Thank you for standing by. This is the conference operator. Welcome to the Capri Holdings Limited First Quarter Fiscal 2021 Earnings Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Jennifer Davis, Vice President, Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining us on Capri Holdings Limited first quarter fiscal 2021 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 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 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 corresponding GAAP measures and related reconciliation, please view the earnings release posted on our website earlier today at capriholdings.com. Before we begin, I would like to note that we have posted on our website, slides that provide highlights for the quarter. 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. Today, once again, we are joining you from our New York offices. I’m sorry, but there may be some light background noise due to construction in the building. Before reviewing our first quarter results, I would like to share some thoughts around the evolving COVID-19 pandemic. The situation remains very serious and dynamic as it continues to profoundly impact the entire world. My thoughts and prayers go out to all those who have been affected by the virus, and everyone on the frontlines who are tirelessly helping combat this pandemic. As we continue to reopen our stores around the globe, the health and safety of our employees, customers and communities remains a top priority. I want to thank our teams around the world for the hard work and dedication they continue to demonstrate every day to support each other and their communities during this unprecedented time. Now, turning to our first quarter results, while our performance was significantly impacted by the COVID-19 pandemic, revenue and earnings exceeded our initial expectations. We were particularly pleased with our robust e-commerce growth as revenue increased approximately 30% compared to the prior year. And as our stores reopened, revenue exceeded our original expectations. Similarly, our wholesale partners, e-commerce sites, and reopened stores are performing above our expectations. However, our wholesale partners placed limited orders during the quarter due to the store closures. Overall, first quarter revenue in our retail channel declined approximately 60%, while wholesale sales decreased approximately 85%. Total Revenue declined 66% with trends improving progressively each month. Looking at gross profit, we were pleased with our performance as margin expanded 480 basis points. This improvement, in part, reflects our corporate initiatives to increase full price sell-throughs and selectively raise prices generating higher AURs. Additionally, gross…

Thank you, John, and good morning, everyone. Starting with first quarter results. Revenue of $451 million, decreased 66% compared to last year. The revenue declined was driven by our retail fleet being closed for approximately 55% of the quarter, and limited wholesale orders. Across all brands revenue trends improved progressively each month throughout the first quarter, primarily due to deleverage on lower revenue, we generated a net loss of $156 million, resulting in a loss per share of $1.04. Looking at revenue performance by brand, Versace revenue was $93 million, a 55% decrease compared to prior year. Versace ended June with a global luxury fleet of 204 retail stores, a net increase of 8 from prior year. For Jimmy Choo, revenue during the quarter was $51 million, a 68% decrease compared to prior year. Jimmy Choo ended the quarter with a global fleet of 228 retail stores, a net increase of 13 from prior year. Turning to Michael Kors, total revenue of $307 million declined 69% compared to last year. Michael Kors ended the quarter with a global fleet of 822 retail stores a net decrease of 31 from prior year. Now looking at total company margin performance. Gross margin expanded 480 basis points to 67.2%. This predominantly reflects an increase in Michael Kors driven by higher AURs and favorable channel mix. Operating expense as a percent of revenue was 100% compared to 48.3% last year, due to deleverage from lower revenue. Total company operating expense decreased $200 million, primarily due to benefits from our cost reduction initiatives, as well as lower variable store costs. Total company operating margin of negative 32.6% compares to 14.1% last year, reflecting the significant deleverage on lower revenue. Turning to our balance sheet, we ended the quarter with cash of $207 million and debt…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Omar Saad of Evercore ISI. Please go ahead.

Thanks for taking my question. Good morning. Thanks for the update. I’d really like to dive in a little bit further on the Michael Kors in a positive AUR and underlying gross margin trends. John, maybe you could talk about some of the brand dynamics driving that. And do you see an opportunity here in this pandemic to think about pricing and the promotional levels in your own channels and with your wholesale partners, taking this opportunity to kind of reduce that on a go-forward basis? And do you think the demand environment could support that, kind of an ongoing positive AUR trend? Thanks.

Good morning, Omar. And I hope that you and your family are all safe during this unprecedented time. Let me first start out by telling you that, as we said in our prepared remarks, the majority of our initiatives that we started out with in our fiscal 2020 are really still in place today. So we haven’t changed a lot of our strategies, given the pandemic. And when I say that, when we look across each of the groups, we see enormous growth opportunity, and first starting with Versace, where we clearly believe we have one of the most underdeveloped luxury houses in the world. And when you look at our current revenue trend, pre-COVID, we feel that we were underdeveloped significantly. And we’ve said numerous times, that we think that’s, ultimately, a $2 billion opportunity, which means a little over a $1 billion growth for the company. So I think we remain very confident with that. We see our ability – we’ve taken really the first year, year-and-a-half of owning that company. We’ve been cleaning it up. We’ve been closing certain unproductive stores. We closed out 2 lines, where we dropped over $100 million in revenues. And we’ve finally gotten the company into position now, where we can also start to expand margins, and we’re doing that through the larger penetration of accessories, and also really kind of refocusing some of our initiatives around live size in the company. So we were doing that. All those things heading into COVID and we launched our new Barocco V logo, which along with our Medusa, we think gives us tremendous opportunity to create engagement and brand loyalty. As consumers, pre-COVID, again, were still very engaged with products that represented a brand’s heritage or the symbol of that brand, and we think…

Our next question comes from Erinn Murphy of Piper Sandler. Please go ahead.

Great, thanks. Good morning. I guess, my question is around the recovery that you’re seeing here in the Americas. It looks if I’m looking at your slides, John, it looks like the Americas is a lot steeper of a recovery versus some of the other regions. So if you could just speak a bit more about what you’re seeing. And then, in certain states, as we’ve seen case counts rising, have you seen any major regional differences in the month of July? Thank you.

Thank you. Good morning, Erinn. And I hope wherever you are, you are safe and your family. So, Erinn, I think when you look at that chart that we sent out, which we hope is enlightening and helps, give you all some view on what’s happening. And I feel for many of the analysts who are on this call, because we’re living this day to day. You’re getting the information a little bit later than what’s happening live. So we appreciate. You need as much information, for our investors as possible. So we’re trying to be as transparent and share with you what we see. So I would go around the globe and I would start with Asia. Again, we’ve said that China has seen the fastest recovery, where Versace and Jimmy Choo are doing quite well there. Michael Kors is a little less so. And I just want to address that, and that’s really because when the pandemic broke in January, we very, very rapidly moved that inventory that was in route to China, to EMEA and to the Americas. Hindsight 2020, that was probably not the best decision, given the recovery bounced back pretty quickly in China. So we’re lean on inventory in that region and that inventory is arriving basically as we speak. So we needed more fresh new merchandise. And that’s an interesting trend that we’re seeing, both in China, EMEA and the United States. Customers really responding more than ever to newness. It’s quite interesting. It’s a little less about what’s on sale and a whole lot more about what’s new and fresh, and what’s going to excite me. So it’s a really fun time from that standpoint to be out marketing and storytelling. And again, we’re companies that really project an image and a…

Our next question comes from Matthew Boss of JPMorgan. Please go ahead.

Great, thanks. So maybe on the wholesale front relative to the 85% global decline in the first quarter. How best to think about the progression of wholesale shipments in the second quarter versus the back half of the year? And larger picture, John, maybe how do you think about the opportunity to emerge from the pandemic with a stronger wholesale distribution footprint overall?

I’m going to take the second part, and then I’ll turn it over to Tom for the first part question. As I’ve said to you on many calls, we are very proud and we believe deeply in our partnerships with our department and specialty store partners, and travel retail partners around the world. So when you look at our wholesale penetration, which last year ran about one-third of our business, about 30% – sorry, for the total corporation. That number will come down this year and next year, not necessarily by some unique design, but as you know, you see bankruptcies that are happening, you see door closures that are happening. And so that’s going to limit that. We also believe that the travel retail business will probably take at least 2 years to recover. And again, I’m not telling you anything that actually you have heard or been listening to. So we think that that number will become a less relevant number to the company although extremely profitable, and we value those partnerships and we think that our customer absolutely shops at – whether it’s Neiman’s, Saks, Bloomingdale’s, Macy’s, Dillards or Galeries Lafayette, Harrods or Harvey Nichols or the Minkoff, whatever the places are, these are beautiful stores with amazing sales associates in them and they have great relationships with their loyal customers. So we continue to remain engaged with that channel and want to see that channel ultimately recover although we know it’s going to be smaller for just a host of reasons. And the last thing, I’ll say, and then I’ll turn it over to Tom, is that while you’ve seen this decline, which was quite precipitous, given the outbreak of the pandemic, we actually went to our department store partners. And we laid out – we told them, here’s what we think is going to happen for the next 4 quarters. We want to actually not ship the merchandise, because we think it would be bad for the brand, obviously, everyone was worried about cash at the time. And we took the position that we think we’ve got a better way of working our way out of it. I don’t think we were the only one doing that. But I think what we did turn out to be quite smart. And we’re seeing that pay off for us as the department stores as I said to you before, actually recovering very nicely for at least the ones that we do business with today. And remember, they’re down to only a handful of people that we do business with today. And the recovery seems to be quite good. So we’ll start to see that recover over the next few quarters, but I’ll let Tom talk about that.

Sure. Thanks, Matt. And just to build on what John was saying, we had seen good POS trends and positive on the e-commerce side for our wholesale partners, so that has been very encouraging. That said they replenishments and new orders have been on the lag from our own retail business. And what we expect coming out of Q1 is that it will recover, it will recover through the year. However, it will be slightly paced behind our own retail shipments and recovery throughout the year. And as John mentioned, looking at it maybe a little smaller and longer term, we have had a few door closures with bankruptcies, but in large part those are small and not really a major impacted to our business.

Thank you, Matt.

Our next question comes from Alex Walvis of Goldman Sachs. Please go ahead.

Good morning. And thanks so much for taking the question here. My question is on the belief and how you’re thinking about that longer term. John, you mentioned in your comments that the plan is still the same for the store rollout and the opportunity that you see for the reflection for Jimmy Choo. How has the pandemic and the associated acceleration on e-commerce, growth change kind of thinking about the fleet or anything on the structure of your direct to consumer business going forward across the 3 brands?

First off, good morning, I hope you and your family are safe. Secondly, I think we couldn’t hear the first part of the question, if you could just repeat that?

My apologies. I wanted to ask about how the acceleration in e-commerce growth during this pandemic has changed how you’re thinking about in the presence of physical retail in the business. I believe the thoughts on the store opportunity for Jimmy Choo and Versace is still similar. So I guess, I’m wondering why that is and how you’re thinking differently about maybe the types of stores that you’re kind of how they interact with e-commerce in the future?

Sure, okay. So, as I said before, the – absolutely the pandemic has accelerated our e-commerce revenues, it’s increased the penetration of that to our total business. The great news is some time ago, we built our – at minimum, in Michael Kors, our strategy to have $1 billion e-commerce business that we didn’t think that would happen overnight. And it’s still not going to happen overnight. But we’ve built warehouses. We built platforms, et cetera, to be able to handle that type of business. So we feel very comfortable that we are in a position to be able to grow that as fast as we possibly can. And what’s happened is some of our integration and transformation is starting to take place. Jimmy Choo, for example, they’re moving into our Holland warehouse in Europe. And we’re looking at other initiatives where we have the ability to help the other divisions, be able to take advantage of this rapid growth in e-commerce. Secondly, we’ve really for the past 2 years, been on a very strong initiative. You hear us talk about it regularly, we’re going to grow that database at our ecosystem, and we’re pushing as hard as we possibly can on that, because we know that it’s got tremendous value to us. What we’re able to do with current customers, new customers, lapped customers. When it’s – when you’re dealing with, in particular, the fact that traffic is down and we don’t know when that’s going to recover or what rate is going to recover at. The one thing we can do is we can talk to our customers that we have their names, and they’re engaging with us. And then, of course, you see the social media following growing, that’s not growing, because they don’t like us. That’s…

Our next question comes from Kimberly Greenberger of Morgan Stanley. Please go ahead.

Great, thank you so much. And I just want to say a special thank you for the very helpful slides. I thought they really added to the presentation today. And I just wanted to start with the slides, if I could. It looks like North America is really nicely accelerating. And June, if I’m eyeballing it correctly, look to be down about 50% or so, with July really materially better at sort of a down 20%, am I sort of reading those slides correctly? And then it looks like here in July, global sales trends are sort of running down around 25%. So I’m just trying to contrast what looks like we’re seeing in the slides with the second quarter outlook for revenue to decline about 40%. Is that differential, just simply what’s happening in the wholesale channel? That would be super helpful. And then the fleet rationalization that you talked about is really encouraging. And I’m wondering if the cause of COVID and all of the sort of unique external circumstances out there, is it easier to close stores prior to lease expiration, because of these circumstances? And have you – are you still targeting the same 150 stores for closures today that you were thinking about pre-COVID or has COVID actually changed, perhaps, the 150 stores that are on that list? Thank you so much,

Hi, Kimberly. And so starting with the first question on the Q2, it is really our wholesale mix, as we mentioned in Q1, retail was significantly better than the wholesale trend. So while POS at the wholesale channel is performing. We think that the reorders and new orders will continue to lag that. And that ultimately it will normalize, but that it will still have an impact, certainly in Q2. And I’d say that that also will have an impact in this case in a positive sense on our margins. As you saw in Q1, we had a gross margin increase an expansion and about half of that was channel mix, about half of that was the initiatives around AUR that we discussed. So as wholesale continues to normalize, we’ll see that benefit reduced. However, our initiatives are going strong and they’ll continue to drive that 150 basis point margin expansion through the remainder of the year.

And Kimberly, let me add one last thing to that as well. And I don’t mean this disrespectfully, but I think a lot of times, people think of us and our wholesale distribution is just North America. So there seems to be a lot of focus, rightly so on our North American wholesale distribution. But remember, we have a fairly large wholesale distribution in Europe, which is department store and specialty store. And then we have a very big travel retail business in this company. So if you go backwards and start with travel retail, we don’t know when that’s going to recover. So that for all intents and purposes, is 0 today. And we’ll probably remain at 0 for quite some time. So that’s going to hurt our wholesale shipments. Secondly, the specialty store business in Europe is very slow to recover. They will not be taking any new orders in, I would assume until really September. Again, these are small, family owned businesses that are really struggling through this pandemic. And that’s also a sizable business for us. It’s actually the greater part of the business in Europe, specialty store department stores. And the department stores in Europe are really struggling on the recovery, because remember, the key ones that I mentioned earlier, their flagships account for significant amounts of their revenue. So until again, travel, retail comes back, they’re going to be impacted. Oddly enough, but the North American department stores are the best equipped right now, because they have very robust e-commerce businesses. And so where we have seen difficult situations in major flagships at our department store business in North America. We’re actually getting offsetting lift. As I told you, there was a few weeks where we’ve actually comped over last year, because the e-commerce…

Our next question comes from Michael Binetti of Credit Suisse. Please go ahead.

Hey, guys, thanks for all the detail today. I guess, I’ll just follow-up on a couple of the earlier questions, when – you’ve obviously given us some good color for third quarter and fourth quarters we look out a little bit here, but maybe some thoughts on how the initial conversations are going for orders in the wholesale channel, particularly in the U.S. as you look to Spring 2021, which is just from talking to the retailers when they feel like they can lift their eyes a little bit and maybe go back on offense. But I’d love to hear what your initial conversations are for them as they look at how they’re going to set their floors. And then I guess if I put the pieces together here, Tom, it sounds like you think wholesale revenues are going to lag POS through – at least through this fiscal year. Maybe you could speak to, when you think those actually will come back into alignment. I know there’s a lot of moving parts, but is it far into 2022 or how would you describe that? Thanks.

Good morning, Michael. I hope you and your family are safe. And I think you got to say that to Kimberly, I hope both of your families are safe as well. So the department stores, look, the initial conversations we’re having are actually once again encouraging. We have been one of the best performing brands during COVID. We were told that by our key North American department store partners it’s a little less so in Europe, because of they have much smaller e-commerce businesses. So it’s been a little harder to have to understand what that customer reactions meant to our brand until the stores reopened although we’re seeing some relatively reasonable results since stores reopened. So I think, our field – our numbers that we’re getting from the stores have been have been quite in line and actually slightly better than what we had internally budgeted for. And I might add that’s particularly in accessories and in footwear, a little less so for ready-to-wear. Ready-to-wear has been the – and I think I mentioned that previously – has been the softest category for us. And we’re doing some things to mitigate that. Obviously, we’ve been a company for both Versace and for Michael Kors, where we’ve been very – a company that’s focused on more of a polished image. And there’s clearly a big market that can be tapped in a more casual, but also something that excites people for what their new lifestyle is. And so, we’re making some adjustments to our assortments on that, and we think that’ll – you’ll see that more in the first half of next year. So, again, we haven’t seen anything that’s told us – anything that’s concerning, given what our projections are. And again, our POS sell-throughs are – we’re being again told we’re one of the best. And as I said to you, they’re running at our performance rates and in some cases better. So, we’re feeling pretty good about what – again, I want to caveat all of this. If obviously, there’s a resurgence, if there’s a heavy second or third wave of this, obviously, that’s going to impact everything that we possibly could be discussing today. But if we continue at this slow pace of recovery, I think we’re feeling confident about working with our partners.

Right.

And in terms of the revenue, normalizing and how it really relates to retail, I think it’s dependent upon the overall economy and the COVID situation itself normalizing. I think at that point, you’d see more similar trends. But for wholesale, as John mentioned, we would expect on a percentage of business basis, it will be smaller, going forward. And what we’re going to continue to evaluate is, the health of the EU specialty retailers, and the overall footprint of travel retail in a post-COVID or a normalized environment. We believe in the U.S. we’re with a very strong wholesalers and department stores. So we feel very good about that situation.

Thank you and we’ll take one last question.

Our final question comes from Jay Sole of UBS. Please go ahead.

Great, thanks so much for taking the question. John, I want to just follow-up on the [comment you made a few months ago] [ph] about the margin, the opportunity you seem to get back to 15% margins. How correlated is the margin trajectory to the sales trajectory? So if we look out, as you say, fiscal 2023 and the business is, say, $4.5 billion versus maybe $5.5 billion in a better scenario, how much would that change the opportunity for the company to get back to a mid-teens margin?

Jay, first off, good morning. And I hope you and your family are safe through this very difficult time.

Thank you, John.

Jay, look, there’s no question that that volume or higher revenues will definitely create leverage, operating leverage for us to get back to the mid-teens operating margin for the company. We have very distinct goals. We see something north of 20% and less of 25% for operating margins for Michael Kors. We’ve stated that we see mid-teens operating margins for Versace and Jimmy Choo. I think you’ve heard my positive commentary around that. We think we’ve got some really good initiatives. And we were heading in that direction anyway. So I think we’re comfortable that we will get there. Again, there are certain components that have to come together. As you will know, we got to get a vaccine. We got to see foot-traffic return to brick and mortar, because as important as e-commerce is and omni sales and we’re certainly very well positioned with that as a company and an organization. And where we do have a slight weakness in Versace, we’re fixing that. We need brick and mortar to work. I mean, as an industry, we all need it to work and we believe it will come back. It will be probably a little different than what it was before. More e-commerce revenues versus as much store revenues, but there’s – even today, it’s a bigger percentage of our business. So as that happens, and as travel retail recovers. I think we’ll be able to reach those objectives. And I’m not going to comment on the kind of numbers that you mentioned. The only thing I can tell you is, is that we believe we’ll be somewhat smaller next year from our pre-COVID levels. But that being the case, remember, Versace is very underpenetrated in the luxury market. Jimmy Choo, which had grown every year of its 24…

This concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.