Hello, and welcome to the Capri Holdings Third Quarter Fiscal 2022 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Jennifer Davis. Please go ahead.

Good morning, everyone, and thank you for joining us on Capri Holdings Limited Third Quarter Fiscal 2022 Conference Call. With me this morning are Chairman and Chief Executive Officer, John Idol; Chief Executive Officer of Michael Kors, Josh Schulman; 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 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 to our website earlier today at capriholdings.com. Before we begin, we'd like to announce we will be holding an Investor Day after our fourth quarter fiscal 2022 earnings call to provide an update on our long-term outlook. Now I would like to turn the call over to Mr. John Idol, Chairman and Chief Executive Officer.

Thank you, Jennifer. Good morning, everyone. We continue to be encouraged by the ongoing momentum of Capri Holdings as we execute against our strategic growth initiatives. I'm extremely pleased with each of our fashion luxury houses' robust holiday results. Sales trends significantly exceeded our expectations as consumers responded to compelling product offerings from Donatella Versace, Sandra Choi and Michael Kors. Versace, Jimmy Choo and Michael Kors continue to resonate with consumers as evidenced by the 11.5 million new consumers added across our databases over the last year. Capri Holdings' strong holiday results are a testament to the strength of our brands as well as the hard work and dedication of all our employees around the world. I am especially pleased that we were able to deliver these results, while navigating the ongoing headwinds associated with the pandemic, including regional restrictions and supply chain challenges. Looking forward, as the world continues to recover from the impact of the global pandemic, we remain confident in our future growth potential. Now turning to third quarter results. We were pleased that revenue, operating margin and earnings per share all exceeded our expectations. Total revenue increased 24%, reflecting better-than-anticipated results at all 3 brands. This represents a sequential acceleration relative to the second quarter on both a 1- and 2-year basis. Gross margin continued to expand even with greater-than-anticipated supply chain cost. Operating margin of 22.3% was above our expectations. As a result, earnings per share of $2.22 was better than anticipated. Looking at group revenue trends by geography, [indiscernible] significantly exceed our expectations, increasing 26% and would have been even greater if not for inventory constraints. In the EMEA, revenue increased 35%, also above our expectations with growth across all houses, despite increased restrictions in certain countries. The strong momentum in the region was…

Thank you, John. Good morning, everyone. I am thrilled to be here at Capri Holdings. In the 5 months since joining, I've had the opportunity to spend time with our amazing Michael Kors team across the globe and visit many of our beautiful stores. The level of energy across the entire organization is inspiring, and I'm extremely impressed with the level of the talent and the exceptional work the teams are doing to implement our strategic initiatives. I would like to take a moment to congratulate and thank the entire Michael Kors team for their outstanding execution and performance over the holiday period. The better-than-expected revenue reflects the success of our strategic initiatives, including elevating the brand positioning and capitalizing on our recognizable signature styles. I look forward to building on this success as we continue to innovate and elevate the product and further increase AUR. The time I have spent with the teams, combined with our strong holiday results further reinforce my belief in the future growth potential of the Michael Kors brand. Its tremendous success is in large part due to the fashion icon, Michael Kors himself, his design vision and his ability to create timeless fashion that embodies Jet Set glamor. I believe we have an incredible opportunity to capitalize on the strong foundation that John, Michael and the team have built over the years. I look forward to sharing my vision for the future direction of Michael Kors at our Investor Day. Looking at Capri Holdings, I am impressed with the incredible portfolio of luxury houses, each with their own rich heritage, exclusive DNA, and strong consumer loyalty. Capri is unique, with 3 brands led by the design visions of Donatella Versace, Sandra Choi and Michael Kors. Each of these original founders are iconic figures and have powerful voices to communicate with their fans. I am confident in the strong growth potential for Capri Holdings and look forward to partnering with John and the Board in the future to lead the company through our next chapter of growth. Now let me turn the call over to Tom.

Thank you, Josh, and good morning, everyone. Starting with third quarter results. Revenue of $1.6 billion increased 24% versus prior year, exceeding our expectations. Performance was driven by better-than-anticipated results across all 3 of our luxury houses. Net income was $339 million, resulting in diluted earnings per share of $2.22. This was above our expectations, reflecting better-than-anticipated revenue and operating margin as well as a lower tax rate. Turning to revenue performance by brand. Versace revenue was $251 million, a 29% increase to prior year and above our expectation. Global sales in our retail channel increased over 20%, with double-digit increases in both e-commerce and store sales. By geography, total revenue in the Americas increased 56%. Revenue in EMEA increased 30% and revenue in Asia increased 2%. Versace ended December with a global luxury fleet of 212 retail stores, a net decrease of 5 from prior year. For Jimmy Choo, revenue was $178 million, a 47% increase to prior year and above our expectations. Global sales in our retail channel increased over 40%, with strong double-digit increases in both e-commerce and store sales. By geography, total revenue in the Americas increased 59%, revenue in EMEA increased 73%, and revenue in Asia increased 18%. Jimmy Choo ended the quarter with a global fleet of 240 retail stores, a net increase of 9 from prior year. At Michael Kors, revenue was $1.18 billion, a 20% increase to last year and above our expectations. Similar to last quarter, revenue growth would have been even greater if we had more product available to meet consumer demand. We estimate inventory constraints had a mid-single-digit impact on Michael Kors' third quarter growth rate. Global sales in our retail channel increased in the mid-teens, with double-digit increases in both e-commerce and store sales. Wholesale revenue increased over…

[Operator Instructions]. Our first question is coming from Omar Saad from Evercore.

Another great quarter, guys, congrats. And welcome, Josh. I guess my opening question would be for you. I'd love to hear, coming in on your first call here, what -- how are you thinking about your -- the long-term vision for the Michael Kors brand? It's a big brand. It's already successful and profitable. What do you think is ahead for this brand? And the biggest opportunities? Is it digital? Is it international? Is it Asia? Is it the premiumization effort? Would love to kind of get your high-level thoughts on where you see this brand evolving over the long term.

Thank you, Omar. It's great to talk to you again. And it's terrific to be on the call and terrific to be here with this team. I have been so impressed with what I've seen in the last few months with the brand and the team. And I am particularly encouraged by seeing how this team has continued to elevate the brand. And as Tom mentioned, it's really emerging from the pandemic much stronger than ever. We can see that in the pricing power that the brand has. And to your point about continued premiumization, clearly, continuing to elevate the brand, continuing to lean in to our authentic Jet Set DNA through a modern lens will be a big part of what we will be doing with Michael Kors. Of course, I'll share a more fulsome view of the strategy for Michael Kors at Investor Day in a few months. But just to touch on a few areas where I see a significant growth. So first, digital. We have a database of nearly 60 million people that is growing, accelerating very fast. As John mentioned, we picked up 20% to that database, nearly 10 million people in the last period. And there's an opportunity to harness the power of this database to drive the e-com business globally. And so that's something that I am passionate about. Asia is another point. It's almost as if you articulated some of my thoughts in your list there. Asia, clearly, we are underpenetrated versus our luxury peers there. And there is the opportunity to at least double our revenue in Asia. And then on a category basis, I think John mentioned in his remarks, the positive reception that we're having to our men's products, and that's an area where we are also very underpenetrated relative to our peers. So those will all be areas of focus that you will continue to hear me talk about specifically at Investor Day and as we continue to elevate the Michael Kors brand.

[Operator Instructions]. Our next question is coming from Matthew Boss from JPMorgan.

Congrats on another nice print, guys, and welcome aboard, Josh.

Thank you.

So maybe, John, as we potentially exit the pandemic, could you maybe speak to your confidence in the underlying growth prospects for handbags and accessories as a category? I guess, do you believe your initiatives have now set a foundation for continued full-price selling? Or is there any give back to think about? And then just last, on the double-digit top line for next year, does this a better return of travel and tourism? Or how best to think about timing for that opportunity?

Matt, and thank you for the nice comments about our quarterly results. The first thing I'd like to say is we were very pleased with the performance of all 3 of the luxury houses during the quarter. We saw traffic in our stores accelerate during the quarter, which -- that's not something we've seen in a long time. And that really speaks to the health of the consumer really across the globe. And what we also saw was double-digit revenue growth at all 3 of the luxury houses and accessories. And as you know, at Michael Kors, it's obviously the biggest piece of the business. At Versace, it's the biggest opportunity for the business. And then at Jimmy Choo, that will be one of the key kind of inflections for that brand to get towards those mid-teens operating margins that we've talked about. So I think all 3 houses are really positioned well as it relates to product. The marketing initiatives were, I thought, really incredibly well executed over the holiday season. And as we start out the spring, and we're dropping our new campaigns at all 3 of the houses. I think you saw the wonderful campaign about love and sisterhood and -- with Bella and Gigi. At Versace, I think you -- some of you may have seen the Maluma campaign, also very powerful. And at Jimmy Choo, this Time to Dare marketing is really creating brand heat for us. And so we're seeing some strong reaction from the consumers around that. And then at Michael Kors, as Josh talked about, really focusing on our Jet Set heritage through a modern lens. You're going to see some very powerful marketing around that. So I think when I look at the way that our brands have positioned themselves, the…

Our next question today is coming from Kimberly Greenberger from Morgan Stanley.

Okay. Really fantastic results here. John, I just -- I wanted to start on Versace because I was wondering if you could just reflect on the last sort of 2 or 3 years. Versace has really delivered just incredibly. And as you reflect on the brand investments you made, the momentum the business has now, if you were to sort of categorize the top 2 or 3 drivers of just the long term, what is it that's underpinning the inflection in financial results and the nice growth there? And then, Tom, I wanted to see if you could just unpack the inventory growth a little bit more. The core product growth that you're expecting in 2023 versus, let's say, core versus fashion and your inventory flow strategy in terms of receiving some of that core product earlier to say -- assuming air freight?

Thank you, Kimberly. So first and foremost, I have to take my hat off to the teams at Versace because they're the ones who are really executing on these initiatives. So when we bought the company, as you know, it had multiple lines. We had to reduce those, shaved $150 million in volume, then we were hit by the pandemic. And so we definitely had an uphill walk or trout to try to put our strategic initiatives in place. But we never wavered. During all this time period, we've never lost sight of what the goal is. And I think I said it on a previous call, and I'm going to reiterate it again, we have $2 billion clearly in sight at this point. That is a milestone we feel very comfortable in achieving. The question now is not the $2 billion in my opinion, we'll talk more to you about that at Investor Day. The real discussion is going to be around how much bigger is it going to be than that. And Versace belongs in the category of some of the most important luxury brands in the world. The brand recognition and the love for this brand is nowhere near the performance. And so that is -- that's -- we feel that we will now have products to be able to bring those 2 things together much more closely and fuel that. I want to say one last thing before I get into the 2 or 3 drivers. We need to manage this carefully, though. What we don't want to do is to have something that explodes and then comes back down off that trend. So with luxury, you have to invest, you have to pace it and let the consumer really desire it. And not try to…

Thanks, John, and thanks, Kimberly. When we look at Q3, delays, as I noted in my remarks, really increased during the quarter. So our delays on the water and getting product in were extended. And as John mentioned, we just didn't have enough product to fill our robust consumer demand. Looking forward, Kimberly, we expect that to continue. So we've put in the program -- among other programs, but a key one is the core -- order core product earlier. And that smooths out our product flow and allows us to maneuver and manage around these extended and variable lead times. Fashion is still key. We'll have more core. The fashion piece remains a critical component clearly of all 3 brands, and that will not change. As a result of this, we do expect over the next few quarters or spring time frame to have significantly higher inventory, but would expect that to normalize after. And again, it allows us to manage and satisfy consumer demand. And I would mention that over the longer time frame of full year, say, we're looking at tightly managing and continuing to manage our inventory. This just gives us the flexibility short term to manage this variability.

Our next question is coming from Ike Boruchow from Wells Fargo.

I guess I wanted to ask -- this is great detail, Tom, John and Josh, thank you, for next year. Just kind of curious on the balance sheet and the cash flows of the business, which are tremendously above '19 levels. I guess is there a buyback that's embedded in next year's EPS that you guys are giving us? And then on the topic of M&A, how do you guys balance M&A versus buyback with the stock as cheap as it is right now versus the potential you've obviously proven the ability to acquire and scale an acquisition with Versace? I'm just kind of curious how that discussion goes internally.

So Tom, I'm going to take the M&A piece and just a tiny bit on next year, and then turn it over to you. As it relates to M&A, we've stated it publicly, we're active in research. We don't see anything in the near term. If something becomes available, we will absolutely be involved in those dialogues and conversations. And again, we're interested in expanding our luxury portfolio. That will typically mean that it's basically only European brands that we'll be looking at. So nothing really to report there, except we will be active in that marketplace. In terms of next year, I just want to point out something. We gave, I think, earlier-than-normal guidance or outlook because of the fact that it's hard for you all to see what we're seeing in terms of supply chain and costs that are impacting us. So I hope you appreciate that we're trying to be as transparent as possible to give you and all of the investment community a feeling for how we see next year flowing in particular, in light of these transportation and supply chain challenges. So that's really the rationale around that. Let me turn it over to Tom to talk about the balance sheet.

Thanks, Ike. And I appreciate the comment on cash flow, because I love talking about the cash and the cash flow generation of this company and our 3 brands. So that has been robust this year, and that allows us to both pay down debt, which we've been doing across all the quarters. And as you've seen, increase our share buybacks up to $200 million this quarter. So for next year, with continued progress, we'd expect to continue to generate strong free cash flow. Our leverage even with the debt we have on our balance sheet is extremely low. So I feel we have a very strong position there. And buybacks, again, with the valuation, remain a very important component of our capital allocation priority. In terms of the actual guidance, we haven't provided that level of detail at this point. While we don't normally include that in our guidance when we provide it at the end of the year, we'll be more specific on shares and how buybacks may incorporate into that. But I would say that's something that, overall, we would continue to do.

Our next question is coming from Oliver Chen from Cowen.

Josh, for Michael Kors brand, would love your thoughts on logo and Signature innovation and what may happen next. And also, as you think about lifestyle and multi-category, I mean, Kors has a very attractive footwear business. Where do you see the biggest opportunities and priorities there as you continue to generate and amplify and simplify the portfolio as well?

Oliver. Nice to speak with you. So I think the team here has done a terrific job of amplifying Signature across categories. And I think signature is something really interesting because it's a very clear reflection of brand equity and brand heat. And when people are buying Signature products, they're literally walking around advertising the brand. And so the fact that it is some of our most profitable product that sells at premium prices at full price also is such a good indication of the brand. And so I think you'll see more and more innovation within our Signature using the Signature pattern in surprising ways. Certainly, one of the highlights that John mentioned was the Bond collaboration that the team did in October, which was a -- which was based in a metallic Signature iteration. And then how that was marketed as part of this collaboration and how it was broadcast really across channels globally and built the social following and also drove sales, it's almost a virtuous cycle of how that works to help embed Signature in the culture. And I think you'll see more of that. I think one of the interesting things, as you touch about with the Michael Kors brand, is that this is a unique brand with its own narrative. And that really starts with Michael Kors himself, as the preeminent living New York designer, helming a fashion house. And so it really starts with the categories that he's always believed in and how those reflect the Jet Set DNA of the company. So you mentioned footwear. So there are certain classifications in footwear, whether it's our trainers, our dress classification or boot classification, where we have real product authority there. And I think as I'm getting to know the business and getting to know the brand, spending time with the teams to understand how we can hero our most iconic products in new and refreshing ways across categories is certainly a priority.

Our next question is coming from Erinn Murphy from Piper Sandler.

Congratulations on a great quarter. My question is around the 11.5 million new consumers you referenced, John, that you guys attracted over the last year. Could you talk a little bit more about the age versus the income profile of these new customers versus what you've seen historically in your base? And then just a clarification, Tom, for you. How are you thinking about the potential impact from lapping stimulus in your fourth quarter and first quarter guide?

So Erinn, a couple of things. Number one, I have to take off my hat again to the teams around our company. The Michael Kors team did a spectacular job. And you listened to Josh's comments before, we added 20% to our consumer database. Almost 10 million people in the quarter. I mean that's really incredible. And that's why, quite frankly, we didn't lap promotional activities of last year. Our full price selling is up dramatically. And so what we're seeing is -- and the AURs are up double digit. The health of the consumer entering our brand, both new and existing is really quite strong. And at all 3 brands, we not only grew new customers, but we also had the largest reactivation of lapsed customers that we've had in the company's history. So I think that says -- it speaks volumes to what we're seeing across -- quite frankly, it was all 3 brands. But Michael Kors, again, while hopefully our teams are listening to this call, I want to really tip my hat to all of you for what an extraordinary job you did. And I think it speaks volume to the messaging that Michael and our creative teams are putting together as well as what you see at Versace and Jimmy Choo. So we're seeing definitely a younger consumer come to all 3 brands, which is, in many ways, not unusual to Michael Kors because we've had that over the years. We've always had a younger customer. But it's a bit more unusual for Versace and Jimmy Choo, which tended to have slightly older customers, mainly due to the pricing of the product. But accessories, in particular, handbags and small leather goods, really are a way to engage with consumers that someone want to buy something…

Sure. Erinn, regarding the impact of the stimulus and what's included in our expectations, in the past, the stimulus has come on. And then there have been gaps in it. We've seen momentum only improve with our brands. So if you look across the quarter sequentially compared to the pre-pandemic levels, we've seen great sequential improvement even when there was or wasn't a stimulus impact. What we're seeing now is the consumer, we believe, is fundamentally healthy and the demand for our brands remains very, very strong and robust. So as we enter into Q4, our trends are in line with Q3. We're bringing in new consumers, and that's an important fact as well that will help shore uplift the demand and the continued success of our brands. And all of this is incorporated in our expectations. So it is incorporated in the guidance that you've seen for both Q4 and the quarters next year.

Our final question today is coming from Simeon Siegel from BMO Capital Markets.

Congrats on the ongoing strength. It's a really nice job, and welcome to the call, Josh. Great to have you here. So just 2 quick ones for me. Really fantastic AUR growth. We've been seeing that. Your comments about ongoing opportunity are also really encouraging. So just any view on the order of magnitude opportunity there? And then, Tom, I know we talked about the go-forward inventory. Can you just quantify what the in-transit inventory was within the embedded balance now? Maybe thoughts on the timing of that product? And just so we know what is the in-transit inventory, so just whether we should think about whether there are concerns over any late received seasonal goods or just anything along those lines?

I'm going to grab Versace and Jimmy Choo, and then turn it over to Josh for Michael Kors. We're seeing very strong AUR growth at Versace, and that's really driven by the accessories business and the full price selling and sell-throughs that are happening in that business. So AUR growth quite significant at Versace, and it's really driven by those 2 things. Accessories and much, much better full price sell-throughs because we're not over relying on ready-to-wear, which always has higher markdown rates. Number one. Number two, Jimmy Choo, we talked about price increases. We're putting those -- have been putting those in place and more to come. The brand has been underpriced, if I can say that, versus what the consumer perception is. And we've seen absolutely no consumer resistance to any of the price increases that we take -- have taken, and there will be more as well. So we feel really good about what's happening at the AUR level at both of these companies. I will also say to you that Versace will begin to take price increases. We had certain target levels that we wanted to be at with Versace, which were competitive with certain luxury competitors. All the luxury industry is raising prices. And we will talk to you more about this at Investor Day, but we'll be positioning Versace at a higher price point than where it is today, which should long term bode well for the gross margin of the company. I'll turn it over to Josh for Michael Kors.

So in terms of AUR for Michael Kors, as we noted, we've seen consistent AUR growth in the high teens, specifically in the holiday quarter. And I think it's important to note that, that was led by North America, which typically has been a more promotional environment. And as Tom said, we're not lapping those promotions. And so that has translated into very robust AUR growth. And it has -- my hats off really to the North America team because it's giving everybody confidence, understanding that the consumer is willing to pay for the brand. And the brand is demonstrating pricing power. So you'll continue to see more emphasis on price increases and a specific focus on the best category as we think about the good, better and best opportunities within each classification.

And to add on to what Josh just said, I want to be clear about one thing. We're not just taking price increases, we're improving quality. We're adding more to design. And truthfully, as we go back and look historically, we used to sell much higher handbags, in particular, in the company over the years. And so we're just going back to where we were before. And wherever we were over the past few years, we don't think that's the right positioning for this company long term. So not only will prices go up, but it's really going to be the positioning of the product itself, which I think is really important for everyone to understand. Tom, do you want to just finish up on the inventory? And I'll give some closing remarks.

Sure. Happy to. So Simeon, with regard to in-transit, it significantly increased. It was over 2.5x the prior year level. And what that resulted in was our on-hand inventory overall for the company was around the same level it was in the prior year even though sales were increasing. And that is even more challenging in certain areas, like Michael Kors in North America, which, of course, as John mentioned, that we were not meeting our consumer demand. So as it regards to receipts, we want to make sure we're getting the product in, and that's -- a result of that is the higher cost and supply chain that we noted over the next few quarters. And we believe that will help us meet consumer demand. At the same time, we do expect in-transits to be higher. Inventory, over the next few quarters, as I mentioned, would be significantly higher through spring. A portion of that will be in-transit, and that will be in the normalized past that time.

Thank you, Simeon, and thank you, Tom and Josh. So first and foremost, again, I'd like to welcome Josh to the team. He's been here for 5 months. And I think the future is bright under his leadership at Michael Kors and ultimately for Capri. So again, Josh, welcome to the team. And lastly, I'd like to conclude by saying we were very pleased with our third quarter results. We believe that fourth quarter is also starting off on similar trends. So we see the health of the consumer continuing. And we are -- as we had indicated in our outlook, this will be the highest level of revenues in the company's history this year. As well as at $6 a share, the highest level of earnings per share growth significantly from where we have been historically. So I think this company is really positioned for significant future growth, and we look forward to sharing more about that at our Investor Day in June. Thank you very much for joining us today.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.