly anticipated collaboration with funding.

But <unk> was an amalgamation of signature elements.

And re imagine classic silhouettes from two iconic Italian luxury houses fendi and Versace.

With an exchange of roles and brand codes Donatella designed a fendi by Versace collection.

Fendi artistic director, Kim Jones, and Sylvia Fendi designed versace by spending line.

This partnership has generated significant revenue and increase brand awareness for Versace.

Moving to brand awareness and consumer engagement.

We're such a continues to deepen consumer desire by.

By combining powerful storytelling with data analytics.

For such a summer campaign lava Konzo took the iconic very versace look to collaborate on Italy.

Irish law starred in her first for such a campaign with unapologetic flare embracing the versace vacation lifestyle and reflecting the latest vibrant summer styles.

For such a continued to dress many of the world's most famous celebrities during the quarter.

Which helped to build consumer desire and increase engagement.

As such its presence at the met ball was exceptional with the utility a dressing Blake lively cardi B Gigi Hadid literally James Gabrielle Union.

And Duane weight among others.

As a result for such it was the most engaged brand across all social media channels for the met gala.

In June share and Donatella, United and the celebration of Pride month 2022.

As sure Archie created a limited capsule collection and support of gender spectrum.

A charity committed to the health and well being of gender diverse youth the.

The combination of these brand building activities and our data analytics capabilities led to increased consumer acquisition, driving 40% year over year growth in Versace's Global database.

Overall versace's strong first quarter results speak to the strength of the brand and the success of our strategic initiatives reinforcing our confidence in the luxury houses long term growth potential.

Moving to Jimmy Choo.

We were pleased with the results, which were ahead of our expectations.

Revenues increased 21% on a reported basis or 30% in constant currency compared to prior year as we continued to execute on our strategic initiatives to expand accessories and maximize our casual opportunity.

In women's accessories, which are an important pillar of Jimmy choose growth strategy sales and our retail channel increased over 50% in the first quarter.

Women's accessories are among the fastest growing categories driven by strength in our brand and bond bond families.

The <unk> Quad has quickly become one of our iconic handbag styles with its clean lines timeless design and exceptional craftsmanship.

Turning to footwear.

Sales in our retail channel increased strong double digits.

We continue to see strength in dress styles, driven by a return to office social events and special occasions.

In casual or glamorous glamorous pool slides quickly became a summer wardrobe foundation for our consumers.

They responded positively to slides made with our JC logo jacquard as well as styles embellished with pearls or our Crystal C.

And sneakers, we have seen strong reaction to our new classic gift contemporary Rome trainer in both women.

10 minutes.

Moving to brand awareness and consumer engagement Jimmy.

Jimmy Choo continues to drive consumer acquisition and engagement by combining storytelling and data analytics.

Our storytelling for summer brought Jimmy choose DNA of glamour daring and confidence to life.

Shot in Miami The campaign featured precious Lee and Barbara Paul them celebrating the glamorous Jimmy Choo lifestyle.

Jimmy choose reputation as a favorite brand among style icons.

Also builds desire and increases brand engagement.

During the quarter celebrities wearing Jimmy Choo included Jennifer Lopez, Selena Gomez, Katy Perry, Billy Irish Shawn Mendes, Joe Jonas and Nick Jonas.

Yeah.

We also utilize a wide community of Influencers to leverage brand heat and accelerate regional potential.

In May Jimmy Choo hosted 18 global Influencers in the central pay to celebrate the summer collection launch.

The influencers shared over 400 posts and generated approximately 20 million impressions.

Our engaging customer communication, which combine storytelling with data analytics helped contribute to a 30% year over year increase in Jimmy Choo is global consumer database.

Overall, Jimmy Choo strong revenue growth and operating margin expansion reinforces our confidence in the luxury houses future potential.

Turning to Michael Kors.

Our first quarter performance was better than anticipated.

Revenues increased 5% on a reported basis or 9% in constant currency compared to prior year.

We continue to elevate our product.

And as part of this strategy, we have achieved our goal to grow signature penetration to 50% of revenue across all product categories.

We now see a significant opportunity and products featuring our new M K hardware coats.

These highly recognizable codes build brand identity and drive consumer loyalty.

And accessories.

<unk> continued to perform well driven by updates and soft neutrals feminine pinks.

And jacquard materials.

Consumers also responded positively to our vacation inspired collection of Ocean Blue Hombre and white signature.

Additionally, we were pleased with the success of our new platforms, Carli, and Heather which feature our MK hardware.

In footwear consumers responded positively to the elevated execution of our seasonal flat sandals.

Branded hardware and bold studying performed exceptionally well.

Looking at women's ready to wear we saw strong sales of dresses from romantic palm lace.

Two body Con logo jacquard styles.

Men's remained the best performing category with robust sales across accessories footwear and apparel.

During the quarter, we were excited to launch the Michael Kors or let's say capsule collection offering.

A luxurious and modern take on retro athleisure.

The collection is vibrant sporty and glamorous designs were brought to life in a series of pop up installations and activations around the world.

The collaboration created energy and excitement generating strong engagement as well as solid sell throughs.

In terms of brand awareness and consumer engagement, we continued our jet set storytelling in Miami.

For Summer campaign again featured quintessential Jetsetter Bella Hadid.

Wearing michael's latest fashion designs, while carrying statement accessories.

Bella and friends enjoyed bright days and cool summer nights on the go in true just hit style.

Michael Kors presence at the met Gala was also extensive and drove brand heat and consumer engagement.

Michael dressed celebrities, including Addison Ray Ciara Laurie Harvey.

Asia, Gonzales, Sigourney Weaver, and Chinese Supermodel, Hey, Kong among others.

In June we activated our campaign around pride celebrating Michaels lifelong support for the L. G B T IQ plus community.

Okay.

We launched a dedicated pride capsule that feature a rainbow MK charm logo on a white background.

A portion of the profits were donated.

Two outright action international.

<unk> works to advance human rights.

The LGBT IQ plus community globally.

In China, we launched Ashish capsule collection for Chinese Valentine's day.

Featuring our China watch and jewelry ambassador by Lou <unk>.

Actress.

Chung dueling.

As well as actor and model Blue China.

Combined they have 136 million followers across social media, helping further expand Michael Kors exposure in the region.

The combined power of our jet set storytelling and data analytics capabilities.

Capabilities contributed to a 17% year over year increase in Michael Kors Global database.

Overall, we remain optimistic about the future growth of Michael Kors. The strategies, we put in place prior to the pandemic have been generating strong consumer demand as well as attracting new and younger customers.

At the same time, they enable us to drive strong profitability, even with elevated supply chain costs and other macro headwinds.

In conclusion, we are pleased with the progress our luxury houses are making towards our strategic goals.

Looking forward, we remain optimistic about the long term growth potential for Versace, Jimmy Choo and Michael Kors.

With our portfolio of iconic founder led fashion luxury houses Capri holdings is positioned to deliver multiple years of revenue and earnings growth.

Now, let me turn the call over to Tom.

Thank you John and good morning, everyone.

Starting with first quarter results revenue of $1 $3 6 billion increased 9% versus prior year or 15% in constant currency exceeding our expectations.

Performance was driven by better than anticipated results across all three of our luxury houses.

Net income was $215 million, resulting in diluted earnings per share of $1 50.

This was above our expectations, reflecting better than anticipated revenue gross margin and operating margin.

Turning to revenue performance by brand for.

Versace revenue of $275 million increased 15% versus prior year or.

Of our 30% in constant currency, which was above our expectations.

Global retail sales increased double digits.

Geography total revenue in the Americas increased 32%.

Revenue in EMEA increased 23% on a reported basis or 40% in constant currency.

Revenue in Asia decreased 20% on a reported basis or 9% in constant currency.

Reflecting increases in Japan, and southeast Asia, offset by an expected decline in China.

Versace ended June with a global luxury fleet of 208 retail stores flat to prior year.

For Jimmy Choo revenue of $172 million increased 21% to prior year or 30% in constant currency above our expectations.

Global retail sales increased strong double digits.

By geography total revenue in the Americas increased 42%.

Revenue in EMEA increased 32% on a reported basis or 51% in constant currency.

Revenue in Asia decreased 4% on a reported basis, but increased 3% in constant currency, reflecting increases in Japan, and southeast Asia, partially offset by a decline in China.

Jimmy Choo ended the quarter with a global fleet of 236 retail stores, a net increase of three from prior year.

At Michael Kors total revenue of $913 million increased 5% compared to last year or 9% in constant currency also exceeding expectations.

Global retail sales increased in the low single digits.

By geography total revenue in the Americas increased 6%.

Revenue in EMEA increased 16% on a reported basis or 30% in constant currency revenue in Asia decreased 16% on a reported basis or 10% in constant currency, reflecting strong increases in Japan, and southeast Asia offset by a decline in China.

Michael Kors ended the quarter with a global fleet of 821 retail stores, a net increase of one from prior year.

Now looking at total company margin performance gross margin of 66, 2% was below 68, 1% last year, primarily due to anticipated higher supply chain costs.

Margin performance was above our expectations, reflecting the ongoing benefits of the Companys strategic initiatives.

Operating expense as a percent of revenue was 47, 7% compared to 47, 2% last year, reflecting increased marketing in support of the business on an absolute basis operating expense increased approximately 10% or $57 million versus prior year.

As a result of better than anticipated gross margin and operating expense leverage total company operating margin of 18, 5% was 200 basis points above our expectations.

All brand operating margins also exceeded our expectations.

At Versace operating margin was 18, 9% compared to 20% last year.

At Jimmy Choo operating margin was 11% compared to seven 7% in the prior year.

And then Michael Kors operating margin was 24, 3% compared to 27, 6% last year.

Now turning to our balance sheet, we ended the quarter with cash of $221 million and debt of $1 4 billion, resulting in net debt of approximately $1 2 billion.

Total liquidity at the end of the quarter was $900 million.

As part of our ongoing commitment to return cash to shareholders, we repurchased approximately $300 million worth of shares in the first quarter.

We have an additional $700 million of availability remaining under our share repurchase authorization.

Looking at inventory, we ended the quarter with $1 265 billion, a 66% increase over at historically low level last year.

Relative to pre Covid levels first quarter inventory increased 25%.

As a reminder, we anticipated elevated inventory levels as we implemented new programs to receive seasonal merchandise earlier as well as hold more core inventory given supply chain delays.

As we look at inventory flow for the remainder of the year, we expect levels will moderate sequentially and as planned below prior year by the end of the fiscal year.

Now turning to guidance.

Yeah.

Starting with our full year overview, we are maintaining the outlook we shared during our recent investor day.

As we noted then the U S dollar has further strengthened.

As a result, we reduced revenue by $100 million for the full year.

However, we are pleased to maintain our operating margin expectation of 18% and earnings per share of $6 85.

Additionally, as we look at revenue, we now expect the impact of Covid related restrictions in China will continue into the second half of fiscal 'twenty three.

As a result, we anticipate approximately $50 million less in revenue from mainland China relative to our prior forecast.

Now assume revenue in mainland China will decline approximately 20% year over year in the third quarter and approximately 10% in the fourth quarter.

Now turning to detailed full year guidance, starting with revenue, we forecast Capri holdings revenue of approximately $5 85 billion.

This represents an approximately 3% increase over prior year on a reported basis, while on a constant currency basis revenue is expected to increase approximately 10%.

Looking at full year revenue guidance by brand.

We assume versace revenue of approximately $1 175 billion, increasing approximately 8% on a reported basis and approximately 24% in constant currency.

Jimmy Choo revenue of approximately $650 million, increasing approximately 6% on a reported basis and approximately 13% in constant currency.

And Michael Kors revenue of approximately $4.0 billion to $5 billion, increasing approximately 2% on a reported basis and approximately 6% in constant currency.

For the year, we continue to expect gross margin will be approximately flat to fiscal 'twenty two.

This reflects the ongoing benefits from our strategic initiatives offset by lower sales in China, which is a higher margin region as well as the negative impact of foreign currency.

In addition, we expect transportation costs to remain elevated through the year.

We continue to expect a full year operating margin of approximately 18%.

Our Versace, we anticipate an operating margin of approximately 16%.

For Jimmy Choo, we expect an operating margin of approximately 5%.

And for Michael Kors, we anticipate an operating margin of approximately 24%.

Turning to our expectations around certain non operating items, we now anticipate net interest income of approximately $10 million.

Our effective tax rate is expected to be approximately 10% and we forecast weighted average shares outstanding of $140 million.

As a result, we expect to generate diluted earnings per share of approximately $6 85 for.

For fiscal 'twenty, three representing double digit growth.

Turning to second quarter guidance, we anticipate total company revenue of approximately $1 4 billion.

This represents an approximate 8% increase versus prior year on a reported basis and an approximate 16% increase in constant currency.

We continue to anticipate revenue in mainland China will be down approximately 20% year over year in the fiscal second quarter.

Our second quarter revenue by brand, we forecast Versace revenue of approximately $300 million, increasing approximately 7% on a reported basis and approximately 26% in constant currency.

Jimmy Choo revenue of approximately $140 million, increasing approximately 3% on a reported basis and 9% in constant currency.

And Michael Kors revenue of approximately $960 million, increasing approximately 9% on a reported basis and approximately 14% in constant currency.

Looking at operating margin, we continue to expect second quarter operating margin of approximately 17%.

As a reminder, we anticipate higher supply chain costs in the second quarter versus prior year, resulting in gross margin contraction. Additionally.

Additionally, this reflects the negative impact of foreign currency.

As well as lower revenue from China, which is a structurally higher margin region.

In terms of operating margin by brand for Versace, We anticipate an operating margin in the mid teens range.

For Jimmy Choo, we expect operating margin to be slightly positive.

And for Michael Kors, we anticipate an operating margin in the low to mid 20% range.

Turning to our expectations around certain non operating items, we forecast net interest income of approximately $3 million and.

An effective tax rate of approximately 11%.

And weighted average shares outstanding of $139 million.

As a result, we now expect diluted earnings per share of approximately $1 55.

In conclusion, we are pleased with our first quarter results.

Looking forward, we remain optimistic about the long term growth potential for Versace, Jimmy Choo and Michael Kors.

Although the macro headwinds in the near term our powerful brands have enduring value and proven resilience reinforcing our confidence in the ability to deliver strong revenue and earnings growth over time.

Now we will open up the line for questions.

Thank you very much Sir at this time, we will be conducting a question and answer session. Please limit your questions to just one.

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One moment, please while we poll.

The first question comes from brokerage from Goldman Sachs. Please proceed with your question Buck.

Good morning, and thank you so much for taking our question John given the volatility globally in a very uncertain macro I'd love to hear your perspective, and maybe some additional context around what you're seeing by T.

T Geographic region, right now and the outlook that you're contemplating.

The second half of your fiscal year for each of those regions.

And then maybe as a follow up in North America, how do you see the handbag market evolves into the second half of the fiscal year, and where do you see the biggest opportunity for Michael Kors to gain market share over the over that period. Thank you.

Thank you and good morning Brook.

First I'd like to say.

You can see from the earnings release today that we're extremely proud of starting the year off.

I'm very good solid footing.

<unk>.

Shown record revenues during the quarter and the strongest.

Adjusted earnings per share.

In the company's history. So we're off to a very good start and I think that's a real testament to the three luxury houses of Versace, Jimmy Choo, and Michael Kors and the strategic initiatives that we've put in place.

Most of them all before the pre pandemic and as.

As you heard me.

R R.

Recent Investor day.

We've really transitioned this company and our transition is complete in terms of our positioning ourselves as a luxury group. So I think we're.

We're feeling very good about our accomplishments to date and we think that.

If we continue to stay the course.

Really execute against our strategic initiatives.

There's going to be significant upside really at all three of the luxury houses.

In terms of how we see the.

The regional performance I'll start with the current performance as you could see North America was was quite strong.

Better than our anticipation.

And we really feel that that seems to be continuing as well now none of us know what's going to happen in the back half of the year with the consumer.

It appears that the luxury industry.

Is quite robust and quite healthy.

I think that is going to continue for the foreseeable future in the back half of the year there might be some consumer adjustments. We again, we don't know but from what we're seeing currently.

It seems to be holding up.

In terms of Europe , I would say I would use the word surprised we were very pleasantly surprised at how strong and robust.

The consumer is in Europe .

I think that they are clearly showing.

Resilience and a desire to.

Get back out and enjoy.

Opened.

Current lockdowns are basically nonexistent in Europe .

Even though COVID-19 cases are on the rise around the world I think people are learning to live with it and so we think that again, there is quite a bit of pent up demand in Europe.

Were they really reopened a bit later.

The North America, and we're seeing that kind of move through what we're also pleased about in both North America and Europe is the travel the internal travel.

In both of these markets.

Let me go back or I should say EMEA, not just Europe , but in EMEA.

The travel is quite strong.

And that's generating business both in the in the local markets and we're seeing some return.

With our travel retail business that is not where it was pre pandemic, but we're definitely starting to see some pickup.

In that business.

And then when you move to Asia.

I think we are.

Very optimistic about.

Certain of the Asian markets, Japan, and southeast Asia reopening seem to be going.

Quite well there.

The economies are building, especially in terms of consumer purchase in the luxury market.

We are we are less optimistic can you could see that our forecasts about.

China.

Theres a number of things happening there again, most of which you all on this call know first.

There is.

Different restrictions that are being put in place in multiple cities at multiple different times.

We have stores that are opening and closing working on reduced hours.

So that's causing.

Some some some issues in that marketplace.

Lee travel is down dramatically.

We believe the report in June was close to 50%.

Internal inter inter country or travel.

And that's definitely having an effect on all three of our luxury houses.

We believe that it will recover.

In the latter part of this year.

You can see that by our forecasts.

Getting consistently better and we've already seen some recovery.

To date we.

We just think it's going to take us some time and we thought we would plan.

More conservatively I think we planned conservatively going into this year and we maintain that that perspective long term, we still have tremendous faith and confidence in how our luxury portfolio will perform in that market in all three of our brands are significantly underdeveloped compared to our competitor.

<unk>.

And whatever.

And I've referred to this many times.

Over the past two to three years is there going to be bumps in the road, whether it's certain.

Issues around the macro economic headwinds, whether it's certain issues related to the pandemic.

Any other issues that might come up we still believe in the long term growth of the China market and how that will impact our company's revenues.

<unk> earnings.

Lastly in terms of the North American market I view it not just for Michael Kors I viewed for all three of our luxury brands.

As you've heard us talk hidden Versace.

Our retail channel accessories grew over 80% during the quarter, which was really an extraordinary performance.

And then in Jimmy Choo accessories grew over 50%.

Michael Kors growing very very strong in the mid single digits. So we see the market in totality growing.

And Michael Kors will continue to grow with the market and.

And again as we reposition.

The Michael Kors brand in a considerable way through that that initiative.

Initiatives, we think the customer is going to continue to respond very positively to the elevation in the Michael Kors brand should continue to grow.

As we've seen that in and if you recall, where we had significantly reduced our expectations for the Michael Kors brand.

Heading quite frankly into the pandemic.

During the pandemic, we have now been pleasantly surprised at the resilience of the brand even with the repositioning raising prices elevating qualities and the consumer response to that so we're feeling again quite optimistic.

There's going to be bumps in the road for all of us over the next.

12% to 24 months, but I think we feel the strength of our three luxury houses will power us through that.

Continue to see very strong revenue and earnings growth for the company. Thank you Brian .

Thank you.

Thank you. The next question comes from Omar Saad from Evercore. Please proceed with your question.

Good morning, a nice results. My question is actually around inventories wanted to see if there was any major variations across the brands.

Three brands or if its relatively evenly spread across the sizes and maybe John talk a little bit about core inventories what gives you such confidence in carrying some higher level of core inventories, especially for those of US who remember signature several years ago got a little bit over its skis and maybe also touch upon consumer demand called for core classics.

Versus more fashion, and newness and what Youre seeing in the split there.

<unk>.

I'm going to let Tom take the general inventory question and I'll get to your slightly more specific parts of that so call.

Omar and first I'd, just say that what we're seeing is how we planned inventory. So it's very consistent with our expectations to have the higher inventory and the comparison against what is it really historically low level, where we did not have enough inventory last year to meet consumer demand so compared to <unk>.

Covid levels inventories up to 25% and as we looked at the broader inventory and supply chain situation that the delays are more related to on the water for product coming from Asia to the U S into EMEA.

So that is where we are holding a little more core inventory and pulling up fashion or more.

That has impacted overall, what we're seeing now is delays are shorter.

<unk> compared to pre Covid, what we're seeing today would still be extremely long.

Compared to those times, we expect delays to continue and for costs remain high through the year.

And we believe that we're in a very good spot to continue to see levels of inventory sequentially declined through the year and as I mentioned in the prepared remarks at the end of the year would be below the prior year. So we see it playing out as anticipated and want to have the inventory in hand to be able to meet consumer demand as we see it.

Omar.

Take your questions.

Questions and break them up.

But first I want to remind everyone on this call. This as we planned our inventories to be at this level. We did two things we moved our design calendar up by almost 90 days.

And we did that purposely because at the time when the pandemic was probably at its peak.

We were seeing delays.

Up to that amount on the water. So we made the determination that we were not satisfying the consumer demand and we needed to adjust our design calendars as well as adjust.

The inventories and when we were taking them in to avoid.

Really the delays that we're seeing now is predominantly in North America, but not exclusively to North America. We were also seeing.

Pretty significant delays going into Europe as well.

So that was the first thing that we did the second decision that we made was to take core and hold it a bit more towards a six month basis as opposed to a 90 day basis, which had been our historical averages.

So we're seeing the peak of that as we speak today.

We are going to probably pull back on the core piece of that.

To a more historic level.

And we think that thats, probably appropriate given as Tom mentioned some of the delays have have reduced.

Down, but still we are still seeing.

30, plus day delays at the ports. So we will reduce some of that and again as Tom had mentioned, we'll be back to actually below.

In Q4 prior year levels, and that's really when we started this whole initiative to to kind of change our inventory flow. So theres nothing in our inventories that weren't planned this way.

And Additionally, we really feel like we're in a good place for the fall season.

This is across all three of the group So it's Michael Kors, Jimmy Choo and Versace.

Where we move design calendars and we are also in a better position in terms of our core inventories.

Lastly, next core versus fashion as you heard me say in the Michael Kors piece.

We're up to about 50% signature.

And thats kind of where we want to hold it we don't want it to go much higher than that.

And we.

We think that's the right place for us to be fashion represents the balance of that.

We do believe that there is an opportunity with our new MK hardware pieces to get further.

Lift with the consumer and really as we have said.

Consistently.

Those brand codes really are engaging with the customer and creates a further loyalty. So we will see a hopefully a lift from that and we've seen some very good initial reactions.

On some of our new introductions.

I'd add also that in Jimmy Choo when.

We bought the company the company did not have any signature hardware.

We've introduced that a little over two years ago, and we are seeing incredible response from from that so we're learning from some of our sister companies across the group and seeing things happen that are quite strong and of course, you know and Versace. We have now three codes we have.

Greco we have Lama do so and we're just introducing.

We have like wrecker.

Let me do so virtuous and we're just introducing <unk>. So we feel we're in an excellent place for such a we won't really be introducing any new additional brand codes.

And we feel quite strong about that so in terms of our inventories we feel good about where they are right now I want to remind you also that we have in transit still.

Tom exactly how much it's double what it was prior year and it's a significant percent of what you see on our balance sheet. So it is not all here right.

We're still getting our way through the supply chain situation, we think will be most of the way through it.

Kind of the September .

September October time period here and Thats when youll start to see.

The more significant kind of declines in the inventory start to happen.

Thank you very much for those questions Omar thanks for the detail good luck.

Thank you. The next question comes from Matthew Boss from Jpmorgan. Please proceed with your question Matthew.

Great. Thanks.

John maybe larger picture what in your view drives the durability of the overall accessories category that were seeing is mid to high single digits still the best growth rate to consider multiyear I guess and also are you seeing any signs of softening across the assortment as you dissect the portfolio by Ing.

Some demographic any pushback at all to your proactive pricing initiatives and have you seen any changes so far to what has remained a rational promotional backdrop in your segment.

Okay.

Thank you Matt.

Those questions number one again I want to.

Ill re emphasize that we believe that we are in.

Both footwear and accessories, because footwear is a big part of our growth strategy for this company again, you've heard about that.

In Jimmy Choo, and you heard about that in versace's strong growth, we probably don't talk about it as much in Michael Kors, but you've heard about it and the.

In the Investor day that we think we can add approximately $250 million.

Part of our of our business.

So in luxury it is both accessories and footwear that we think are driving consumer desire consumer engagement.

And very important.

Both of those continue to grow.

In that mid single digit.

Possibly high but I think more realistically mid single digit range as what we think is the appropriate areas.

You know that we've taken price increases in the Michael Kors brand.

For over two years there'll be more coming.

This fall and some of the spring season.

And at Versace, and Jimmy Choo, Jimmy Choo started its price increases a little over a year ago and Versace is starting those as we speak.

And I think I've mentioned previously the Versace is.

Probably on the lower end of some of the pricing in particular.

Successories versus our luxury competitors.

We have not seen any consumer resistance to those to those increases.

And we think that's really being driven by the strength of our designs from Donna tell us Entre and Michael Great design teams that we have.

The.

The other issue is.

Think people continue to use accessories as a way to express.

Themselves in terms of their their fashion sensibility.

And we see that as as really being a very positive.

For the future I would also tell you that interestingly enough. The resale market has I think created a comfort level with people.

In the luxury world that they can not only purchase and enjoy but they can see value and the ability to be able to resell product I think we all might have been concerned about it a few years back, but it's actually created a circular economy and one that we think is actually helps.

People, especially those who want fashion they want it knew they wanted early and they might not have as much space to either keep these things in their home or they just want to update their wardrobes on a more regular basis and this is a nice way to keep circulating the products. So I think we feel very good about that.

In terms of the last part of your question promotional rationality.

We've said it a number of times, it's not a relevant issue for us.

<unk>.

Versace and Jimmy Choo, and this is really a north America issue for Michael Kors, we'd rather give up the revenues, we'd rather walk away from some of the business.

And even if that means our competitors do certain things that we don't necessarily agree with.

We're going to probably walk the business before we start to go back into what we saw before the pandemic.

We learn.

Learn things that we think in the end didn't end up being right.

For the brand and ultimately for the operating margin and gross margin performance. So we stay clean.

Clear to our vision and.

The consumer hopefully will respond to us because of the great design.

I think really exciting storytelling, that's happening across all three of our our luxury houses and really excited about what's happening at Michael Kors with our jet set storytelling and then the use of data analytics and how we're really targeting and serving customers I think in a more efficient way for them in a more exciting way. So again, we feel.

Good we can't predict what's going to happen in the greater macro headwinds in the back half of the year.

I'll certainly reading about it in.

In hearing and we're not going into this with our eyes closed.

That being said I think we feel that our brands offer something that will excite the consumer and hopefully engage them.

Have them interact with us Thank you very much Matt.

Yeah.

Yeah.

Thank you. The next question comes from Kimberly Greenberger from Morgan Stanley . Please proceed with your question Kimberly.

Okay, great. Thanks, so much.

Thanks for the great discussion and the comprehensive view.

On revenue John I thought that was really helpful.

Maybe I'll go to the gross margin because we haven't talked about that a lot here.

During the Q&A session.

Gross margin, Tom you talked about higher supply chain costs.

First if you could just look at the year over year change in gross margin can you help us understand.

What the merchandise margin performance was as separate from some of the supply chain costs and then within the supply chain costs.

You break down.

The the elements or even just give us rough buckets.

On which of those things you view as transitory and could be recovered.

In future quarters or future years.

Each of those cost increases and supply chain do you think are likely to be more lasting or more permanent we're just trying to understand.

If we're sort of in a moment in time, where there are some temporary pressures on the gross margin that could abate in the future or if anything has fundamentally changed what the cost structure. Thanks. So much.

Sure. Thank you Kimberly for that.

Let me start with Q1, because we were really pleased with performance gross margin was better than anticipated and some of the dynamics occurring in the quarter are indicative of how we're looking at the year and how we pace out through the year and it does touch on the strategic initiatives or as you were referring to the merch margin as well as.

The supply chain pieces.

So in the quarter, we saw the strategic initiatives continue to deliver and that's across all three brands that.

That includes increase in full price sell throughs, our pricing activities are growing accessories, Jimmy Choo and Versace. So all of that continued to deliver and that was of course in the quarter offset by high supply chain cost.

Almost entirely the decline versus prior year of supply chain.

As well as the impact of negative FX and lower sales in China, which has structurally higher margin region.

So now as we look at it and I'll talk about the quarter pacing, we expect the supply chain negative to continue into the second quarter compared to prior year because of those costs really starting to add up in the third quarter and more in our holiday timeframe last year, and then as we move through the increase or the headwind.

Will lessen in the back half of the year, where supply chain costs through this entire time, we expect this strategic initiatives or merch margin as you might have been referring to them to be continue to deliver every quarter and thats what will ultimately come through so first quarter, we expected our margin to be down.

But it was better than expected Q2, we still expect to be down due to supply chain in the second half as that year over year mitigates that we now expect gross margin to be positive year over year and for those items to continue on an ongoing basis and so those we expect through this year and next.

On the supply chain side as to what is transitory as certainly the airfreight costs were transitory in the past year and we hope that we're not in a position with dislocations to do that at any high level. The other piece time will tell as the supply chain environment normalizes and we get into <unk>.

New season of contracting we are taking advantage of the lower delays and a little more not normal by any stretch the imagination, but better than prior year, let's use things like less broker usage, but going forward.

We hope that supply chain will ultimately become somewhat of a tailwind.

Yes.

Thank you thanks, so much Tom.

Thank you. The next question comes from Ike <unk> from Wells Fargo. Please proceed with your question.

Hey, Thank you good morning, maybe John just on the topic of M&A.

There does seem to be some assets out there that do appear attractive outcome for its been mentioned in the news of late but I guess I'm curious current thinking on the M&A landscape timing for <unk> and when you think about potential targets for the business are you solely focused focusing on owned brand acquisitions or does the idea of a licensing struck.

Sure appeal to you as well when you kind of think about potential deals.

Thank you and good morning Ike.

So.

First and foremost as it relates to where we see the greatest value that we can create for our shareholders. It is on executing against our growth strategy initiatives.

From what you saw at the Investor Day, we firmly believe that we have the opportunity to take this.

Group, two 8 billion.

We feel very comfortable with our initiatives and our goals around versace to grow that to 2 billion Jimmy Choo as you can see by the by the results is really starting to work now for the group and.

And we do think that that is a $1 billion.

Brand for the company.

And we do think operating margins are going to start to get into that mid teens range here in the not too distant future. Obviously this quarter was very good for us, but just on a go forward basis, we think we understand how we can unlock the value there and then lastly, Michael Kors.

We as I've said before we're pleasantly surprised at.

At our.

Our results and where we think the future lies.

In terms of I'll call it capital allocation.

<unk> looked at.

The least expensive company that we could buy right now is Capri and so our priority is to continue to return.

Our value to shareholders through share repurchases. We think this is still.

An asset that is considerably undervalued and.

And based upon that the board and myself.

That that is really one of the best uses of our capital.

In terms of a third another acquisition for the company.

We've been I think very clear.

Whatever it is has to have scale to it.

We don't want to buy something that's small and would distract management.

We have this very big opportunity in front of us with our three existing luxury houses.

Secondly, we think it really needs to be a European luxury brand. We believe that's where the value is and the sustained growth opportunity is for the group over many many years.

There are assets that either are available or will be available. We've said that previously I don't think anything is going to happen that rapidly.

And when it does we believe that we have the.

The balance sheet and the capacity.

To do an acquisition again, we don't want to do anything to distract from our strategic.

Goals that were that were.

That we're trying to execute against today.

But if the right asset were to come available we would certainly be in the mix. We know there are competitors, who will also bid for those assets.

And as I reminded everyone in the past.

In the luxury world. These assets are not going to be inexpensive, they're going to come with very high multiples on the purchase price.

You either pay for that asset or you don't get the asset it's just that simple.

So so that's how we view it and lastly, we would not be interested in any licensing.

Situation at all.

And on that note I want to thank everyone for joining us.

This morning, and again we are.

Really pleased with our ability to start the year off on a very solid footing.

We think that the balance of the year is going to be very good for the company. There are going to be some macro headwinds that we will face.

And we believe that our three luxury houses have the ability to power us through whatever is in front of us and take us into the future. Thank you very much and have a great summer.

Thank you very much. This concludes today's conference you may disconnect. Your lines at this time and thank you very much for your participation.

Okay.

[music].

Yeah.

Yes.

Yeah.

Sure.