Greetings. Welcome to Capri Holding Limited Fourth Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to 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 fourth quarter fiscal 2021 conference call. With me this morning are Chairman and Chief Executive Officer, John Idol; and Chief Financial 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 impairment, ERP implementation costs, Capri transformation costs, charitable donations and inventory step-up adjustments, acquisition foreign currency effects, 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. Before we begin, I would like to note that we have accompanying slides posted to 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. Looking back, fiscal 2021 was a year like no other. Over this time, the COVID-19 pandemic has had a profound effect on the entire world. The unprecedented challenges tested our business and industry in ways we could never have imagined. My thoughts go out to all those affected by the virus and to everyone on the front lines who worked tirelessly helping combat this pandemic. The entire Capri team came together, not only to successfully navigate these challenging times, but also to position the Company to emerge from this global crisis even stronger. I want to thank all of our employees around the world for the hard work and dedication they demonstrate every day to support each other and their communities. It has been inspiring to see the entire organization rallied together. I'm incredibly proud of the team and what Capri Holdings has been able to accomplish during these unprecedented times. Looking at fiscal 2021, we are encouraged by the performance of all three of our luxury houses. Revenue and earnings results significantly exceeded our original expectations. Retail sales improved sequentially every quarter while e-commerce sustained strong increases across all brands with growth rates accelerating even after stores began reopening. Additionally, in line with our goals to expand margins across all our luxury houses, gross margin increased approximately 340 basis points in fiscal 2021. Furthermore, we attracted nearly 9 million new consumers across our luxury houses as evidenced by the double-digit increases in our customer databases over the last year. Our success is a testament to the strength of our brand as well as the dedication, resilience and agility of the entire Capri Holdings team. During the year, we reevaluated and refined Capri Holdings' strategic direction to ensure the Company emerges from the…

Thank you, John and good morning, everyone. Starting with fourth quarter, revenue of $1.2 billion was flat to last year significantly exceeding our expectations. Performance was driven by better-than-anticipated results across all brands and regions. Net income was $59 million resulting in diluted earnings per share of $0.38 this was above our expectations reflecting better-than-anticipated revenue and gross margin along with lower operating expenses. Looking at revenue trends by channel, total company retail sales increased 13%. These results were driven in part by robust e-commerce sales which increased approximately 80% and once again accelerated relative to the prior quarter. Additionally store performance improved significantly quarter-over-quarter driven by local clienteling initiatives and improved traffic trends. In the wholesale channel, revenue also improved sequentially. By geography, in Asia, retail sales increased double digits versus prior year. Once again, revenue in the region increased across all three of our luxury houses driven primarily by stronger growth in Mainland China, where sales were up over 100%. In the Americas, retail revenue increased double digits, despite store closures in Canada. Conversely, in EMEA, retail revenue trends remained negative as an average of 60% of our stores were closed during the quarter. Despite the increased restrictions and store closures in EMEA, retail sales trend improved sequentially driven by triple-digit increase in e-commerce. Turning to revenue performance by brand. Versace revenue was $235 million, representing a 10% increase to the prior year and above our expectation. Global sales in our retail channel increased double digits with e-commerce sales once again increasing triple digits. Sales in Asia grew double-digits driven by strong double-digit growth in Mainland China. The Americas was once again the best performing region with revenue up strong double-digit. Trends in EMEA remain below prior year impacted by increased restrictions and store closures. Versace ended March…

Thank you. [Operator Instructions] Our first question is from Omar Saad with Evercore ISI. Please proceed.

Good morning, thanks for taking my question and great job in the quarter, pretty exciting stuff. I guess I'll use my one question to ask about how sticky some of these margin gains are that you guys are generating, especially around the Kors brand, I think it's up 400 bps gross margin, up 400 bps versus kind of pre-pandemic and less promos more pricing power, and I'm wondering if we should think about longer-term as supply and demand normalize. Do you think some of that promotionality will go away. I'm sorry, could return and, or should we think about Kors as kind of like a smaller, a little bit smaller, leaner, more profitable brands, steadier grower in terms of long-term algorithm. Thanks.

Thank you, Omar, and good morning. I'll pick part of it and I'll let Tom pick part of it as well. To begin with, I think we're extraordinarily pleased with what happened in the quarter for all three of our luxury houses and really the margin expansion we saw which was -- which was I think really important, because we've been focused on reducing the SKU counts across all three of the companies and really putting a laser focus on full price sell-throughs and that's gone up right across the Group and so I think we're seeing the impact of that. Also, I just might add that the performance of accessories at Versace is really extraordinary and far ahead of what we had, where we had expected to be at this point in time. And when you look at this brand having about a 10% increase in the quarter and remember two years ago we dropped almost $150 million when we bought the company from its -- from its revenue base to really clean it up and set it as a luxury company where we eliminated two of the lines. So that whole strategy is working in place and I think we're also seeing at the Jimmy Choo the power of two things happening again, reducing our SKUs. We are seeing better full price sell-through in the dress shoe business which is returning and our active business in particular, the -- our Hawaii and DIAMOND platforms are having a great sell-throughs. So really good things happening there. Again, that's helping to improve margin. And then at Michael Kors, there's a number of things going on. Again, SKU reduction is part of the story. Clearly, the price increases that we've taken and we will take more I think we talked about…

Sure. And thanks, again, Omar. As John noted, we did exceed expectations all this year and was really through fundamental actions and initiatives, the business is taking. And more importantly there are initiatives that are going to continue and expand upon in fiscal '22 and into '23, but we forecasted 50 basis points of expansion for margin in '22 and that includes all of these initiatives plus a little headwinds related to transportation costs and particularly in Q1, the wholesale mix. But if you look at the quarterly progression which we provided, you can see we'll be getting stronger as we move through the year as these initiatives take hold and we move past the wholesale normalization. And then, for fiscal '23 we continue to expect 100 basis points of expansion. So when we look at the total Company, we'll be expanding and then we look at Michael Kors in particular we'll be on a path to the 25% margins, which -- operating margins, which is well ahead of where we have been historically.

And Omar, I'll just add one last point as well in terms of the KPI. When you look at the fact that we've been raising prices in Michael Kors, really there has been less promotional merchandise available. Our inventories are down as less for the customer to find, and remember, that's more of a North America situation, when you go outside of North America, we don't have that cadence in the business, we follow a much similar cadence to the luxury industry. But we grew our database 18% in the last quarter, and that means two things, as the customer is responding to our marketing and Michaels' phenomenal designs, and it also means that the price increases are not stopping that customer from crossing the line and purchasing products. So thanks a lot for that question, Omar.

Great color. Thank you.

Our next question is from Kimberly Greenberger with Morgan Stanley. Please proceed.

Okay, great. Thanks so much. Really, really nice numbers here in fourth quarter. Thank you so much for the rundown. John, it sounds like just an answer to Omar's question that you might be sort of rethinking your view on long-term margins given maybe to higher margin rates that you guys are delivering right here with the ongoing opportunity. So I'm just wondering, am I reading you correctly? Do you think that longer-term operating margins both in aggregate and by brand could in fact be higher than the targets you established several years ago. And if you could just, and Tom, can you just help us understand how margins change over time through international growth and e-commerce growth? Thank you so much.

Kimberly, great question and good morning. I would answer that in two ways. First off, I think you saw in our press release today, we've announced an Investor Day. We're going to lay out some of those longer-term strategic goals and some more detailed timing around them, because we're, again we don't have crystal clear vision as you can only imagine. We're still coming out of the pandemic, and the business in Greater China has been the lead, the business in North America has had strong growth, especially this last quarter. And I might add, it's continuing on into this quarter. And one of the things we're really pleased about is the department store business in North America is quite strong. So we're really pleased to see that. And again this is on significantly reduced inventories. So the sell-through, turn and margins, it's all really in a great place. I might add, you will still see depressed wholesale numbers for two reasons; number one, Europe is not back by any stretch of the imagination. We're going to be well into latter part of Q3, I think until we see something get healthier there. And when I want to talk about, I'm talking about calendar Q3. And then, hopefully into calendar Q4, as the vaccines get rolled out there and you get more borders opened. And then lastly, while I think we've all been reading about the return of domestic air travel and we're all excited about how many people are going to travel this week. And from an international duty free business that we've talked about which is the third component of our wholesale business, that's still is basically shut down, but we think that will return in '22. So that's going to be a nice addition for us when…

And Kimberly, there were two other items you'd asked that on international e-commerce and how they impact our margins longer term. They're actually both positives for our margins and would support additional growth and expansion. When we look at international and I'm speaking about Asia in particular, it grew this year to over 20% of our total revenue and all three of our brands are growing and performing well in the region. And that is a region that structurally has higher margins. Historically, and we anticipate that to continue in the future. So as we increase our penetration in Asia and China in particular that will help the overall Company margin base. The second item is e-commerce. And now for all three brands, our commerce margins are positive for Jimmy Choo and Versace, they always were in line with or better than stores. And now for Michael Kors with the growth that we saw this year and the leverage that we've seen in e-commerce, our margins are at or above store levels. So as we increase penetration and by the way, e-commerce penetration about doubled in fiscal '21 and we'll be growing off a much larger base. As we move forward that will also be accretive to margins, we'll be making investments to help support that growth across the business as part of our CapEx plans and we're really excited about it.

And I might add, lastly, but on the part of the Greater China in particular, our competitors across the Group are running in the -- in the almost $1 billion to $2.5 billion just in Greater China in terms of revenues. So you think about the opportunity we have and those are single branded basis and think about the opportunities that we have for Versace and Michael Kors probably more able to get into those types of ranges, Jimmy Choo little less, but still a lot of opportunity. And it's, there is a very big runway of growth for this company with our brands. Thank you very much, Kimberly.

Great, guys. Thank you so much.

Our next question is from Ike Boruchow with Wells Fargo. Please proceed.

Hey, everyone. Let me add my congrats. Just wanted to dig into the gross margin real quick. I guess on the outlook, can you talk about, especially in the near term the pressures you're seeing on supply chain and fulfillment, just any detail there would be kind of interesting this year. And then maybe, Tom, on GSP just to be clear, are you assuming the GSP is not renewed in your guidance. And then if you are, if you're not what would, what would the benefit be if something retroactively does go through at some point this year. Thank you.

Thanks, Ike. With regard to supply chain and fulfillment, we are seeing delays as I noted and costs are higher. We're seeing challenges for instance just getting container space and our port delays coming out of Asia in particular, and then more delays in Long Beach and LA. However, as I noted, we have built that into our forecast and we have incorporated the higher costs. Our teams are doing an amazing job working to mitigate that both what they have done and additional plans that we're putting in place. So we do anticipate it will continue, ultimately normalize but it's incorporated in our forecast right now. With regard to GSP, we do assume that ultimately it will be renewed. There is actually some legislation put forward in the Senate that was introduced to start that process. And, but overall when you look at the GM impact, I think you have to look at the total puts and takes as to where this would fall if for instance it were not done, it's really too early to tell the impact of GSPs since we don't know the timing and the form of renewal. And as John mentioned, and I also noted, we have a number of other actual base business initiatives, full price sell through and increasing signature our pricing activities as well as those other items like Asia growth in e-commerce that we've over delivered on in the past. So with all the puts and takes, I think it's a little too early to talk about the overall impact, and net impact to our gross margins right now. We're very comfortable with the 50% or 50 basis point increase this year and 100 next.

Got it, thank you.

Thank you, Ike.

Our next question is from Matthew Boss with JP Morgan. Please proceed.

Thanks and congrats on the improvement. So maybe John, it's a little bit larger picture, but I know we've talked about it at length in the past. As we exit the pandemic hopefully sooner than later. I guess how would you re-frame the relative growth rates and opportunity as we think about first the accessible luxury market at Michael Kors operate them. And then second, maybe trends in the forward-looking really to have on core luxury, that would be more Versace and Jimmy Choo on a go-forward basis.

Thank you and good morning, Matt. So Matt a couple of things. Number one, in terms of the growth trajectory. We've really reevaluated and refined our vision for this company. I think that's been a quite a seminal moment for us is to say profitability is going to be one of the things that is absolutely critical in terms of growth and also gross margin expansion and full price sell-throughs. So as we did that and looked at that strategy, we thought that our business, and it gives around -- could somebody mute their phone by the way. There is a beeping noise. So, we really looked at around our business strategies and how we could execute against those in light of our goals and I think we came away saying Versace for sure we're on the right track. We know what we're doing, the company is really I think been cleaned up more importantly, has a very clear product strategy and vision and that's resonating with the consumers. So we're looking for a 32% increase in growth in Versace this year and by the way, again, that's really without having Europe, we will be lucky if Europe is in a healthy place by the second half of our fiscal year. And again, I'm not trying to be negative. I'm just trying to say it just takes time. And remember Europe doesn't have the same levels of stimulus being provided as North America does. So again, we're just cautious about what we see happening there. With Jimmy Choo, I think we feel much more comfortable today with reopenings and how we see the world moving forward and that business with our estimated $500 million to $525 million is a 23% growth year-on-year, which is again a very healthy increase and…

Great color. Best of luck.

Our next question is from Erinn Murphy with Piper Sandler. Please proceed.

Great, thanks, good morning. John, my question is for you on Versace, the logo product, that you recently unveiled back at the end of March. Can you talk about what distribution will look like this fall and then into next spring? And then Tom, if I can just follow-up on the gross margin, what is embedded in the outlook for any raw material cost price increases that you're seeing? Thanks so much.

Good morning and thank you, Erinn. Erinn, the La Greca, which is what you saw in the show in March, I hope you all got excited about that. Again I take my hat off to Donatella and the design team under the leadership of our CEO Jonathan Akeroyd. And this was -- this is a very important moment for the Company. The Company while we've had our iconic Medusa emblem, it really is not a full signature logo strategy. And the Company has never really had this it its history. And also what is so exciting about what's happening in Versace, when you think about Italian luxury-goods companies you typically think about leather goods. And this company, while it's been in the business never used it as its lead obviously, we were always about runway and fashion and ready to wear. And the customer has just absolutely accepted our entry into this market. And as I said, much quicker than we had anticipated or maybe even dreamed. And again, we're not even fully put our foot on the accelerator, we're just kind of mapping this very tight and strategically. So the distribution for La Greca will be obviously our own digital channels, our own retail stores and then limited our department store luxury partners. Again, we're going to go slow. This takes time. This is not going to, just all of a sudden hit and be a huge take off. But what I really, and pleased about is we now, and this is in two years, we have three pillars, we have La Medusa, La Versace [ph] and coming La Greca. And honestly we don't need anymore. We've got what we need, and now we can build upon this with our marketing strategies, our storytelling. And I think, if Versace can't tell a story, then I don't know who can. And we're so really excited about how that's going to look. And the last thing you should know for Versace and the same thing really holds true to Jimmy Choo. We have some of the best store locations in the world. We're about 40% plus renovated in the stores. We will hopefully be maybe 60-ish by the end of the year and then over the next couple of years, we will 100% renovate fleet. And as we do more business in these stores, they either go from a low level of profitability to very significant levels of profitability or some stores might have been losing money that will become profitable. So you will see quite a bit of a step change with Versace in its own retail network. So again that's what you're going to see happen. And as what I mentioned earlier to Kimberly about aspirations, as we see those step change happen, we think we're not exactly sure, 100% what volume levels, but there is opportunity to go above even our stated goals on operating margin. I'll turn it over to Tom.

And Erinn, with regard to raw material costs. We have seen increases in raw material costs and input costs and specifically leather, for instance. That is embedded in our outlook for our gross margin levels and 50 basis point increase for the year as well as the progression through the year. So if you look at the puts and takes, the takes being transportation and then the input costs and wholesale in the beginning of the year, overall which will be more than offset by the positive. So the full price sell-through, our pricing actions and growing the accessories business among other activities. So that's how we see it playing out. And then progression-wise, the first half is a little more impacted in particular Q1 by the wholesale mix as that normalizes and we get into the second half, then the benefits and the strength of those initiatives can shine through. They're there the whole time, but that's when you'll see them picking up in terms of gross margin expansion.

Thank you, Erinn.

Thank you.

Our next question is from Paul Lejuez with Citigroup. Please proceed.

Thanks, guys. The Michael Kors brand within North America, just curious what your assumptions are for this year on the wholesale side. And what percent of that brand sales in the US department stores. And then how does that compare to pre-pandemic levels? And also just curious if you could talk about performance of urban stores, malls, first outlet. Thanks, guys.

Thank you, Paul. So Paul, as I've, I think I've pointed out over the last two years. So we tried to make a very specific point in this that we look at the wholesale business at Michael Kors in three buckets. We look at the North American department store business, which I'll talk to in a moment, we look at the European business, which is a combination of both department stores and specialty stores. And by the way, there is also some regional licenses, which we don't even talk about, and there which, it could be our licenses in Russia or the Middle East, etc., all reside in that category. And then lastly is the travel retail business, which is a -- was a sizable wholesale business for us. So let me go back and start from the beginning. The North American business, will probably be more dominant of the wholesale business really because these other two categories, Europe or EMEA and travel retail is, as we've talked about is really been shut down. So, when you look at our next fiscal year, those businesses will be back in place, our fiscal year 2023. And so, the North American wholesale business will be less weighted to the total that it is today. But in North America as we've said, what we did was, we reduced the amount of sell-in of product to really push up the sell-through and to reduce the markdowns. And I have to tell you our partners here in North America have been really thrilled with this strategy. They're on board with the strategy. And they're really executing on the strategy. And if anything right now, we're a little lean on inventory. Their sell-throughs are so high in some of these stores. And that's a great place…

That's helpful, John. Thank you.

Our next question is from Jay Sole with UBS. Please proceed.

Great, thank you so much. My question is just on the balance sheet and free cash flow. John, if you could sort of elaborate what your priorities are for the free cash the company is going to generate this year and M&A is something that's rising in terms of the priorities that would be super helpful. Thank you.

Jay, thank you. I'm going to let Tom answer that, just before I want to make sure everyone knows as you're looking at here, developing your thoughts around our company. But we intend to spend into this year. So our objective is to really engage with our consumer and get them back into stores. Stores are critical that we see them return to ultimately pre-pandemic levels and so -- and so we will be using our upside in many cases to spend into great marketing initiatives and in particular at something like Versace when if we see La Greca happening, we're going to spend into it and we're going to really develop that communication with our consumer. So please make sure you keep that in your mind. And we think that's the right thing for us to do, continue to build brand equity and in certain cases in certain regions of the world where we are under-developed and Asia would be that in particular, we want to try to ride the wave and/or take market share and we think to do that we'll need to spend to those activities. Tom?

Sure. Jay, when you look at the free cash flow this year is a little over $0.5 billion is pretty close to where we were pre-COVID at over $600 million. So we're really pleased with how the business performed based on all the different initiatives we put in place and as we look forward, I think that the operating income being up at guidance levels over 60% and that's really going to help build back up our cash flow profile. And just a testament to the fundamental strength of the businesses. As John mentioned, we will be investing this year in really two areas, little higher capital expenditures as we renovate stores and build out, particularly in Asia and also investing in inventory to support the higher sales growth, but feel like we're very much on the path to continue to generate strong free cash flow. From an allocation perspective, we'll be investing in the business and this includes areas like digital. We'll be paying down debt. We have paid down significant amounts for this year, $850 million. But we will continue to do that and further strengthen our balance sheet. And that does give us capacity in the future to return cash to shareholders, and our balance sheet is very strong with leverage under 3 times at this point. And at some point in the future we may look at additional acquisitions, but we're really focused on our business right now.

Got it. Thank you so much.

Our next question is from Dana Telsey with Telsey Advisory Group. Please proceed.

Good morning, everyone and nice to see the progress. As you talked about the digital margins and the retail margins, what are the opportunities and where do you see the digital margin getting to given that it is surpassing retail margins. And is there a difference by region or by brand? Thank you.

Good morning, Dana. And thank you for that question. Dana, look our digital business is exciting. We're using data analytics to support more targeted and personalized marketing. And we're really seeing all three of our brands excel under this strategy and it's great to see the teams get together and talk about what's happening in each one of the business units and share learnings. So we find our expertise growing every day in this area. I want to also make sure everyone knows that we really believe in an omni experience and we think that as exciting as the growth is in digital and e-commerce and we want that and we're going to make sure that we continue to empower that. We're going to be equally is focused on stores. Stores will still be the predominant part of our business and we think also that we're seeing consumers moving between stores, moving between online and requiring the new thing from us, which is, which is in home experience and our clienteling initiatives that you've heard us talk about over the past few calls have really been extraordinary by all three of the groups. We're helping people by having an in home experience whether that's virtually whether that's something that we're sending products to the consumer and we're seeing excellent results from that. So we view our initiatives to be very omni based and our data analytics to be very omni based. That being said, there is clearly huge opportunity for us to continue to grow our digital pieces of the business and what we're excited about I'll just give you a good example of that is that Michael Kors, we have something called MK Go really kind of a more sporty side of the business and that business is running…

Sure. And when you ask about upside being, I think there is upside we thought this year just by building scale for instance in Michael Kors and the impact that had on the e-commerce margins being very, very positive. So as we continue to grow the size. The absolute size of that business. I think that that will certainly help. Also we're going to be making investments in our digital platforms and continue to expand our analytics capabilities, which will help improve our returns as we're investing in that business to generate sales. So that's also an efficiency I think we can apply against all three of our brands. Finally, when you look across the business is just due to the price points for Jimmy Choo and Versace have a higher structural e-commerce margins and Michael Kors, but again that Michael Kors business is improving rapidly.

Thank you, Dana. I'd like to take this time to thank everyone for joining us this morning. I know this was a little longer than normal, but it is our year-end call. And I think we also wanted to take the time to really provide some more detailed guidance. It's not our normal practice, but we felt that given the fact that we had reevaluated and refined Capri's strategic direction and that we've got a little better insight into how that flows, that it was important to share that information with you. And we look forward to giving you further updates in calls ahead and of course we'll hopefully see and talk to most of you at the upcoming Investor Day. Thank you very much, and nice speaking with you all.

Thank you. This does conclude today's conference. You may disconnect your lines at this time. And thank you for your participation.