Good day and welcome to the Capri Holdings Limited Third Quarter Fiscal 2019 Earnings Conference Call. Today's conference is being recorded. I would now like to turn the conference over to Ms. Katina Metzidakis, Vice President of Investor Relations. Please go ahead, ma'am.

Good morning, everyone, and thank you for joining us on Capri Holdings Limited third quarter fiscal 2019 conference call. With me this morning are 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 this call may constitute forward-looking statements, which are subject to risks and uncertainties that could cause actual results to differ from those that 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. Investors should not assume that the statements made during the 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 items related to transaction, transition and integration costs associated with the Jimmy Choo and Versace acquisition and restructuring and non-cash impairment charges primarily associated with underperforming retail stores. Unless otherwise noted, all information on today's call will be presented on a non-GAAP basis and all revenue and comparable store sales will be quoted on a reported basis. To view the corresponding GAAP measures and related reconciliations, please view the earnings release posted to our website earlier today at capriholdings.com. Now, I would like to turn the call over to Mr. John Idol, Chairman and Chief Executive Officer.

Thank you, Katina and welcome to our first Capri earnings call. We are extremely pleased to have recently completed the acquisition of Versace. The house of Versace is one of the most storied, luxury brands in the world and fits perfectly into our group strategy to focus on international fashion luxury brands that are leaders in style and trend. With this addition, we’ve created one of the world’s leading fashion luxury groups. We have positioned Capri Holdings to now have accelerated growth in the global fashion luxury market. Both Versace and Jimmy Choo are underdeveloped brands versus their potential. With the resources and investment that our group will provide, both of these brands will be positioned for significant growth. In particular, our expertise in luxury accessories will help accelerate this underdeveloped category at both Versace and Jimmy Choo. We are already in the process with both companies to develop these categories rapidly. With the power of Versace and Jimmy Choo as well as the strength of Michael Kors, we believe our 3 iconic founder led fashion brands position Capri Holdings to accelerate revenue to $8 billion and deliver multiple years of earnings growth. Now, I'd like to turn to the results for Capri Holdings. Revenue in the third quarter was $1.44 billion and were flat year-over-year, reflecting a 4% decline in Michael Kors, offset by increased revenue from Jimmy Choo. Earnings per share of $1.76 was above our guidance range. Our new guidance for fourth quarter and full year now incorporates the projected results of the Versace acquisition. For the full year, we expect earnings per share of $4.90 to $4.95, including $0.15 dilution from Versace. This guidance reflects a $0.05 increase to our previous expectations of $4.95 to $5.05 per share for the pre-acquisition business, reflecting our better than…

Thank you, John and good morning, everyone. For the third quarter, total revenue of 1.44 billion was flat compared to last year, which was slightly below our expectations. We were impacted by foreign currency headwinds and lower Michael Kors retail revenue. Net income of 265 million and diluted earnings per share of $1.76 were ahead of our expectations. Turning to our performance by brand, Michael Kors’ total revenues were 1.28 billion, representing a 4% decrease versus last year. In the Michael Kors retail business, revenue decreased 1% compared to last year. This reflects revenue increases related to the opening of 22 net new stores versus prior year, more than offset by a comparable store sales decline of 2.4%, which was in line with our expectations. On a constant currency basis, comparable sales declined 1%. Global e-commerce benefited comparable sales by 290 basis points. As John noted, watches and jewelry were a larger headwind in the quarter than anticipated and combined reduced total comparable sales by 260 basis points. Looking at inventory, we entered the quarter with inventory, down 11% versus prior year and were under penetrated in our signature products. We continue to make necessary adjustments to inventory and expect to have a more appropriate level and mix balance in the fourth quarter. For the Michael Kors wholesale business, revenue declined 8%. As previously noted, we expected revenue to decline in Q3 as a result of our strategy to reduce inventory and increase full price sell through in the holiday season. Michael Kors’ licensing revenue decreased 10% versus the prior year. This reflects a continued decline in fashion watches. We were also impacted by lower jewelry revenue, as our new Fine Jewelry offering is in less stores than the prior fashion jewelry offering. We anticipate a continued negative impact from…

[Operator Instructions] We will now take our first question from Mr. Matthew Boss from JPMorgan.

So on the Michael Kors brand, I guess maybe could you elaborate a little on the drivers behind the 100 basis points gross margin compression here in the fourth quarter, maybe just anything on the near term puts and takes on the comp and then just multi-year, the 3-year outlook for the Kors brand now calls for stable margins, I'm just curious what the embedded comp in that 3-year plan is?

Good morning, Matt. Let me first start off by saying, as we said in our prepared remarks, I’m extremely excited to see Capri Holdings in the position that’s in today to have the power of the Versace brand, to have the great performance that we've seen in Jimmy Choo and of course we've got a very powerful brand in Michael Kors and we started a vision for Michael Kors called Runway 2020, which was focused on three initiatives. First being product innovation and how we would return the brand to growth through the exciting level of product that we were delivering. During the quarter, we saw something that we had pushed very hard on the amount of fashion that we had delivered into the stores and had, at the end of the spring season, or kind of the majority of the spring season, we were reducing our signature penetration in the company. That was a mistake. We should have not reduced our signature penetration to the level we did. We saw an impact in Q3, given the amount of signature that we did not have inside the stores as well also reducing our inventories a little bit too far. And so we've taken very quick corrective action that you've seen us in Q3. And we saw some very interesting things happen in Q3. Number one, our sequential performance in accessories improved during the quarter, as the new inventory flows hit really in December, which was primarily signature driven and so we’re very encouraged by what we saw happening there. In the quarter, the thing that really went negatively against us was our watch business, which unfortunately had much larger comp store declines than we had anticipated and I believe that was a, we saw that across the industry, both in…

[Operator Instructions] We will now take our next question from Lorraine Hutchinson from Bank of America.

I wanted to follow up on the gross margins at wholesale in North America. The gross margins overall at wholesale were up, but you attributed that to Europe. Now that you've pulled a lot of the extra inventory out of the wholesale channel, I guess, first of all, how did it perform over the holiday season and second, would you expect gross margins to be up in all geographies in the wholesale business going forward?

Let me talk about a few things. We planned our wholesale business down both in North America and in Europe and what happened during the quarter is there were lower allowances that were given out with both North America and in Europe in the wholesale business, much greater levels of reduction in Europe. So the performance overall was close to our expectations and we just had a better situation with the amount of allowance money that we returned. So what is I think most important is that we are forecasting and still feel comfortable that the wholesale business next year will be approximately flat. So we had said that we would return to that business to roughly flat, possibly even a little growth next year and I think we feel very comfortable at this point in time that the wholesale business will be approximately flat for next year and we've been fairly steady with the operating margin in that category and so, again, it's going to depend on sell throughs of the product at retail and what our assistance is to our retail partners, but I think we're feeling relatively comfortable and the channel definitely has seen certain strengths in various regions.

We will now take our next question from Paul Lejuez from Citi.

John, just curious, now that Versace is in your hands, have you learned anything else that you didn't know at the time you last spoke to us about it, any thoughts on synergies, any updates there and I'm curious if you could talk maybe about what's driving that business, maybe give a sense of timing on when you plan to take the brand into more handbags as well?

I can only tell you we're even more excited and we've been spending really since September, super quality time together with Donatella and Jonathan and the management team, a very strong management team inside the company that Jonathan has put together over the last two years. So that's one of the great things about the company is -- and the dedication of the employees, some of these employees have been there since Johnny and Donatella and Santos started the company 42 years ago, it's really incredible. The team that's in place there, so I think we feel great about it. We’ve made a couple of new hires, in particular, in the marketing, we've hired a new Chief Brand Officer for the company, that just happened recently and we are strengthening the design teams and accessories where the company will need to have additional resources put together in that group. That all being said, Donatella, like Michael, is one of the most prolific designers in the fashion industry and she has already taken the reins of the accessories project and I think I believe I mentioned on the previous call, she's already designed our new logo collection, which we have anticipated at delivering, it will probably be spring of 2020 at this point, but the company really doesn't have any product in that category. The strength has been around the Medusa, which we will continue to drive as an iconic element to the brand, but you're going to see much more -- very visible brand identification added to the line and you mix that with the iconic strength and the fashion leadership that Donatella and the company have had for 42 years, we've just got a powerful, powerful opportunity for us. So I'd say, you're going to really see the accessories…

We will now take our next question from Erinn Murphy from Piper Jaffray.

I guess my question John for you was on Europe. The retail side of your business seem to be a really strong highlight and several other peers have called out more softness, France, Germany, UK. So I'm curious what you're seeing on a regional basis in Europe and on the retail side and really what's driving that just from a strategic perspective that outperformance? And then relatedly on the wholesale side, when do we start to see the European pullback in wholesale stabilize? Thank you.

Thanks, Erinn. Two things. Number one, our Europe business has seen two things happen. As you know, we really pulled back the inventories inside the stores and also the marketplace is less promotional than the North American marketplace and we were really able to capitalize on a disciplined approach to how we presented the product to the consumer and even though we did not have globally the penetration of signature that we needed, we were more disciplined about how we exited the fashion inventories in Europe and that really helped drive our business in the markets. We're also seeing increased traffic in our stores in Europe, which is a very positive sign. Customer engagement is up significantly in the marketplace. So we saw a very positive reaction and to be frank and honest with you, it was in almost all markets. We saw some weakness in Germany, but beyond that, we really saw very positive reaction in all the markets in Europe. On the wholesale side, we've got still a bit more cleaning up to do. As you know, this has been about a year and a half plus project for us in North America and we're only about a year into it in Europe. So I'd say that will continue on for us probably midway through next year and then we'll start to see that business turn. We're getting in a much better position than where we had been previously. And as I said to you, we were probably putting too much inventory in the channel and in Europe where markdowns happen at the end of the season, there was just too much markdown inventory and that I think actually was not a very good position for our brand perception, but we're almost through that, but another 6 months…

We will now take our next question from Kimberly Greenberger from Morgan Stanley.

Thank you so much and good morning. John, I wanted to just ask you about the sort of medium term outlook for the operating margin stability at the Michael Kors brand. And if I look back here in fiscal ’17, ‘18 and ’19, it does look like we've sort of been hovering in this high 19% to 20% area, so it's been relatively stable. When I look at the quarter to quarter, it looks like there is a lot more volatility there. And with the inventory growing, we're just trying to figure out how do we reconcile some of the higher inventory with -- and the recent trends in gross margin with the longer term view that the operating margin for the Kors brand can be stable roughly at this level. So I'd love to just hear your thoughts on that and then with the balance improving and inventory coming into the fourth quarter, is there an opportunity for, if you get the merchandise assortment right, it -- would there be an opportunity over the next several quarters perhaps for some merchandise margin recovery?

Thank you, Kimberly. I would answer, it’s two things and then I'll let Tom also speak to it. Number one, clearly, the operating margin in retail in the third quarter is something that was not planned for. We would have expected to have better operating -- gross margin performance in fact in the retail segment and that was I think I’ve already discussed in terms of the inventory balance. We see that recovering in the fourth quarter as we said, although there will be a little bit of pressure on the gross margin in the quarter versus our original expectation. And then we think that given if we are able to get our signature inventories and some of our core inventories back up to a level that we think is appropriate and more in line with what the consumer demand is and I might add, we not only had issues with our signature inventory during Q3, where we were clearly walking customers. We also had that in some of our more core styles that we had walked away from that the customer came in asking for. So, you'll see a lot of things coming to retail very quickly that represent certain categories that we quite frankly had walked away from. And so I think that's going to be a positive impact to our margin. And even though the inventories are up 8% in the quarter, you'll see that kind of decelerate down over the next couple of quarters. So we're not uncomfortable with that at all and also some of that’s some new store openings, et cetera. As you know, we brought the inventories down way too low, coming out of Q2 and that was a mistake. So, again and that was driven by us trying to continue to get the full price selling up and so I would say that we feel comfortable that the operating margins, there's always going to be movement in the quarters, but I think we feel confident that we'll be able to remain at this stable level that we gave in our guidance for the Michael Kors brand. And I'll let Tom talk to those as well.

Sure. Kimberly, the one thing I'd add is over the past few years, one impact to operating margin has been de-leveraged due to wholesale declines in revenue and as we discussed Q3 for the Americas, last larger adjustment in inventory in the channel and as John noted, Europe over the next six plus months or six months will be in a better position in wholesale and that headwind will then normalize. So that will also be a support as we look at these stable margins over the next several years.

And Kimberly, I’d add something else and I get Tom has raised a very good point. Number one, we've said that we think wholesale will be approximately flat next year and the other thing that's happening is, as we have gone through our fleet optimization program, we’ve closed a lot of stores that were unproductive, unprofitable for us and you're going to see some of the benefit of that starting to show up, as we go forward as well. So that program has been moving along very, very nicely and again, we think that that's the right thing for us to do as a company and a brand and so you'll see -- between wholesale getting flat, inventory mix getting a bit more balanced and the fact that we take in the fleet optimization program and that will start to have some benefit for our retail group, particularly in North America. As I think, we've got enough drivers there that we're going to be very comfortable with our operating margin guidance.

We will now take our last question from Mr. Randy Konik from Jefferies.

Again, the long term outlook is very helpful for us. So I just want to get a little deeper there Tom. Around the Jimmy Choo and Versace margin outlook over the next few years, the margin growth there, is that primarily a function of SG&A kind of leverage, or is that a mixture of gross margin and SG&A, just give us some perspective there on those margin ranges or changes? And over that long term horizon there, are those kind of fully optimized type margin levels or do you see them kind of having opportunity from there and then back to the Michael Kors, stable, I guess, outlook for the next few years. It appears there does seem to be some gross margin opportunity, as you noted in the next quarter. So just curious on where we are in the gross margin range for the Kors retail segment within the Michael Kors brand and if there's any SG&A leverage opportunities within the Michael Kors segment as well to help those operating margins possibly beyond stable as we go forward throughout the next few years?

So I’m going to start with one thing. When we bought Jimmy Choo, I think the company had approximately 11% or 12% operating margins, if I remember the number correctly, I mean, the range. We purposely took those margins down and we did that because we were investing in marketing and advertising. We did that because we're investing in people, we did that because we were quite frankly driving certain other initiatives inside the organization that we thought would benefit us for the long term. So we could have taken the company and quite frankly bring more cost out of it and probably gotten the operating margins up into the mid-teens, right after we bought it. Also remember, there's some accounting -- purchase accounting in there as well, which goes against us negatively. So we could have done all that, but that was not the decision we made. And I think you're going to see as we move forward with the accelerated growth that the company is getting with the fact that most of our big initial investments are going to be behind us at the end of this year, little more marketing and advertising next year, but then we are going to really reap the benefits of what we have set up for Jimmy Choo. So this is all thoughtful. It's planned and quite frankly we're right on track for what we had anticipated. So that's all really good news. And I want to caveat that all by accessories, obviously have to be successful and you'll really see the big launch of that come this fall season with the new JC signature piece. The second thing is Versace is a very similar story. The company had a high single digit EBITDA margins and was moving quite frankly to --…

Sure. Randy, just to give a little more color on Jimmy Choo and Versace and what is driving the growth in margins, John mentioned, normalizing the investments over time. So that is absolutely a driver, moving in and increasing our penetration on sales and accessories, which brings higher margins along with that category is an important contributor. Of course growing overall sales provides leverage on the overall fixed cost base, so that will also help. Gross margin opportunities within that beyond accessories, Jimmy Choo's already doing a great job there, driving some gross margin opportunities just within their business. And another one for Versace would be exiting unprofitable business lines as we noted there exiting the Versace line for instance and that will help support their margins going forward. So we think that there are a lot of support and very clear initiatives that will help drive this. In terms of being fully optimized, I just reiterate what John said. We noted Versace in fiscal 2022 at a low double digits, we see that as a mid-teens, ultimately or perhaps larger. And with regard to your third question for Michael Kors opportunities, I would just talk about it in terms of gross margin and then the SG&A piece. So an optimized inventory mix is absolutely going to help support our margins and it’s both stabilizing them and supporting them going forward. We continue -- our teams continue to drive and work through manufacturing and product savings. So that's an ongoing effort that we’ll continue to work on. SG&A level, on this forecast, a low single digits growth for Michael Kors will really help lever the overall P&L. And as we talked about in the other calls the, renovations and wholesale normalizing will also be supportive.

And Randy, I'd like to add one last thing is that I mentioned earlier, we are in the process of building a location in Florence. We're terming it a center of excellence. It's in a really amazing location, where we will have our three companies’ design teams have the ability to really utilize the group’s European manufacturing resources. We think there's great margin opportunity through leverage out of this facility and we're also going to be buying certain factories over the next few years and though we believe we will have also expanded margin opportunities in that and those are going to be primarily footwear and accessories related, so we have a very clear plan of how we're going to support the luxury goods production and how we can create additional opportunities for margin, both Versace, which is today more of a ready to wear driven company, men's and women's and Jimmy Choo more of a footwear driven company, those are historically as you know not as high margin businesses as what we can develop in both the men's and women's accessories business and there's already leverage that we've created, even in Jimmy Choo with some of our knowledge between our three groups and there's kind of been some significant savings that we see on the horizon from just group leather buying, different things that are starting to come through. So we never -- and we still have not baked any of those synergies into any of the projections that we've given you to date. But we do believe that over the long term, we'll be able to talk more about that as we get these initiatives implemented.

I'd just like to conclude by saying, we look forward to seeing you all at our Investor Day in June. We thought it was important, as Tom said in his earlier prepared remarks, to lay out what our outlook is and our expectations for how the group and the different brands inside the group will perform over the next three years. We feel very confident that what we have is 3 highly recognized and respected houses of luxury around the world and we can build on those three houses. We will have our moments of ups and downs, we know that, but that being said, the opportunity and I would say in particular in Versace and Jimmy Choo as being very underdeveloped brands, given what we know from the competitive landscape and what we know from the fact that these houses have such incredible recognition with the consumer. We will optimize those over the next few years and we think we've got the right management teams in place to be able to execute against these plans. I also want to add that, we are led by our founders. Michael Kors is still here, he has helped build this company to 4.5 billion and he will help take us to north of 5 billion. Donatella Versace is still at Versace and has been leading this company to growth. She will be there to help taking us to over 2 billion and Sandra Choi who founded Jimmy Choo has been there and has been growing that company year-on-year. That company has grown every year since it's been in existence is still at the helm and our leadership with Pierre Dennis there and Jonathan Akeroyd of Versace, we've got an amazing team of executives who are going to take and build these businesses going forward. So we're proud, we're excited and we look forward to updating you on future calls about the growth of Capri Holdings. Thank you for joining us today.

This concludes today’s call. Thank you very much for your participation. You may now disconnect.