Greetings and welcome to the Capri Holdings Limited Third Quarter Fiscal 2021 Earnings Conference Call. At this time, all participants are in listen-only. A question-and-answer session will follow the formal presentation. [Operator Instructions] as a reminder this conference is being recorded. It is now my pleasure to introduce Jennifer Davis, Vice President of Investor Relations. Thank you. You may begin.

Good morning, everyone, and thank you for joining us on Capri Holdings Limited third 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 these statements made today 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 and inventory step up adjustment, 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 to our website earlier today at capriholdings.com. Before we begin, I would like to note that we have accompanying slides posted on our website. 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. Before reviewing our third quarter results I would like to once again take a moment to acknowledge the ongoing COVID-19 pandemic and it's profound impact on the entire world. My thoughts go out to all those affected by the virus and to everyone on the frontlines who are tirelessly helping combat this pandemic. I want to thank our 15,000 employees around the world for their hard work and dedication. They demonstrate every day to support each other and their communities during this challenging time. It's been inspiring to see the entire organization rallied together. I'm incredibly proud of the entire team and what Capri Holdings has been able to accomplish during these unprecedented times. Looking back over the last three quarters since the onset of the COVID-19 pandemic. We're encouraged by the performance of all three of our luxury houses. Revenue and earnings results have significantly exceeded our original expectations. Retail sales improved sequentially every quarter while e-commerce sustained strong growth across all brands. Gross margin expanded nearly 400 basis points year-to-date through the third quarter. Additionally, we attracted new consumers to each of our luxury houses as evidenced by the double-digit increases in our customer databases over the last three quarters. We achieved all this by executing against our strategic initiatives while also carefully managing expenses and liquidity. Our performance during this difficult period illustrates the strength of our brands as well as the resilience and agility of our business. We now believe that the near term will be more challenging. The resurgence of the virus has led to additional restrictions and stores closures that impacted the third quarter and are expanding in some countries in the fourth quarter. However, we're encouraged that the vaccine rollouts provides some visibility to the end…

Thank you, John and good morning, everyone. Starting with third quarter results, revenue of $1.3 billion decreased 17% compared to last year, a sequential improvement relative to the second quarter and above our expectations. Performance in the Americas and Asia regions was better than anticipated, partially offset by a more challenging environment in Europe. Net income was $250 million resulting in diluted earnings per share of a $1.65. This was above our expectations primarily reflecting better than anticipated gross margin expansion. Looking at revenue trends by channel, total company retail sales declined 10%, a sequential improvement relative to the 17% decline in the second quarter. The better results were driven in part by robust e-commerce sales which increased 65% and once again accelerated relative to the prior quarter. Store performance also improved quarter-over-quarter driven by local clienteling initiatives. In the wholesale channel performance at the point of sale also improved sequentially, but tracked lower than our own stores. Sell ins continue to lag sell throughs and total company shipments declined at a rate similar to the second quarter with improving trends in the Americas offset by decelerating trends in the EMEA region. Turning to revenue performance by brand, Versace revenue was $195 million approximately flat compared to prior year and above our expectations. Global sales in our retail channel increased low double-digits with e-commerce sales once again increasing triple digits. Sales in Mainland China increased double-digits contributing to growth in the total Asia region. The Americas was once again the best performing region with revenue up double-digits. Trends in the EMEA region remained below prior year impacted by increased store closures and restrictions. Versace ended December with a global luxury fleet of 217 retail stores, a net increase of nine from prior year. For Jimmy Choo revenue during the quarter…

[Operator Instructions] our first question comes from the line of Kimberly Greenberger with Morgan Stanley. Please proceed with your question.

John, you've obviously been able to learn a lot about pricing and inventory management and let's say price optimization over the last nine months. I mean, I don't know who would have expected such a silver lining in such a troubled period. But I'm wondering if maybe you can step back and think about and just share with us your thoughts on. What's been the key unlock in your mind that has revealed the opportunity for price improvements and better full price selling across. It seems like all of your channels and all of your brands. Is there a key messages or key strategic pivot that you would expect to be able to continue post pandemic? Thanks.

Good morning, Kimberly and thank you for your question. Let me start by saying, we think we had a very good quarter relative to the environment we're surrounded in. we exceeded our revenue expectations, our internal revenue expectations and that was even with a fairly significant downturn in the EMEA region at the back half of the quarter and I think what that shows us is the consumer engagement with all three of our luxury houses. As you saw from our prepared remarks, the Versace global database grew 18%, Jimmy Choo grew 15% and Michael Kors grew 16%. So when you look at all those and those are kind of very key indicators for us in terms of the health and the desirability of our luxury houses. All the things are pointing to very positive reception from the consumer. As you noted, we've been raising prices in Michael Kors in specific which by the way we started that again before the pandemic began. It's something that we have talked about in the last few calls that we believe that where we're competitively and the way the consumer uses our brand. We have actually been undervaluing how this brand is been looked at. That went along with a very concerted effort around the reinvigorating of our signature products across our line and as we said in accessories that accounted for about 40% overall sales. We saw numbers in our footwear and women's ready-to-wear area is growing very, very dramatically and so consumers I believe see that Michael and his design teams are really creating products that are desirable and then our marketing messages that are surrounding that either led by Bella Hadid or some of the storytelling that we've been doing is really resonating with the customers. So I feel in…

Thank you.

Thank you. Our next question comes from the line of Ike Boruchow with Wells Fargo. Please proceed with your question.

I guess John I wanted to - if you can elaborate on some of these - during the remarks on Kors, I think you mentioned you're planning to get the brands operating margin back to approximately 25%. I believe last year you talked more about a range of 20% to 25% of the target, has something changed to give you a bit more confidence in the brands profit outlook, just kind of curious if you could elaborate a little bit?

Sure, Ike. As you know historically the brands been around 20%. And so I think as we move closer into our visibility for next year and again you saw extraordinary gross margin expansion during the quarter and as Tom said in his remarks, a great deal of that is actually led by full price selling and again led by these product initiatives and the consumer response. So we have consumers engaging, product selling through third categories were actually immune to - it's not a good thing to say you run out of things. But sometimes it is a good thing. So we're really getting very, very strong response from our consumers. So I think we have a little bit more confidence and our ability to reach those targets and again as I mentioned as we worked through our fleet optimization program. We will be reducing stores and again we still plan on closing well over 100 stores and that's just going to really help improve the overall operating margin as we do that, still going to take us 18 to 24 months to do that. But many of our leases are coming off naturally and we'll renew those stores where we're profitable and those stores where we're not, we won't because it doesn't make sense for us to do that. And so I think we have a bit more confidence I do want to put a caveat which Tom mentioned in his remarks and that is, that there is GSP program which we're hopeful gets renewed. But if not, that could have some headwinds for us on the gross margin side. But I think in general we see optimism around what is happening in the Michael Kors brand and the way we're growing it, relative to our expectations has given us a strong point of view on that. Thank you, Ike.

Thank you. Our next question comes from the line of Matthew Boss with JPMorgan. Please proceed with your question.

John, maybe near term. Can you speak to recent revenue trends in the Americas post-holiday partially driving the reduction in the fourth quarter top line plan that you cited and then multi-year on your target for revenues to exceed pre-pandemic by fiscal 2023, how do you see the relative pace of recovery by region and by brands playing out?

First off, good morning, Matt. Matt, the caution that we gave in our prepared remarks was not actually directed towards North America and as I just said a moment ago. Again I can't tell you that it's going to hold true. But for the moment the Michael Kors brand is an example and North America is showing actually positive comp results which is quite extraordinary given where we're right now. Again I don't know that it'll remain true for the balance of the season. So North America has actually all three brands for Versace and Jimmy Choo we've seen a very healthy January. Again can't tell you what February and March are going to look like. But so far, we're off to good start. In Europe as I think we indicated where we've more stores closed in this quarter than we had in last quarter. I assume everyone on this call is reading the press announcements as they come out. We anticipate most of the government restrictions which in some cases have accelerated in places like France. To remain in place through the balance of the quarter even though many say that will list in early part of March. I think we're less optimistic as you know the vaccine rollout has been quite slow across continental Europe and so we think that's going to really have an impact and we actually believe that will stay true through most of the first half of calendar of 2021. So we believe EMEA results will be a drag in a headwind for the company and then in Asia, there's a slight bit of concern as I've again I assume you're reading or hearing from other people. There has been some small resurgence of virus in China and the government has not required but…

Thank you. Our next question comes from the line of Omar Saad of Evercore ISI. Please proceed with your question.

Thanks for all the information. The updated margin targets for Jimmy Choo and Versace are really impressive actually coming off of where we stand now. Is the key driver there or the key factor the return in sales and being able to leverage sales? Are there other key drivers that we should think about looking at that magnitude of the margin improvement we'll see over the next couple of years? That's really what my question centers around. Thanks John.

Omar, this is Tom here. Thanks for the question. There are couple different things that are driving the increase in expansion and margin for Jimmy Choo and Versace and the first is gross margin. So at Jimmy Choo, we're looking to increase pricing selectively and believe we have opportunity to do that compared to our luxury peers. And for both brands we're looking at increase full price sell through. And finally across both accessories is a key focus for Jimmy Choo and Versace already made a significant headway in creating collections and logos and signatures to build on and we'll be expanding those over the next several years. So we do believe that gross margin is an opportunity across both brands. And the second piece is leverage, we'll be seeing leverage at both the store level and at the SG&A level for corporate as we significantly made investments in the businesses after buying them and had cost reductions coming into the year due to COVID. And so we'll be building off of that as we quickly lever and grow revenue over the next couple of years for those businesses. And as we mentioned earlier the 15% of mid-teens margin goals for the brands compared to other luxury peers and actually very, very favorably and below. So for Versace we're looking at getting to that level in FY 2023 and looking at double-digits for Jimmy Choo in FY 2023 and opportunity for Versace since we won't be at $2 billion in sales level to even go beyond that. Thanks.

Thanks got it. Thanks Tom.

Omar, let me one of the - thing two is. As you heard my level of excitement about what we're going to be showing in March and what that's going to do, as you heard me say, I believe it's going to significantly change the trajectory of the Versace business which we are already pleased with. As we built out a base for this company which the company really over its history hasn't had compared to our other luxury peers that will improve the profitability dramatically of Versace because we're doing this today primarily on ready-to-wear which as you know has higher mark down rates and as you clear that inventory whereas accessories and in particular in footwear or your core items have the possibility for greater longevity really creating a margin story for us there. So it's not going to necessarily at Versace to be a gross margin story. But it will be an operating margin story because sell throughs will be up and that maintain profitability will be better and you saw what's happening at Michael Kors by us doing that and we're going to be applying those same principles and also to Jimmy Choo as well overtime. I think we understand the formula and I think we have the –we're resolute in our vision to implement those strategies even during these very difficult times. Thank you, Omar.

Great.

Thank you. Our next question comes from the line of Michael Binetti with Credit Suisse. Please proceed with your question.

Tom, would you mind clarifying what the language on the operating expense plan for fiscal 2022 in dollars please?

Sure, Michael. Happy to. So for fiscal 2022, our next fiscal year we see $100 million of savings flowing through from our savings initiatives this year. As you know we had originally provided a target of 250 and the underlying drivers of that were headcount reduction of 20% and other cost savings, all those things remain in place. We do see though a weaker dollar creating an FX headwind which will make SG&A higher as a result. So there's 150 offset to that. So we see $100 million flowing in and that's off of a base of a pre-COVID base. So FY 2020. That's how to think about that. Now we're continuing to work on managing expenses and as John noted, we continue to execute our store closure and fleet optimization plan and that is also contributing to the savings and something that could further drive savings in the future.

Okay, thanks for that clarification very helpful. And then I guess could you, I'm curious on the supply chain. Any complexities you're seeing today on the West Coast ports given some of the California restrictions we've seen or how do you see the freight outlook as we think about the margins in the near term, please?

Sure. So we have seen delays and some capacity constraints on transportation due to COVID. We noted it in the prepared remarks in Q4 as an offset to some of the great results coming through on AUR and margin for the business and we're seeing some delays in receiving merchandise. So it will have some impact and we have been and our teams have been doing a fantastic job, planning to mitigate this and managing through it. So cost have increased for vessel and freight, but the impact is included in our guidance remarks. We anticipate it will continue into beginning of next year, but that eventually will normalize as again where it all comes back to a more normal situation as the vaccines are more wildly distributed. So we believe it's a short-term situation.

Okay, thank you very much for the help. Appreciated.

Thank you. Our next question comes from the line of Jay Sole with UBS. Please proceed with your question.

Just want to ask about the GSP trade deal. Could you just sort of elaborate on what the impact is and what the prospects are for that deal getting renewed and is the impact going to be retroactive, if the deal is not renewed?

So Jay, the GSP program as you know provides a lower or no tariffs for certain countries for importing into the US and it expired at the end of the year. In the past, it has been renewed and it has been renewed retroactively to the beginning of the year. But as we all know, there are lot of different priorities right now for Congress and we can't predict, if and when it would be renewed. The impact to us is a little too early to tell because it does depend on where we source our goods fund and we do have the ability to change that sourcing and shift production. So as we get through the quarter and into the New Year and we're going to talk to you in the May - June timeframe, I think we'll have a lot better visibility on the impact for the year. But we would of course work to mitigate it, if it is not renewed.

Got it, okay. Thank you so much.

Thank you. Our next question comes from the line of Erinn Murphy with Piper Sandler. Please proceed with your question.

I guess my question is around China, within China can you share a little bit more about what you're seeing in Hainan Island? And then bigger picture how do you think about the recovery of global travel retail within your framework of getting back to pre-pandemic or exceeding pre-pandemic levels for both sales and EPS by 2023. Thank you.

Good morning, Erinn. Thank you for your question. Erinn, obviously as you know from us and from our other contemporaries in the industry. China has been the strongest region and that's been fueled by the fact that the traveling Chinese tourist is not necessarily traveling outside the country. We see the unfortunate effects of that in Europe in particular and we see the effects of that in Hong Kong and in Macau which still have not recovered - and actually very, very difficult in terms of performance. The China business remains quite strong and as I said earlier even with the government encouraging people not to travel as broadly as they normally would during this upcoming Chinese New Year, we still think it will generally be a very solid performance maybe not quite as strong as we had all anticipated. But still a solid performance. As I'm sure you've heard Hainan Island is on fire. It's an extraordinary - the results there. Travel has continued and we're all - again we're no different than anyone else. The performance remains phenomenal. So we're enjoying the benefits of what is happening there with the consumer visiting that location. That's probably the only tourist location that we can talk about globally that is seeing a strong performance. We do not believe and we've said this in previous calls. We don't believe the travel, retail business comes back until our fiscal 2023 and to put that more calendarize [ph] to calendar 2022 and we really don't think that comes back until kind of May [ph] on in calendar 2022. So that's in our projections when things come back and as you know this is going to depend on first and foremost, will countries allow people to travel across into their borders? And will there…

Thank you very much.

Thank you. Our next question comes from the line of Simeon Siegel with BMO Capital Markets. Please proceed with your question.

John, e-com strength is obviously fantastic. What are the e-com penetrations by brand now? And then did you know any regional discrepancies that are worth calling out? I guess I'm just wondering performance in EMEA given the greater store restrictions. And then just Tom, really encouraging to see the ongoing immaterial debt pay downs. Any help on thinking about or quantifying how much you expect to pay down over the next year? Thanks guys.

Good morning, Simeon. So e-com obviously has been the shining star and I'm so proud of everyone in our organization. Michael Kors as you know we've made significant investments into our e-com capabilities whether those are platforms, whether those are distribution capabilities, whether those are store to fulfillment capabilities and even the way our sales associates are using it to engage with clients and the results we're seeing from that, is really just extraordinary how that has helped to have this growth level that you've seen come quarter-after-quarter. And we've been able to ship and deliver which is important for the consumer obviously. We don't break out penetrations by brand or by region or anything like that. I've given you some thoughts around where we can - where we think that will be in the future but clearly North America has the strongest growth across the brands and which incredible is, we're doing that on already very significant levels. Europe is becoming the highest penetration but it doesn't make any difference right now that's just because stores are closed. So we can't look at that today. Although it is growing very, very fast and reaching in many cases close to North America kind of growth rates which is good to see, that we're able to transition consumers to that channel. And then lastly, I would say both China and Japan which for the past many, many years it was not a significant business for us although we were engaged in it. It's becoming very important business for us in the regions and of course we know, we made commentary about our great success in China on Tmall and in particular how successful we've been with the Michael Kors brand and so I think we view the online capability and quite frankly our omni-capability as being a great strength across the group and we look to continue to further invest around again platform enhancement in particular also around analytics and how we're going to continue to use this great success we've had in growing our database and then using that to our advantage across each one of our luxury houses to gage with our customers both new and old where we need to reengage with lost customers. And lastly let me just say, we're having the same type of conversations, relationships with our wholesale partners. Those could be pure play or they could be department stores who have an e-commerce capability and we're growing those businesses exponentially as well. So I think obviously e-commerce is here to stay, it's a big part of our future and we believe it's one of our core competencies and a great strength of the group. I'll let Tom answer the second part of the conversation.

Thanks. So related to debt, I'll start Simeon. We're really pleased with the cash flow generation of the company. In the quarter generated free cash flow of $370 million and $460 million year-to-date in a COVID year. Paying down debt of $370 million in the quarter and nearly $800 million year-to-date. So we ended the quarter with $1.2 million in net debt. And our leverage ratio is below three, so we're feeling comfortable with the progress. As we look to the future, we do feel strongly about the cash flow generation potential to company and we would first invest in the business. Second, continue to repay debt. So that is a focused. But as we're emerging from the pandemic, we'll reevaluate sending cash back to shareholders and in the past, we've been able to implement share repurchases as well as paid down debt. So that's something we'll certainly reevaluate. So I believe right now we're in a very strong liquidity position and balance sheet position and it positions us well for the future.

Thanks a lot guys. Best of luck for the rest of year and congrats again.

Thank you. Our next question comes from the line of Paul Trussell with Deutsche Bank. Please proceed with your question.

John, you spoke to signature penetration nicely higher year-over-year in footwear and handbags. Do you see that penetration continuing to go higher or do you feel like you're now at the right levels currently, and I'd also be curious to hear what you're seeing from a ready-to-wear and watches standpoint at Kors? And then, Tom, just on the margin front, could you maybe just speak to some of the key items for us to really keep in mind as we think about 4Q and how it's differentiated from what you experienced in 3Q? Thank you.

Good morning, Paul. Thank you for your question. First off at Michael Kors the strategy that we set upon two years ago to take a classification and very highly identifiable classification of our accessories business and make it much more strategically important than we had for some time before that has been a huge win for the company. And again I think the consumer is resonating around that product and what it stands for and what it means to them. So then again, it's led by Michael and our design teams and what a great job they're doing, that's the first thing. And to be penetrated at 40%, we wouldn't be uncomfortable back up to 30%, I don't think that's something you know many of our luxury competitors are in the 70s. So I would say we would be happy to see that continue to move up and we think that also provides additional opportunity for margin expansion because it's a product that suffers less markdowns and we get more consistency in terms of a base. As I've mentioned we're very pleased with what's happening in our footwear business around our signature products and in women's ready-to-wear, which is quite extraordinary. Our women's ready-to-wear business has been the most difficult business in the company. We've talked about it previously. A large part of our business was of dresses and that kind of classification has been significantly impacted. We've been making up with outerwear and actually some of our active collections. We'll be talking to you about some major announcements that we have around that in the coming quarters. So we know that this is a shift and we don't think the shift is permanent. Actually when we talk about a rebound, we think that actually women's ready-to-wear will be one…

Thanks, and, Paul, related to margins in Q4. We continue to anticipate, as we noted in the prepared remarks, that gross margin would expand to about 100 basis points, and that's really driven by just a continuation of the benefits of higher AUR, better full price sell throughs across the businesses and partially offset by some of the GSP and supply chain costs in the quarter. But feel confident that, that will continue and then those underlying drivers continue into next year with the additional benefits of pricing and accessories growth across different parts of the business. From an SG&A perspective, we noted that $425 million of savings would occur in the year and that's really up from our prior forecast driven by lower costs and great expense control in Q3. In Q4, we are seeing an impact from the weaker dollar and the FX impact on SG&A, so that will probably trade a little deleverage on that line. Importantly, as we look forward, we will still get that $100 million of savings flowing into FY 2022 from all those initiatives.

Thank you for the color.

I want to thank everyone for joining us today and thank you for staying on a little bit longer with us. I just want to, in closing, tell you that we remain very encouraged about the future of Capri Holdings and our three very prominent brands; Versace, Jimmy Choo and Michael Kors and the ability to grow all three of those in the future. I'd like to just make one last comment and I'm also very proud of our announcement that came yesterday about the formation of the Capri Holdings Foundation for the advancement of diversity in fashion. Like we are, in the industry, we consider ourselves to be leaders and visionaries and we think this is a great step forward for our industry to be able to support those in underrepresented communities. And we think that we are going to need to do even more to foster our involvement in the ability to create opportunities. So we're very proud of the organization and its commitment to diversity and inclusion. Thank you, all. Stay safe and have a great day.

Thank you for your participation today. This does conclude today's teleconference. You may disconnect your lines at this time. Have a great day.