Good day, and welcome to the Capri Holdings Limited First Quarter 2020 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Jennifer Davis, Vice President of IR at Capri. Please go ahead.

Good morning, everyone, and thank you for joining us on Capri Holdings Limited’s First Quarter Fiscal 2020 Conference Call. With me this morning our Chief Executive Officer, John Idol; and Chief Financial Officer and Chief Operating Officer, Tom Edwards. Before we begin, let me remind you that certain statements made on today’s call may constitute forward-looking statements which are subject to risks and uncertainties that could cause actual results to differ from those we expect. Those risks and uncertainties are described in today’s press release and in the company’s SEC filings, which are available on the company’s website. Investors should not assume that these 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. Unless otherwise noted, all financial information on today’s call will be presented on a non-GAAP basis. And all comparable store sales numbers will be presented on a constant currency 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, Jennifer, and good morning, everyone. As we outlined in our recent Investor Day presentation, Capri Holdings’ strategy is to focus on international fashion luxury brands that are leaders in style and trend. The foundation of our strategy is innovation and fashion leadership led by the design visions of Donatella Versace, Sandra Choi and Michael Kors. With the resources and investment that our group will provide both Versace and Jimmy Choo are positioned for significant growth. We believe both luxury brands have significant opportunity to expand in accessories and footwear. Supported by our group expertise, we are already executing on initiatives with both houses to rapidly develop these categories. Additionally, both Versace and Jimmy Choo will increase revenues with global retail expansion. At Michael Kors, we continue to execute on our plans to position the brand for future growth by continuing to develop the Asia market and accelerating growth in our men’s category. With the power of Versace and Jimmy Choo, and strength of Michael Kors, we believe our three iconic founder-led fashion luxury brands position Capri Holdings to accelerate revenue to $8 billion over time and deliver multiple years of earnings growth. Now, turning to Capri Holdings’ first quarter results, revenues of $1.35 billion increased 12% year over year. Earnings per share of $0.95 exceeded our expectations. Based on first quarter performance and our plans for the remainder of the year, we are reaffirming our earnings outlook for fiscal 2020 of approximately $4.95 per share, which includes the impact of the strengthening U.S. dollar and additional tariffs on imports from China. Starting with the house of Versace, one of the most storied luxury brands in the world, we were very pleased with first quarter results. Revenues of $207 million and double-digit comparable store sales growth were both ahead…

Thank you, John. Starting with first quarter results, revenue of $1.35 billion increased 12% compared to last year, driven by incremental revenue from Versace partially offset by lower results from Jimmy Choo and Michael Kors. Net income of $145 million and diluted earnings per share of $0.95 were ahead of our expectations and included $0.08 dilution from Versace. Looking at revenue performance by brand. Versace revenues were $207 million and comparable store sales increased double digits compared to prior year, both ahead of our expectations. Comparable sales continued to be driven by strong ready-to-wear and active footwear performance. Versace ended the quarter with a global luxury fleet of 196 retail stores, a net increase of eight from prior quarter as we begin to accelerate our retail expansion. Turning to Jimmy Choo, revenues during the quarter were $158 million, a 9% decrease compared to prior year. On a constant currency basis, total revenue declined 6% versus prior year. These reported results were below our expectations reflecting unfavorable foreign exchange translation, lower wholesale shipments and flat comparable store sales driven by late active footwear deliveries. Jimmy Choo ended the quarter with a global fleet of 215 retail stores, a net increase of 24 from prior year. Turning to Michael Kors, total revenue of $981 million declined 5% compared to last year on a reported basis and 3% on a constant currency basis. Comparable sales declined in the low-single-digits in line with expectations. Excluding watches, which continued to be a significant headwind in the quarter of approximately 170 basis points, comparable sales would have been positive. Comparable sales grew in Asia and Europe offset by declines in the Americas. Global e-commerce benefited comparable sales by 130 basis points. Michael Kors ended the quarter with a global fleet of 853 retail stores, a net…

Thank you. [Operator Instructions] We will take our first question from Paul Lejuez from Citi. Please go ahead. Your line is open.

Hey, thanks, guys. I think you’ve given us the percentage of handbags that come from China in the past. Can you remind us what percent of apparel and footwear are sourced from China today versus where you see that going based on any adjustments you might have made? And then, also it seems like you reduced the dilution number for Versace, could just talk about what drove that? Also curious, what’s the reason you expect comps to slow to mid-single-digits this quarter if you’re running up double-digits in 1Q. Thanks, guys.

Good morning, Paul. Paul, let me address. I think there are three questions. I’ll let Tom take the dilution and then I’ll come back to the Versace comps. Number one, the percentage of footwear and ready-to-wear that is made in China today, while – it represents a more significant piece of those two categories. We do not feel even if the tariffs were to go to the full 25% that that would be impact our innings. We believe we have enough opportunity to mitigate some of those issues. As you saw, we just did with the increase of the 10% on those categories. So we’re comfortable that both in this year and as we move forward that will not impact our earnings projections. And I also might add, our intent is to not raise prices. We believe that, as we stated in our previous – in our prepared remarks that Michael Kors, the brand, will return to flat and even positive comp store growth in the back-half of the year. And we think it’s very important that we continue to maintain our pricing strategy that we have both domestically and globally. And as we’ve been saying, we are absolutely seeing traction in the business. And particularly, in accessories, we’re seeing a pretty good rebound at the more signature inventory we get into. Our own retail stores, it’s really helping the business considerably. And so, we want to stay on the strategy. I might also add that we’re seeing traffic inside our stores a really kind of level off, which is a great sign. The marketing initiatives in the Michael – that’s being led by our teams here. Michael and also Francesca Leoni are really taking hold with Bella Hadid and now the announcement of Gigi. We’re reengaging with certain customers that may not have been focused on the brand in the past. So we’re feeling really good about the initiatives that we’re taking and we’re seeing that reflect. And as you know, we also stated that our comparable store sales in Asia and in Europe remain positive and we’re seeing great growth in those two regions. We think we’re going to be able to achieve the same thing in North America. And that’s going to be coming pretty quickly. I’ll turn the second part over – on dilution to Tom.

Sure, Paul. When you look at Versace’s performance in Q1, we had expected dilution of around $0.15. It came in much better at $0.08 and that’s really driven by the better sales performance, higher comparable sales as well. So we’re flowing through that, mostly to the year, moving from $0.25 dilution to $0.20 with a slight piece not going through due to the FX headwinds from the U.S. dollar. So we feel we’re really reflecting a great start to the year for Versace in that full-year dilution outlook, which is much lower than what we had anticipated, when we’re originally discussing this acquisition.

Yeah. And turning to the Versace comps, again, we’re very, very pleased with what we saw in the quarter, which was ahead of our expectations. I can’t tell you that we, hopefully, won’t be in the same position we were on this call in a few months from now. We are certainly planning the business aggressively. I think that we are going to take a conservative approach always with the luxury businesses to just see good steady solid growth. So mid- to high-single-digits is where we kind of will always be thinking about the Versace business. And so, I think we’re very comfortable at that range. It can go higher, et cetera. But we’re well positioned to do that. The other thing that we will also do with Versace, which is exactly what we did with Jimmy Choo and we talked about this in our prepared remarks, we’re going to start to wind out of some of the current accessories collections, where we’re introducing the new Barocco V, which you saw on the runway, the Virtus bag, which has already – before we’ve even tried to accelerate this is really getting some very nice reaction. So we’re going to do a little tweaking on that side. As I’ve told you before that takes us about 12 months, exactly more or less what we’ve gone through with Jimmy Choo. And by the way, if you get a chance to go into the Jimmy Choo store, the new [Auvarnet] [ph] collections have arrived in not only the accessories, but in the footwear. And we’re really pleased with the early results that we’re seeing from those signature collections in the store. So I think we’re executing just right on the mark for what we had had planned for Jimmy Choo and we’ll be doing the same thing in Versace. Thank you, Paul.

Thanks and good luck.

[Operator Instructions] We will now take our next question from Matthew Boss from JPMorgan. Please go head, your line is open.

Great. Thanks. John, maybe can you speak to the health of the accessible luxury handbag category, specifically what changed over the past 3 months in North America wholesale relative to your prior outlook? And then just larger picture, what are you seeing in terms of traffic trends, channel inventories and promotional activity today in North America?

Okay. A lot more questions, very good, Matt, and good morning. So the accessible luxury category, I think we see it as the following. We still see it growing mid-single-digits in Asia. So we feel good about that. That category is still growing there. In Europe, I think we’re actually seeing a little acceleration in the category, which is something we feel really good about. We have had multiple quarters of comp store increase in our Europe business and very clearly our accessories business is healthy there. And again, both product and the marketing based around Bella Hadid. In North America, I think the accessible luxury category is actually down slightly. And I think that is – some of that is a little bit of lack of innovation, which I think we’re now starting to see some really good reaction to. When I – at the end of our prepared remarks I talked about the fact that we have now 3 new collections, being Manhattan, Cece and Whitney, that are really doing well inside of our stores. And quite frankly, it’s been a while since we’ve had 3 strong collections all simultaneously performing and then on top of the signature styles. So I think we will begin to leave some of that rebound for the category. And I think you’re going to see that happening relatively quickly. I think the consumer wants innovation and they’ll respond when there is innovation. In terms of channel, we definitely see the department store channel as being the weakest channel for – North American department store channel is the weakest channel for us around the world. And I think there, we are behind on the strategy that we have in our own stores there, significantly below the 20% mark in our signature category. We…

Thanks for all the color.

We will now take our next question from Kimberly Greenberger from Morgan Stanley. Please go ahead. Your line is open.

Great. Thank you so much. Good morning. John, I had a couple of questions on Michael Kors and Jimmy Choo. In the Kors brand, when do you think the wholesale destocking might be finished? Do you think that sometime this fiscal year? Or do you think we’ll continue to see a destocking of the Americas wholesale channel into next year as well? And in terms of the margin performance for the Kors brand here this quarter, the 180 basis point decline was that pretty exclusively gross margin driven, or if you have any margin color there? That would be helpful. The revenue for Jimmy Choo, the wholesale decline, was that strictly timing or are you seeing any destocking in the wholesale channel? We’re just looking – wondering if there’s going to be a little bit of a catch up perhaps in upcoming quarters. And then last question on the share count guide. Tom, I’m not entirely sure I understand the share count guidance, I think, you said $153 million for the year, but the first quarter was $152 million, so I’m just not sure why that goes up? Thank you so much.

Okay. It’s a lot of questions, Kimberly, and good morning. So number one, the – I would not call what is happening in North America Michael Kors accessories to be a wholesale destock. The performance has been negative on a comp store basis, whereas last year, we were actually trying to put less stock into the stores to have less promotional activity. So this is more of an issue of us getting the right product in the stores, excited in the consumer and we believe that’s going to be led by first and foremost our signature collections, which are performing very well. And as I said to you, the department store channel is running 5, 6 points behind us in our own freestanding stores. And we’re working very hard to get them back in position. And they’re onboard with us, so that’s all – we’re all aligned. And secondly is more and better product from us in terms of excitement, and I think we’re there. I think, you’re starting to see some very interesting product come from Michael and the design teams and we’re seeing that positive response. We’re having strong sell-throughs on various groups. And as I – as we’ve said again in our prepared remarks, we believe in our own channel, we will return to flat to positive comp store starting next quarter. So we’re feeling good about that. And clearly, the department store channel is having some traffic issues, and so we can only hope that, that begins to mitigate. We’re very excited about what we’re seeing in our own stores in terms of traffic, and that’s in North America in particular. So we can’t sit here and tell you when that is going to turn around per se. But I think, we’re feeling positive about the…

Good morning, Kimberly. So with regard to the share count, we typically issue stock incentives for management around the June time frame, so you would see that has really impacted dilution or the share count on a diluted – fully diluted basis coming in our second quarter. So that’s why you’re seeing that increase from $152 million to $153 million. And then, with regard to Kors margin, we’re talking now and guiding to operating margin, and I’d like to talk a little bit about that level and then provide a little color commentary perhaps on some of the components. But as I mentioned in the prepared remarks, our Kors operating margin was ahead of expectations in this quarter. And when you look at it compared to the prior quarters, it’s an improving trend. We expect that to continue to improve through the year and will be supported in large part by our inventory initiatives to build signature, which as you’ve noted, will help support the gross margin as that will reduce our deeds to do any markdowns as we have done in the past or as many. And then, we have cost control on the SG&A side that has really helped the margin this quarter. And when you look at the broader ability to hold our $4.95 EPS for the year, it’s largely driven by effective cost control across the business. And we see the beginnings of that in this first quarter with Michael Kors.

Great. Thank you so much.

Thank you, Kimberly.

[Operator Instructions] We will now take our next question from Michael Binetti from Credit Suisse. Please go ahead. Your line is open.

Hey, guys. Thanks for all the detail here today. I wanted to see if I could ask you just a question on the guidance as you laid it out between the third quarter and fourth quarter. Tom, that was a fairly interesting detail. With the EPS down, the way that you pointed to in third quarter, would you mind helping us think about how Michael Kors revenues track in the third quarter, if those will be down to a similar extent? Like should we be thinking double digits or should we be thinking more like mid- to high-single digit revenue declines, and get to the rest of the EPS that you pointed to on sales deleverage? And then, I also wanted to ask you on Jimmy Choo, and I apologize if I missed this, but with the comps in the second quarter – first quarter and the guidance for flat in the second quarter. Is the mid-single-digit comp for the year still valid at Jimmy Choo? Is it still valid ex-currency? If that’s an impact, I know the UK probably factors into that a little bit? Thank you.

So I’ll take the comp guidance on Jimmy Choo first, and I’ll let Tom discuss the guidance for the year and Michael Kors, and good morning, Michael.

Good morning.

So in Jimmy Choo, again the inventory issue we’ve got to get back in the inventory in the trainer category. As we said in our prepared remarks, we believe will be in – back in the inventory in Q3 So I don’t want to say either way whether we think that the mid-single-digits or low-single-digits is going to be what we’re going to achieve. We’re going to have comp store growth and a little bit of that’s just going to depend on the development of the accessories in the back half of the year, which we are feeling very good about. And as we also said, in initial reaction to Madeline, which I think many of you probably seen either in-store or online, we’ve got some – we’re off to a great start on that group. And [Auvarnet] [ph] wallets, only in the past few weeks, the sales associates are very excited, we’re absolutely selling bags. And what’s interesting is we’re selling footwear, the new boots that came out with the JC signature on it. And our new pump with the JC Signature are both retailing very well. So I think it bodes well for us, I think, we feel good about what we have and again I want to remind everyone this currency situation with the pound is something, we believe we will be dealing with for at least the next year as well as the UK goes through Brexit. So it’s a little hard for us to kind of sit here and be as 100% specific on some of the Jimmy Choo numbers. I might also add they’re not for the moment as material for us in terms of earnings. So while it’s important, it’s not going to be the key for us. Next year, obviously, both Jimmy Choo and Versace start to become a much more significant part of our earnings growth story. And so, again, we’ll be watching the currency very closely. But our current forecast includes what we believe is going to happen for the strength of the American dollar.

Thanks.

And Michael, with regard to Q3 and Michael Kors, so we did want to provide some color on the EPS directionally for Q3 and Q4, we thought it was important given the change in revenue overall for the year and how it paces out in the quarters. So while we’re not going to provide specific guidance at this point on revenue, I would say, that the Michael Kors wholesale looking at all the quarters that will be the quarter, that will be most impacted by this reduction given the holiday timing and seasonality of that business. And the reduction in EPS versus our prior guidance is related directly to that, while the cost savings that we are generating are flowing through our quarters at a more even level through the year.

Yeah. And also in Q4, I think, we – as previously stated that it includes Versace’s December, because they’re on a one-month lag, and that is a very profitable quarter on for them, so that also impacts our Q4. So when you’re looking at your modeling that’s one of the other reasons why Q4 we get the lift as well as Tom had mentioned previously, we are going to see margin expansion from Michael Kors, in particular in the fourth quarter related to inventory positioning and the quality of that inventory positioning. Additionally, we’ve been getting certain additional manufacturing cost reductions, which will start to flow through as well. So we’re feeling very good about where the margin story in the company is going to be going in particular in the back half of the year.

Okay. Thanks a lot for all the help, guys.

Thank you, Mike.

And we will now take our next question from Lorraine Hutchinson from Bank of America. Please go ahead. Your line is open.

Thank you. Good morning. I wanted to follow-up on the Jimmy Choo accessories launch. Can you just give a little bit more detail on your discussion of the initial results being very encouraging and also is that the factor that you think will drive the comps back up to positive in the back half, is it your better distribution on the athletic or athleisure side? What exactly do you think will drive that resurgence in comp at Choo?

The first off, good morning, Lorraine. Yeah, two answers to that. Number one, we’ve been very transparent comp store sales and accessories for Jimmy Choo has been down, basically, almost since the first quarter we bought the company, and we did that purposely we’ve been flushing out the old product and really the new design team’s product arrived in the beginning of spring. We just don’t have enough density of collections inside the store to really comp or what we were doing clearing and to don’t have enough breadth of product. But again, if you take a minute to go into one of our stores, I think, we are well past that at this point. The stores look terrific. We’re very proud of where we’ve gotten to in this point. So I’d say that, that will be a very important step change for us and we expect that to really start happening over the next 30 to kind of 60 days, because the [Auvarnet] [ph] collection is there. We’ve turned on the Kaia Gerber marketing, which is online you can see it very, very vibrantly. We have pop up shops that are happening in Japan, in China, in Europe, and so there’s a lot of activity both in the physical retail stores, in our department store partners and in the social media to activate that new signature collection. So I’d say that in itself will be a very positive thing. Secondly, clearly, we already had comp store growth in this quarter in footwear. So by getting back in stock with our active, we think that will further enhance that performance inside of our own stores. So as I said before, we’re expecting double-digit growth in total retail sales and wholesale together for the group next quarter, and then on a comp store basis flat maybe slightly better than that, but that’s really going to be a function of those two things happening, the new [Auvarnet] [ph] and a broader assortment of accessories and the return to active inventory. Thank you, Lorraine.

Thank you.

We will now take our next question from Erinn Murphy from Piper Jaffray. Please go ahead. Your line is open.

Great. Thank you. Good morning, John and Tom. I guess, my question is around Greater China. I would love if you could talk a little bit more about what you’re seeing across the three brands in the portfolio. And then, have you seen any unrest or kind of change in trend with unrest in Hong Kong. And then as it relates to the Chinese tourists, maybe talk about what you’re seeing into the United States from that cluster of consumer and then into the European market. Thank you.

Good morning, Erinn. Yeah, couple of things, our all three brands experienced very strong and positive growth in China during the quarter. So we remain encouraged. And I would say, not only in China, but I think you have to talk about the Asian market in total, because we see a tremendous amount of traffic that is taking place in the Asian market from Chinese consumers, because they travel to Japan and Korea and to Malaysia, et cetera. And so, again, we see that those markets are remaining healthy and strong for the company. And in fact in Michael Kors, in particular, we were very excited. I talked about in our prepared remarks with the collaboration we have with Tsubasa Honda in Japan, and that really lifted our business in Japan. And so again, many of these influencers and collaborations that we talk about on the calls are extremely important to increasing brand engagement, but also activating consumer sales. And we see, as we’ve talked about in the past that resonates into that customer, either traveling or living in non-Asian markets. So again, we’re seeing – we see a halo and a lift from that. Our best-selling Manhattan bag in Michael Kors was actually launched in Japan, first. So very exciting how we’re seeing some of the activities take place. We’re definitely – our business is healthy in Europe, in most of the brands. And the Chinese tourists is down a little bit in Europe in general. But it’s not a significant number that we’re looking at today. And then lastly, in North America, it’s not a very big business for us in total. There is a business which takes place a little bit more in Michael Kors than other brands, which is the daigou business, where product is bought here and transferred to be resold in China. Again, it’s a business, it’s not a significant business for us, but it is a business. And I’d say that business has weakened as you’ve seen the very much consumers in China spending more money on the Mainland and there’s just more activity happening on the Mainland in particular. And then lastly is, obviously, Hong Kong is an issue. And it appears to be getting worse, not better. So I can’t tell you what the implications of that will or won’t be, because we just don’t know, but – we have a very strong and significant business there with all of our brands and it does concern us. Again in the total scheme of things, it won’t be material to the overall group, but it definitely impacts in that region itself.

Thank you very much.

Thank you very much, Erinn.

We will now take our next question from Oliver Chen with Cowen and Company. Please go ahead. Your line is open.

Thank you. Good morning and great execution on the product and partnerships. John, I had a bigger picture question. We’re working a lot with a lot of re-commerce and resale of companies and there is innovation happening there as well as subscription. What are your thoughts on how this may manifest in your business and how you’re thinking about that as well as the topic of sustainability, just the key topics that we think are important for the future of retail? Thank you.

First off, good morning, Oliver. Two things, on resale, I think it is clearly an active market. And we believe – and I think we were one of the first companies to talk about it three years, four years ago – there is no question that resale in North America impacted the Michael Kors accessories business. There is a substantial amount of product that is resold on numerous websites, which we do not do business with directly. We don’t sell those companies directly, but you can find our product on there. And it is consumers reselling accessories in particular and that we believe has had an impact on the overall performance of the accessible luxury market in North America. And as you know, on the luxury side, it is a growing business. There are a few people who are active in it. Again, we haven’t – we’re new into the greater piece of the luxury business as part of our total revenues. And so, I can’t comment to what that will or won’t mean for us. But we know it exists, we know it’s there. And we’ll continue to watch it carefully. And there are other channels – again you’re aware, who are the subscription models, et cetera. And Michael Kors has a relationship with Stitch Fix and it’s been working really, really quite well. And we think it’s another way to activate and engage and excite a customer for us. So we’ll be very slow in our looking at these different opportunities or ways to engage with the customer. But there is something that has to be looked at carefully. In terms of sustainability, the corporation has been for years working on multiple different initiatives inside the company, in particular in Michael Kors. Now, that we’re a group, I think you will see in the future some fairly significant statements coming out from the group on our group-level sustainability initiatives. And we look forward to sharing those thoughts and objectives and goals with you and our consumers at large. Thank you all.

Thank you, that’s great.

I want to take this opportunity to thank everyone for joining us this morning. As I said, in our earlier prepared remarks, we are very pleased with the way that we started out the year. We know that we have initiatives and objectives that we need to execute upon. But we feel that the teams that are here and at all of our founder-led companies are very focused and have the support and leadership to be able to execute on those initiatives. We’re also very pleased to be able to reaffirm our earnings guidance for the year in light of multiple challenges that we had faced. And again, we feel very positive about what’s going to happen in the back-half of the year, in particular for the Michael Kors brand and it returning to positive – flat/positive comp store growth. So again, we’re very excited and look forward to reporting to you on our future initiatives on our next call. Thank you very much.

Ladies and gentlemen, this concludes today’s call. Thank you for your participation. You may now disconnect.