Good day, and welcome to the Capri Holdings Limited Fourth Quarter Fiscal 2019 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Tom Edwards, Chief Financial Officer and Chief Operating Officer of Capri Holdings. Please go ahead.

Good morning, everyone, and thank you for joining us on Capri Holdings Limited's Fourth Quarter Fiscal 2019 Conference Call. Before we begin, let me remind you that certain statements made on today's call may constitute forward-looking statements which are subject to risks and uncertainties that could cause actual results to differ from those we expect. Those risks and uncertainties are described in today's press release and 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 items related to transaction, transition and integration costs associated with the Jimmy Choo and Versace acquisitions; restructuring and noncash 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. To view the corresponding GAAP measures and related reconciliations, please view the earnings release posted to our website earlier today at capriholdings.com. I would also like to provide an update on our revised segment reporting structure. Given our recently expanded group, each of our 3 brands now forms a segment. In addition, we have created a Capri Holdings corporate cost category for activities that support our overall group. Together, these 4 elements comprise total Capri results. Please note that costs now included in our Capri corporate category were previously allocated to the Michael Kors brand. The Michael Kors operating margin has been adjusted accordingly for all reporting periods, and historical results will be provided in this format with a separate 8-K filing in addition to our 10-K filing. Going forward, we will discuss results and guidance at the total Capri Holdings level as well as in our 3 brand segments. Finally, I would like to note that all comparable store sales numbers that we discuss today are on a constant currency basis, which is how we will be reporting these numbers going forward. Now I would like to turn the call over to Mr. John Idol, Chairman and Chief Executive Officer.

Thank you, Tom, and welcome to our fourth quarter fiscal 2019 earnings call. Looking back, 2019 was a transformational year for Capri Holdings. We expanded our fashion luxury group with the addition of Versace, one of the world's most storied Italian luxury brands. We delivered robust growth for Jimmy Choo and continue to execute against Michael Kors' 3 strategic growth pillars: product innovation, brand engagement and customer experience. Taken together, we believe our 3 brands position Capri Holdings to accelerate revenue growth from $6 billion to our long-term goal of $8 billion. We expect to grow Versace from $900 million to $2 billion in revenue, expand Jimmy Choo from nearly $600 million to $1 billion in revenue while building Michael Kors from $4.5 billion to $5 billion. Now turning to our full year. We were pleased to report that Capri Holdings delivered double-digit revenue and earnings growth. Revenues were $5.2 billion, an increase of 11% compared to the prior year. Earnings per share of $4.97 increased 10% versus last year, including $0.13 dilution from the Versace acquisition. The addition of Versace was a milestone in the strategic expansion of our global fashion luxury group. We have quickly and successfully integrated this new acquisition into Capri Holdings and have already begun to implement our growth initiatives to rapidly expand the brand's global presence. We are building on a base of strength and momentum as Versace delivered double-digit revenue and comparable store sales growth over the past year. For Jimmy Choo, we successfully executed against our growth plans and delivered double-digit revenue results in fiscal 2019. Comparable store sales increased mid-single digits during the year, led by our iconic footwear offerings, and the brand is now positioned to accelerate its accessories expansion. Operating earnings were above our expectations, and Jimmy Choo was…

Thank you, John. Starting with the fourth quarter. Revenue of $1.3 billion increased 14% compared to last year, driven by incremental Versace revenue, strong growth at Jimmy Choo and flat Michael Kors results. Net income of $95 million and diluted earnings per share of $0.63 were ahead of our expectations. Moving to revenue performance by brand. Versace revenues were $137 million, which was ahead of our expectations and represents high single-digit growth compared to last year on a constant currency basis. These results were driven by high single-digit comparable store sales growth, led by continued strength in men's and women's ready-to-wear as well as active footwear. Versace ended the year with a global luxury fleet of 188 retail stores. Versace's new retail store concept debuted in Florence, Munich and Bal Harbour. We are encouraged by the performance of these stores, which are showing a significant sales uplift. These strong results give us confidence for the future success of our store renovation program. Now I'd like to turn to Jimmy Choo. Revenues during the quarter were $139 million, representing a 29% increase compared to prior year. These results were driven by 3 factors. First, we added 26 net new stores versus last year, bringing the total global fleet to 208 retail stores. Second, Q4 benefited from a wholesale shipment timing shift from Q1 of approximately $10 million. And third, comparable store sales increased in the mid-single digits, reflecting continued strength in footwear partially offset by flat accessories sales. Turning to Michael Kors. Revenues of $1.07 billion were flat compared to last year on a reported basis and increased 2% on a constant currency basis. Comparable sales declined 1% with watches and jewelry continuing to be a large headwind in the quarter that reduced total comparable sales by a combined 170 basis…

[Operator Instructions]. And we'll take our first question from Oliver Chen with Cowen and Company.

At the Michael Kors brand, you mentioned more inventory leading to better growth margins. Maybe you could help us understand how growth margins are trending by channel, and what your forecast calls for in terms of wholesale versus direct-to-consumer? And related to that, is your conviction around the Signature opportunity?

Oliver, that was a long question to start off the morning. But first off, I'd just like to say that I think Capri Holdings had an outstanding year last year and with double digit top line revenue and earnings per share growth and the acquisition of Versace, so I think we've really positioned our company for long-term growth. And obviously, we're setting ourselves up this year for really positioning the company for double digit earnings growth in fiscal 2021. So let me talk first to your question about the Michael Kors margins, and where that's going, and how that's related to the accessories' inventory. So as you know, we reported comp store sales down about 1% during the quarter, and that was really impacted, once again by our watch business, primarily. And to a slightly lesser degree, our jewelry business, as we have repositioned that from a fashion jewelry line to a fine jewelry line. And we're starting to see some very interesting and nice results around that transition as we're actually seeing on some -- on individual stores because we have that line in less doors, we're starting to see some comp store growth in that category against the fashion jewelry line. So we like what's happening there. We also like, Oliver, what we saw during the quarter with our business and our stores. Again, given the high trend of the decline in the watch and to a less degree jewelry sales, that meant that other categories were performing well for us, in particular, again our footwear, our women's ready-to-wear, our menswear all comped up very, very nicely. And we're seeing some very nice trends in the accessories business. So in particular, Signature is significantly outperforming its inventory levels, and that's in all channels. And so we still have…

We'll take our next question from Randy Konik with Jefferies.

I guess a question for Tom. Can you just clarify the quarterly cadence on the guidance real quick? I think you said -- just wanted to make sure we're clear. I think you said flat EPS for the second quarter, down EPS for the third quarter, and we know the guidance for the first quarter. So I just wanted to make sure, does that imply we should see fourth quarter up sizably? And then second part of the question would be around -- I think you said something along the lines of $15 million of annualized synergies over time. So in that, is that incorporated in the fiscal 2021, '22 outlook? Or is that not incorporated? And if it's not incorporated, when can we start to see those synergies? And just curious on nonfinancial things, how do you think about the groups or these houses of excellence working together on helping to benefit the face of product, assortment or product design, et cetera?

Okay. Thanks, Randy. Let me just go through the cadence. First, you articulated it correctly. About -- approximately flat in Q2, a little lower in Q3 and Q4 would be higher. And I talked about a little context in Q4, that we're benefiting from Versace, with both an additional month and favorable seasonality. In Jimmy Choo, we'll begin anniversarying investments and see that inflection begin on operating margin and income. And as John was noting for Michael Kors. As we are in a better inventory position with higher signature in core, that positions the Michael Kors business to begin to see margin expansion. So we believe that, that will begin to all pull together at that point. In terms of synergies, the $50 million in synergies over time, they are not built into the current forecast. We're still working through all of the pieces and developing our plans, and we'll continue to update you as we see that going forward. And in terms of the group, and how the group is working together, I'll let John speak to that.

Yes. Thank you, Randy. Randy, I think we're very pleased with the integration of Jimmy Choo into the company. That's gone really well for us. And I think we feel similarly to how we're integrating Versace. We're moving very quickly. I'd point out number one, we closed the collection in Versus line which will have about a $50 million impact this year. In actual revenues, it was over $85 million the prior year. So we're moving quick to make sure that we focus on the luxury part of Versace as we position this for its long-term growth. I would also add that we are in the process of buying factories that we've talked about previously. We're not prepared to disclose all that information yet, but we are moving quickly towards that. We're also building a new building in Florence, which will house our Jimmy Choo and Versace and some of the Michael Kors Made in Italy production groups and design development will take place there and a great place for design teams to work. So we're creating synergies where we're able to work with some of our leather suppliers, some of our manufacturers, and we're already seeing some of that come to fruition where we're using the group's leverage to create benefit, everything from quality to cost and to resources that are available to us. And what I'm also very proud of under the leadership of Pierre Denis and Jonathan Akeroyd is how closely their teams are working together. Because remember, the Versace and the Jimmy Choo businesses are slightly different than the Michael Kors business and the amount of product that we're making in Italy is significantly higher at those two companies versus Michael Kors, but we're also layering that into -- really actually benefit Michael Kors and our collection business. So with all of that, and then we're layering on our new systems implementations that Tom talked about with SAP. We really think that we're going to be able to create some significant synergies, everything from supply chain to warehouse, the distribution, and also how we're able to provide resources to our design teams to be able to let them move very quickly. So I think again, we've been working at this since almost September of last year, so this is not a new initiative for the company, but it takes some time to actually get all these pieces of the puzzle up and running together. And so far so good, that we're seeing those initiatives come together and will benefit us in the future.

We will take our next question from Matt Boss with JP Morgan.

On the Michael Kors margin, I guess what was gross margin performance in the fourth quarter relative to the 100 basis point contraction forecast? And then within the stable operating margin guide for Kors next year, what's the best way to think about gross margin embedded within that?

So Matt, we're not guiding any longer to gross margins at a brand level, more to operating margins. And once you adjust for the change in our corporate category cost, Michael Kors margin in Q4 was a little lower than we had anticipated coming into the quarter. When we look at next year, and this current year fiscal 2020, we expect the cadence slightly lower in the beginning, earlier parts of the year, and then inflecting positive later in the year, supported by the inventory position. But we'll be talking more to total operating margin as we move forward.

Great. John, and maybe just a follow-up. In North America, I guess, higher level. How would you assess the current health of the accessory luxury handbag category? And just any changes over the past year in your view.

Matt, I would break the 2 categories down separately. The luxury accessories business globally still feels very healthy. And obviously, with the strongest momentum being in Asia and then Europe and then kind of Europe and the U.S. are similar. On the accessible luxury business, the cadence is somewhat similar in that -- the Asia market remains robust for that category. For us in Europe, we had a very strong performance second quarter in a row, showing very nice comp store increases in Europe. So we're really pleased with how that business has returned to health. And that was all part of our repositioning. As you knew about, we're not finished 100% with our repositioning on the accessories piece of the business over there, but it's getting better. We're starting to see some -- a return to health there as well. North America, I would say the market is weak, and we believe that the North American accessible or luxury market is, I would say, about flat to may be slightly down. And again, we are one of the large players in that markets. So I think we have a sense of it, and I think that unfortunately it has been driven to some degree by some activities around promotions, where we see our competitors have been very aggressive in price, and that seems to drive down more of the transaction value. So we're actually seeing unit sales up continued. It's unfortunate that the -- it's more of a pricing issue. That's another reason why we want to continue to take product out of the marketplace. One of the initiatives we're actually working on that, that you'll hear us talk about in our Investor Day is we would like to see the North American accessories market contract a little bit…

We'll take our next question from Kimberly Greenberger with Morgan Stanley.

I'm wondering -- I think you said there was a 170 basis points comp headwind to the Kors brand for watches and jewelry. How big is that business in terms of your retail sales? If you could size that for us, just so we can understand where that is today versus historical. Secondarily, did you see any, sort of, different performance in the North American market between full price and outlet? I know there was a lot of promotion, for example, going on in the outlets, and I'm just wondering if you're seeing some disparate performance there. And then if you would care to comment on sales trends in Asia by brands. Any -- if you're seeing just continued strengths in some of the luxury pieces that would be interesting to hear.

Okay. Kimberly, we don't really comment by channel in terms of our performance. That being said, what I will give you some color on is that the inflection is -- clearly, we're seeing our lifestyle omni business improving, and we see that happening rather nicely, so that's why you hear confidence in my voice. And that's being driven by, first and foremost, as I said, Signature is really resonating with the customer. You might also recognize the fact that our -- all of our marketing campaigns are driven around that. We're also very pleased with Bella Hadid and what she's done to really engage with, not only the millennials, but the Gen Z customers. That's been a really strong marketing initiative on our part on a global basis. Also, we've had some very strong influencer campaigns that are taking place in Asia. So we like what we see happening driven by the marketing campaigns and the animation that we're creating with Bella Hadid and our local influencers. And by the way, you're going to see that local influencer initiative happening more significantly in our other brands as well, and I'll talk to that in a minute. The watch, we don't give that percentage in terms of what it is. It's still a significant business for us inside of our stores. Unfortunately, as we said in our prepared remarks, and we said at our last quarter as well, it is accelerating faster than historic levels. And so therefore, we need to really emphasize other categories, and that's -- one of the issues you'll hear us talk about more is our men's business, which we think is a very big opportunity for us, and we will begin to focus more on leather than we had in the past. We probably focused more…

Our next question will come from Paul Lejuez with Citi.

Curious if you can maybe give us some color on what you see in terms of sales transfer rates when you guys closed stores as part of this recent store closing program. Just curious what you've seen on that front? Also curious, John, can you talk a little bit about price points in the handbag category. You've seen, I think some pressure from smaller handbags outperforming the larger, pricier handbags. Curious if those trends are still in place, how much of a drag that is, and where you expect that to be as we look out to this year?

Thanks, Paul. On the sales trends, I didn't understand your question about store closure. I'm sorry.

On closed stores, what sort of sales from those stores are you able to retain either in other stores or on your e-comm business?

Okay, thanks. So Paul, there's no real good, accurate information that we have. We do see some of the transfer to online, but it's not like we see it go to other locations that are within a radius or vicinity. So we haven't really seen that. We've seen the most amount of transfer happen to our online customer. I will tell you that obviously, it's really very helpful for us to take these stores that have been losing money -- and by the way, many of these stores 3 or 4 years ago made money. It's just when the e-commerce initiative started happening, we were transferring business really out of the stores into our online initiatives, and that's how the customer is shopping. So it's very helpful for us to have these store closures happen. And most of it will be behind us by the end of the year. And in fact, what we're really excited about is our store openings. And if you look at what we're going to do with Versace and take that company from approximately 200 stores to 300 stores, we have huge opportunity to open, and these will be in the best cities. And I'll remind everyone that 300 to 400 is where the luxury market is. We will probably be more at the 300 level. And as you noticed in our prepared remarks, we also talked about Jimmy Choo. We're seeing excellent results from the new stores that we've opened, and therefore, we've increased our goals to reflect a 300-store fleet. And again, very pleased with what's happening at Jimmy Choo, quite frankly, both online and in store. And so there's great opportunity for that, and then the Michael Kors fleet will be relatively stable. We'll open some additional stores predominantly in China and…

We'll take our next question from Simeon Siegel with Nomura Instinet.

This is Dan on for Simeon. Just one on Versace and Choo. Wondering if you could speak to your comfort in the margin path there and any specific levers that you could point there.

I'm going to take the first piece of it, and then I'm going to really let Tom talk about it. First off, we're going to walk through that very clearly at our Investor Day, so I think you'll be hopefully pleased with how we're going to show you how we'll bridge our margin growth at both of these companies. I'll start with Jimmy Choo actually. We took the operating margins down in that company. Gross margins have remained pretty consistent, and we really did that because of investment in marketing, investment in certain design talent and people and some other initiatives that we're taking internally to create some speed-to-market initiatives inside the company. So all of that's our own doing. We could turn that off tomorrow if we wanted to and have this company in the mid-teens operating margin. We don't want to do that. We want to really plant deep roots. We know that our luxury competitors are very good at what they do, and we have to be in a position to, really have the strong base that we can grow off of. And I think we feel really good about that. And the other thing that will happen as part of the inflection for Jimmy Choo, really -- and our goal here is to get it above where it historically peaked, which was around 10%, 12% operating margin. We want to be in the mid-teens and ultimately the high teens. And accessories will be the cornerstone to that. The company in its 23-year history never had a logo. We have that now. We introduced that. You will see that in the stores literally in a few months with major marketing campaigns behind it. That takes some time to build, but we believe we have the right to…

And just sort of summarizing it and putting it into some areas. First is just normalization of growth investments. As John mentioned, we're investing in people, marketing and other areas. And as I noted in Q4 of this year, we'd expect to see that inflection even begin with Jimmy Choo. Of course, Versace, we're investing for the full year and a little -- and beyond as we grow that business. The second area is just higher revenue and providing leverage on SG&A. So we'll see that over time as both brands are expected to grow double digits. And as John mentioned, the last 2 items are store productivity with a very large opportunity for Versace, but also expected improvements for Jimmy Choo, and the growth of accessories is the last which comes with higher margins and we expect to help build that margin path. So those are the 4 broad areas that we'll talk a little bit more about at Investor Day.

And we'll take our last question from Alexandra Walvis with Goldman Sachs.

I wonder if you could talk a little bit more about the Michael Kors wholesale business, and where underlying trends are there. Specifically, I'm interested in where we are in the reset process in Europe and in North America. You mentioned that, embedded within the guide is the expectation of lower wholesale shipments, and I just wanted to understand what's driving that. John, I think you talked a bit about this in response to a previous question, but maybe you could parse between those geographies, and help us with how long -- how far away we are from clean wholesale markets in North America or in Europe?

Sure. Thank you, Alexandra. The wholesale reset, which went along with our, obviously our full-price resets, I'll deal with Europe first, is -- we've seen a significant inflection in Europe on a constant currency basis, the last 2 quarters. We've been up in the mid-single digits and higher in certain cases in our own company-owned stores and in our e-commerce. So we've -- and our store closure program there is almost finished. So we're really seeing some good things happening in that marketplace. And that's interesting because it's against backdrop of some difficult economic headwinds in the marketplace. So we like what we see happening there. In terms of the retail partners, and there, remember, it's somewhat department-store-driven, somewhat specialty-store-driven. There's been some significant turmoil in some of the groups that we have worked with, and so that has created a position that's going to take us a little longer term to get through. But I would tell you that we're starting to see some inflection in that business. Again, our women's footwear and our women's ready-to-wear businesses have held up relatively well. It's really been our accessories business, and we're starting to see that, kind of, get in a better position. North America, I would tell you that we were disappointed in the quarter, and we thought that the business would be better. Digging into it, we've seen that our penetration of signature in our North American department stores is the lowest than it is anywhere in the world. So this reduction in wholesale/department store shipments is really focused around our accessories business. And I think I have to say that, that is probably our fault. In that, we had just didn't -- we have not planned the business up high enough in that classification with the department stores. I believe the category's probably suffering regardless in the stores, but not to the degree that it has an inflection for us. And that's, again, I would have to put that squarely on our shoulders. And that being said, we're working very closely with our partners to turn that. And I once again would like to see us in an inventory position in terms of ownership of the classification; that's probably not going to be until more towards the back half of the year.

Thank you very much, Alexandra. I want to thank everyone for joining us on today's call. We look forward to seeing you all at our upcoming Investor Day, and I would also like to say, once again, that we are very proud of the year, of our fiscal 2019 and what we accomplished for Capri Holdings with the acquisition of Versace, the growth development of Jimmy Choo and the fact that Michael Kors had a stable year. Again, we think that we are setting ourselves up for long-term growth, and we look forward to telling you more about that in our upcoming Investor Day. Thank you very much.

This concludes today's call. Thank you for your participation. You may now disconnect.