Good day, and welcome to the Capri Holdings Limited Fourth Quarter and Fiscal Year 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 Investor Relations at Capri. Please go ahead.

Good morning, everyone, and thank you for joining us on Capri Holdings Limited fourth quarter and full-year fiscal 2020 conference call. With me this morning are Chairman and 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 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 costs associated with COVID-19 related charges, long-lived asset impairments, ERP implementation costs, Capri transformation costs, restructuring and other charges. Unless otherwise noted, all financial information on today's call will be presented on a non-GAAP basis. To view the corresponding GAAP measures and related reconciliation, please view the earnings release posted on our website earlier today at 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. We are joining you today from our recently reopened New York offices. I hope you and your families are healthy and safe. I would like to take a moment to address the events that are impacting all of our lives today. These are truly unprecedented times. Our heartfelt condolences go out to the families, individuals and communities affected by the unjust and tragic deaths of George Floyd and Rayshard Brooks as well as the countless victims that have come before them. The systematic discrimination against the black community that has led us to this point is deplorable and untenable. At Capri Holdings, we stand against racism, discrimination and violence of any kind. We cannot change the past, but as an organization and as individuals, we have an opportunity to positively impact the future. At Capri Holdings, our Diversity and Inclusion Council is diligently working on initiatives to foster greater equality for our employees and the communities that we serve. We are committed to listening, learning and taking the necessary actions to support long-term positive change for the black community. While we foster an inclusive environment where employees of diverse backgrounds are welcomed, valued, and celebrated. There is more that we can do to increase diversity at all levels inside our Company. We are working on significant initiatives to create change within Capri Holdings and look forward to sharing our plans in the near future. If we want to see change in our industry, we need to be the change in our industry. As you all know, the COVID-19 pandemic has dramatically impacted the entire world. My thoughts and prayers go out to all those who have been affected by the virus. Our hearts are with those who are working on the frontlines to…

Thank you, John, and good morning, everyone. I hope you are all staying healthy and safe. I'd like to start by discussing our fourth quarter and year-end results. In the fourth quarter, revenue of $1.2 billion decreased 11% compared to last year, reflecting the significant negative impact of the COVID-19 pandemic. Net income of $16 million and diluted earnings per share of $0.11 were negatively impacted by the lower revenue, resulting expense deleverage and a higher than anticipated tax rate. We started the quarter with strong momentum prior to the outbreak of coronavirus. However, as the virus spread around the globe, our results materially weakened. January retail revenue was positive at Michael Kors and Versace. In Mainland China, we experienced double-digit increases across all luxury houses. Trends in the Americas and EMEA were also strong, especially at Versace. In February, the vast majority of stores were closed in China and revenue declined 80% to 90% as a result. Trends also weakened in other Asia countries and Chinese tourism in the region halted. Throughout the month of February, revenue in the Americas and EMEA was in line with our expectations. In mid-February, stores began to reopen in China. By the end of the quarter, nearly all stores were back online. As retail locations resumed operations, we saw weekly improvements still from extremely low initial levels. In contrast, in mid-March, we closed all of our stores in the Americas and EMEA. At the end of the quarter, approximately 70% of our global fleet was closed. Throughout the quarter, our e-commerce sites remain largely open and we were pleased with the growth we experienced in the channel. Now turning to total company margin performance. Gross margin was 60.7%, an increase of 130 basis points over prior year. This primarily reflected gross margin expansion…

Thank you. [Operator Instructions] Our first question comes from Matthew Boss from JPMorgan. Please go ahead.

Great. Thanks. John, maybe as we think about as a result of the crisis or following the crisis, any material changes that you're planning for across your U.S. wholesale distribution? Or maybe how do you see the brand's ability to remap distribution, as we think about expansion opportunities that could possibly offset the impact of the accelerating department store closures that we are seeing?

Good morning, Matt. Thank you for that question. And I hope you and your family are safe. Matt, interesting thing during the pandemic, the U.S. department stores have a very large percentage of their business in e-commerce. And we actually have probably even a larger percentage of our business at each one of the retailers in North America in e-commerce. So if you look at Neiman Marcus or Saks, or Macy's and Dillard's, et cetera, we're a very large player on that part of the distribution. And the good news is we saw a significant acceleration. And then a couple of our department store partners – we were actually, if not the best-performing brand, one of the best-performing brands across all the families of businesses that we were part of. So that was very encouraging to me in terms of how our brand responded during – when stores were actually closed. And let me kind of identify something for you. Tom said that we anticipate that our revenues will be down approximately 70% in the first quarter. Our store performance is actually better than that. Just so you're aware both our stores and the department stores, the greater percentage of that decline is because there were really very little or no wholesale shipments. So that kind of impacted us. So just to give you some color, we're actually doing better than that in terms of actual retail performance. And then, of course, our online component is seeing very, very strong double-digit growth across all channels, whether that's department store channel or our own channel. The stores that are going to close, that have been announced, once again, these are not going to be significant volume doors for us. So we will lose some of that volume, and it's really –…

That's great. That's great color. Maybe just as a follow-up, what's your comfort with the composition of channel inventory for the Michael Kors brand today? And how would you characterize the current promotional landscape across handbags, maybe relative to the backdrop that we saw pre-pandemic?

Sure. Matt, I'd like to talk about all three of our businesses because I think they're all important. So when the pandemic started to become apparent and actually COVID in China, we made a very significant move quickly. We actually either canceled production going into that region of the world and/or reshifted it to other parts of the world. And to some degree that's actually holding us back a little bit right now in China because we're – oddly enough, we're slightly low on inventory there because how quickly we moved. And in terms of the balance of the world, we took the same approach across all three businesses. We really reduced our inventories in fall and in holiday. Our summer inventories, we have – because we didn't ship a lot of that to our own stores and to our department store partners. We're repurposing that for a spring season next year. And I think that's going to be fine because that’s great fashion, and there's some really amazing product in there. And so we'll get the benefit of not having to buy the merchandise and then mark it down, which really leads to the third part, which is – markdowns are actually surprisingly much lower at this point. And I think we're seeing that across the industry. Many of the fashion companies, including ourselves, really decided that the worst thing we could have possibly done is to have giant promotions during this period of time. Of course, now, promotional activity is fairly heavy because it’s July, when it was historically more typical to be in this time. So I really applaud the industry for being a little bit more consistent about how to view what inventories we do have because again, we're planned down pretty significantly in inventory in…

Paul Lejuez from Citi. Please go ahead.

Thanks guys. You took a $137 million store impairment charge this quarter. Wondering if you could break that down by banner and/or geography? And just maybe, Tom, talk about how does that tie into the – I think you said there was a potential $175 million in potential restructurings tied to future store closings. Maybe if you could just talk about that? And then just second on the $500 million of operating expense savings, where did you find that? How much came from each brand, if you could break that down? Thanks.

Hi, Paul. Thanks for your question. On the store impairment charges, it was across all three brands and really due to COVID, as we assess the profitability of those stores over the next few years, obviously they are impacted. And I’d just say, in looking at the brands, take a normal distribution across the brand. So I don't think we'll share the specifics on that. But as we look forward to the retail fleet optimization program, we just completed one where Michael Kors closed approximately 140 stores generating savings that we've seen run through the SG&A line in the business throughout this year. And we are now thinking a broader look across all businesses to really optimize the fleet. We still plan to grow Jimmy Choo and Versace. But we'll come back with a little more detail as we finalize that plan. And what I had mentioned in the prepared remarks was approximately a $75 million charge over that timeframe for exiting those stores, which, at a net basis, of course, we will pay back as we reduce expenses over time. In terms of the savings you had mentioned for the $500 million, it's across all the businesses and corporate. And our largest cost base, of course, is in Michael Kors and corporate, so the largest amount would be there. But we've looked again across all the businesses and taken action to really reset our cost base for this timeframe. And at least 50% of these savings will continue to flow going forward, where we look at some of the other areas of savings that will continue to invest back in the business as the business comes back, for instance in areas of marketing.

Paul, good morning. Again, I hope you and your family are safe. I would add further to that. We believe that in Michael Kors, in particular, because of the size and the rapid growth of our e-commerce platform, we're really servicing our customer from an omni-standpoint, but also he and she are definitely shopping more online even before COVID. You can also see that we ended with another 20% increase in our customer database. So we keep giving that relevant point because that's really showing we're building more customers. And obviously we're getting that information and we're doing business with them, and it's becoming quite an ecosystem for us, which we really like. And so I think you can kind of think about 650 stores to 700 stores from Michael Kors over the long-term. And there's no question that those bottom stores are – they're no longer profitable for us. So therefore we're closing stores that are less profitable, and if you unfortunately would have seen and sort of did see, but in Q4, we’re really starting to see the benefits of that fleet optimization program, which we have been talking about some two years ago. And so that's – our mindset hasn't changed and COVID may have accelerated that a little bit, but not a lot. I mean, it's really – our mindset is to have a smaller store fleet for Michael Kors, be more focused on digital growth for the brand and also increase operating margins. Even with COVID, we ended up with north of a 20% operating margin in Michael Kors. And quite frankly, we think we can grow that relatively decently because we're going to get rid of a lot of these smaller stores that are actually creating a loss for us, number one. And number…

Thank you. [Operator Instructions] Kimberly Greenberger from Morgan Stanley. Please go ahead.

Great. Thank you so much. Good morning. John, I'm wondering if you can just reflect upon the strategies you shared with us here over the past year? And as we consider life during COVID and post-COVID, are any of the strategies or several of the strategies that you are putting in place, does this COVID experience sort of sharpen your focus on any particular strategies, and does it cause you by contrast to maybe ease up on pursuing, at least in the short-term some of the initiatives that you've talked about? I'm just wondering how you think about where to focus the organization's energy given the changed environment that we find ourselves in? Thanks so much.

Thank you. Good morning, Kimberly. And again, I hope you and your family are safe. Yes, that's an excellent question, Kimberly, and as you currently imagine ourselves and every other company that's in the consumer products world is going through that same kind of strategic review. So I would say the following. Number one, right at the top of the list you have to reset your cost base because the world has changed. And I think Tom indicated the number of things that we're doing to restructure the cost base in the company. That's had some unfortunate consequences in terms of layoffs and salary reductions and other things. But we’ve done it and we think it’s the right thing because we have to get through this very difficult period of time. Secondly, we've slowed down initiatives that might have been nice to have, and might have shown benefits for the company over a longer period of time. But right now, probably don't have to happen tomorrow, and one of those was SAP. We certainly slowed that down. We're going to resume the implementation of that hopefully beginning next year. But that can take time, and we certainly are a company that is able to operate quite efficiently without having that entire structure in place. We are not holding back, and this is where I would say to you where our focus is on any consumer facing initiatives where that's anything related to our e-commerce platform, to our clienteling platforms, to our omnichannel platforms. We think that that is going to continue to be critical. I think the shopping window is going to be shortened. When he or she wants it, they're going to want it extremely quickly even quicker than they wanted it before. So we have to be prepared…

Omar Saad of Evercore ISI. Please go ahead.

Thanks for taking my question. Hope you all are well. Just one really quick question and follow-up on Versace, and the numbers are obviously great. I know there's some non-comparable factors last year. I don't think you closed until partially through the quarter – partway through the quarter. And then this year, obviously, the shutdown in China, where Versace has higher exposure and then North America. Maybe you could help us understand what the underlying – in 1Q, at least – 4Q, at least what the underlying growth rate has been – what was for the Versace brand? And then John, please, more insight on the comments around handbags, larger handbags, higher AURs, what do you think is driving that? It could be a really important trend given the opposite has been more of a factor in the last few years? Thanks.

In terms of the Versace, we were having the – actually, we started out the quarter quite strong, and in January, just as a note in comp, Versace was up 8.5%. So we were – the business was actually trending quite well. And we had been trending actually nicely in China. And as I said to you before, since the reopening, China is – Versace has shown very strong development there, almost immediately since we reopen the doors there. So we are very pleased with that. I'm also pleased with the fact that over the last three, four weeks, in North America, since we reopen the doors for Versace, our business is very strong here. So I think the work that we've doing is quite good. Again, remember on a – we set out to close down 150 million plus of business at Versace and had four lines previously, one called Versace Collection and one called Versus. And we've been cleaning out all that merchandise and getting rid of it. So this is really where we're starting to be clean. It was really at the beginning of this spring season. So I think to see the kind of results that we were getting was very encouraging. And also the logo that we have on our Virtus bag and some of our footwear and some of the belts we were selling, et cetera is also trending extremely well for us. And you can watch what we're doing on Instagram and our email pacing. So we feel that what we put in place for Versace is definitely taking hold. We're also in the middle of renovating all the stores as you know globally and we're going to continue to do that. That's back to Kimberly's question, one of the things we did…

Lorraine Hutchinson from Bank of America. Please go ahead.

Thanks. Good morning. And I just wanted to focus on Jimmy Choo for a minute. You mentioned that the dress shoe business is obviously under pressure near-term, but as you look out over the longer-term, do you think the casual plus accessories will be able to offset any pressure you may see over an extended period of time for dress shoes?

Good morning, Lorraine, and thank you. That's an excellent question. And also I want to wish that you and your family are safe. Certainly, we saw this coming a little bit beforehand to be quite transparent. You know that the casualization and in particular, the sneaker business has been growing and even more so at the luxury level. So we had been probably behind the eight ball. We introduced a new sneaker called HAWAII, and it's rapidly become either the second or third best-selling shoe in the company. You could see it online. There are many iterations of it coming. We have other new sneakers that are coming behind this. We probably were also behind on the slide category. And so we're building that up and we needed to do that regardless. Where we think we're going to be able to pick up some of the decline in the pump business, is really in items like we have something called the Kaya boot. And so you can see that in plain leather, but you can also see it with DIAMOND brand, which is very Jimmy Choo. You can see a new collaboration that we're doing with Timberland on an overall Swarovski crystal boot that's going to be close to $3,000 or $3,500. So we can sell very expensive things in Jimmy Choo. We found that that we – our customer – the DIAMOND sneaker, as you know, was a very big success for us. Our customer actually wants that from us. So I think you're going to see AURs go up in Jimmy Choo and footwear because we're going to be introducing more luxury fashion at higher prices and more unique things. And that will be everything obviously from our dress footwear, but really also targeted at a lot of…

Thank you. We will now take our next question from Jay Sole from UBS. Please go ahead.

Great. Thank you so much for taking my question. Tom, just wanted to know if you could give us some color on how you see gross margin trending as we go through – as we've gone through Q1 and so we can get into Q2? Thank you.

Hi, Jay. Thank you for that, and hope you and your family are well. In terms of gross margin trending, I think as you go back to our comments related to inventory and managing inventory through the year. As John was discussing, we've really spent a lot of time of replanning and repurposing inventory so that we have what we believe is the right amount throughout the year. So I would expect to see a little more consistent trend in that. And in Q4, of course, gross margin was up across the group and across to Michael Kors and Versace, which we were very pleased with.

Got it. And then maybe also given the change in the balance sheet over the last week, can you just remind us of what the key maturity dates are going forward and what the amounts are associated with those dates?

Jay, we just have a very minor amount that due in October around $50 million, and then going beyond that, we don't have any maturity for several years really about three years out. And right now I feel with the changes we have – we have very strong flexibility of $1 billion in liquidity, which has been consistent and now raised from the $900 million that we had all the way back in April. The changes to the credit agreement provide further flexibility for this situation. And we believe it positions us well to move through this year and emerging to a point where we will again begin paying down debt as we have done in the past on a very regular and material basis.

And Jay, that's a very important points that Tom just noted. We ended the quarter with $1.8 billion in debt and we may even be able to pay down a little more, during the year we're not exactly sure about that. But we think in 2022, we're going to be able to resume some very significant debt repayment, and put this company into a very – even stronger financial position. So we are not going to be active in any acquisitions. We're going to continue to focus on the acquisitions that we did over the last few years. We think they provide enormous growth opportunity for us. We think we have the balance sheet to be able to do that. And I think we're going to come out of this as one of the strong companies, both from a brand and positioning standpoint as well as from a balance sheet standpoint.

I want to thank you all for taking the time for joining us today. Once again, I want to wish that you and your families stay healthy and safe during this very difficult moment in history. We all believe that this will eventually pass, but in the meantime, I think it is our most important responsibility to respect one another to wear masks, just to keep your social distancing, and to help us get through this very difficult crisis. We believe that we have three incredible founder-led brands that are going to position us for growth in the future. And we look forward to updating you on our first quarter results in a few weeks. Thank you very much, and have a good day.

Thank you. That will conclude today's conference call. Thank you for your participation. You may now disconnect.