Greetings, and welcome to Capri Holdings Limited First Quarter 2023 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Jennifer Davis, Vice President of Investor Relations. Please proceed.

Good morning, everyone, and thank you for joining us on Capri Holdings Limited First Quarter Fiscal '23 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. Unless otherwise noted, all financial information on today's call will be presented on a non-GAAP basis. These non-GAAP measures exclude certain costs associated with COVID-19-related charges, ERP implementation costs, Capri transformation costs, restructuring and other charges. To view the corresponding GAAP measures and related reconciliation, please view the earnings release posted to our website earlier today at capriholdings.com. Now I would like to turn the call over to Mr. John Idol, Chairman and Chief Executive Officer.

Thank you, Jennifer, and good morning, everyone. We are pleased that the year is off to a better-than-anticipated start, driven by strength across all 3 of our luxury houses. Our powerful brands continue to resonate with consumers, as evidenced by the 12 million new names added across our databases over the last year. Additionally, consumers are responding to the innovative and exciting fashion luxury products, led by the design visions of Donatella Versace, Sandra Choi and Michael Kors. Capri Holdings' success is a testament to the strength of our brands as well as the dedication, resilience and agility of our entire team across the globe. Looking forward, we remain optimistic about our future growth potential based on the strategies outlined at our recent Investor Day. While we recognize there are near-term macro uncertainties, our confidence in Capri Holdings' ability to achieve our long-term goals is grounded in the proven resilience of the luxury industry, the strength of our luxury portfolio and the talented group of employees executing our strategic initiatives. As a result, Capri Holdings is positioned to deliver multiple years of revenue and earnings growth as well as increased shareholder value. Now turning to the first quarter performance. We were pleased that revenue, gross margin, operating margin and earnings per share all exceeded our expectations, resulting in record first quarter revenue and earnings per share. Total revenue in the first quarter increased 8.5% on a reported basis or 15.2% in constant currency, reflecting better-than-anticipated results at all 3 brands. Operating margin of 18.5% was above our expectations. As a result, earnings per share of $1.50 was better than anticipated. Looking at group revenue trends by geography. In the Americas, revenue growth continued to exceed our expectations, increasing 11% on a reported basis or 13% in constant currency. In EMEA,…

Thank you, John, and good morning, everyone. Starting with first quarter results. Revenue of $1.36 billion increased 9% versus prior year or 15% in constant currency, exceeding our expectations. Performance was driven by better-than-anticipated results across all 3 of our luxury houses. Net income was $215 million, resulting in diluted earnings per share of $1.50. This was above our expectations, reflecting better-than-anticipated revenue, gross margin and operating margin. Turning to revenue performance by brand. Versace revenue of $275 million increased 15% versus prior year or 30% in constant currency, which was above our expectations. Global retail sales increased double digits. By geography, total revenue in the Americas increased 32%. Revenue in EMEA increased 23% on a reported basis or 40% in constant currency. Revenue in Asia decreased 20% on a reported basis or 9% in constant currency, reflecting increases in Japan and Southeast Asia, offset by an expected decline in China. Versace ended June with a global luxury fleet of 208 retail stores, flat to prior year. For Jimmy Choo, revenue of $172 million increased 21% to prior year or 30% in constant currency, above our expectations. Global retail sales increased strong double digits. By geography, total revenue in the Americas increased 42%. Revenue in EMEA increased 32% on a reported basis or 51% in constant currency. Revenue in Asia decreased 4% on a reported basis but increased 3% in constant currency, reflecting increases in Japan and Southeast Asia, partially offset by a decline in China. Jimmy Choo ended the quarter with a global fleet of 236 retail stores, a net increase of 3 from prior year. At Michael Kors, total revenue of $913 million increased 5% compared to last year or 9% in constant currency, also exceeding expectations. Global retail sales increased in the low single digits. By geography,…

[Operator Instructions]. The first question comes from Brooke Roach from Goldman Sachs.

John, given the volatility globally and a very uncertain macro, I'd love to hear your perspective and maybe some additional context around what you're seeing by key geographic region right now and the outlook that you're contemplating into the second half of your fiscal year for each of those regions. And then maybe as a follow-up, in North America, how do you see the handbag market evolving into the second half of the fiscal year? And where do you see the biggest opportunity for Michael Kors to gain market share over that period?

First, then I'd like to say, you can see from the earnings release today that we're extremely proud of starting the year off on a very good, solid footing. We've shown record revenues during the quarter and the strongest adjusted earnings per share in the company's history. So we're off to a very good start, and I think that's a real testament to -- on the 3 luxury houses: Versace, Jimmy Choo and Michael Kors. And the strategic initiatives that we put in place, most of them all before the -- pre-pandemic. As you heard me say at our recent Investor Day that we've really transitioned this company and our transition is complete in terms of positioning ourselves as a luxury group. So I think we're feeling very good about our accomplishments to date, and we think that -- if we continue to stay the course and really execute against our strategic initiatives, that there's going to be significant upside really at all 3 of the luxury houses. In terms of how we see the regional performance, I'll start with the current performance. As you could see, North America was quite strong, better than our anticipation. And we really feel that, that seems to be continuing as well. Now none of us know what's going to happen in the back half of the year with the consumer. But it appears that the luxury industry is quite robust and quite healthy. And we think that is going to continue for the foreseeable future in the back half of the year. There might be some consumer adjustments. Again, we don't know. But from what we're seeing currently, that seems to be holding up. In terms of Europe, I would say -- I would use the word surprised. We were very pleasantly surprised…

The next question comes from Omar Saad from Evercore.

Nice results. My question is actually on inventories. I wanted to see if there was any major variations across the brand -- the 3 brands or if it's relatively evenly spread across their sizes? And maybe, John, talk a little bit about core inventories, what gives you such confidence in carrying a higher level of core inventories, especially for those of us who remember Signature several years ago, got a little bit over its skis. And maybe also touch upon consumer demand for core classics versus more fashion and newness and what you're seeing in the split there?

I'm going to let Tom take the general inventory question, and I'll get to your slightly more specific parts of that. Tom?

Thanks, Omar. And first, I'd just say that what we're seeing is how we planned inventory. So it's very consistent with our expectations to have the higher inventory and the comparison against what is a really historically low level where we did not have enough inventory last year to meet consumer demand. So compared to pre-COVID levels, inventories up 25%. And as we looked at the broader inventory and supply chain situation, the delays are more related to on the water for a product coming from Asia to the U.S. and to EMEA. So that is where we're holding a little more core inventory and pulling out fashion more where that is impacted. Overall, what we're seeing now is delays are shorter. However, compared to pre-COVID, what we're seeing today would still be extremely long compared to those times. We expect delays to continue and for cost to remain high through the year. And we believe that we're in a very good spot to continue to see levels of inventory sequentially decline through the year. And as I mentioned in the prepared remarks, at the end of the year be below the prior year. So we see it playing out as anticipated and want to have the inventory in hand to be able to meet consumer demand as we see it.

Omar, I'll take your questions and break them up a little bit. First, I want to remind everyone on this call, this is -- we planned our inventories to be at this level. We did 2 things. We moved our design calendar up by almost 90 days. And we did that purposely because at the time when the pandemic was probably at its peak, we were seeing delays up to that amount on the water. So we made the determination that we were not satisfying the consumer demand, and we needed to adjust our design calendars as well as just the inventories and when we were taking them in to avoid really the delays that we were seeing. Now this is predominantly in North America, but not exclusively to North America. We were also seeing pretty significant delays going into Europe as well. So that was the first thing that we did. The second decision that we made was to take core and hold it a bit more towards a 6-month basis as opposed to a 90-day basis, which had been our historical averages. So we're seeing the peak of that as we speak today. We are going to probably pull back on the core piece of that to a more historic level. And we think that, that's probably appropriate given as Tom mentioned, some of the delays have reduced down. But still -- we are still seeing 30-plus day delays at the ports. So we'll reduce some of that. And again, as Tom had mentioned, we'll be back to actually below in Q4 prior year levels. And that's really when we started this whole initiative to kind of change our inventory flow. So there's nothing in our inventories that weren't planned this way. And additionally, we really feel like…

It's double what it was prior year, and it's a significant percent of what you see on our balance sheet. So it is not all here.

Right. So we're still getting our way through this supply chain situation. We think we'll be most of the way through it, kind of the September, October time period here, and that's when you'll start to see the more significant kind of declines in the inventory start to happen.

The next question comes from Matthew Boss from JPMorgan.

So John, maybe larger picture, what in your view, drives the durability of the overall accessories category that we're seeing? Is mid- to high single digits still the best growth rate to consider multiyear? I guess, and also, are you seeing any signs of softening across the assortment as you dissect the portfolio by income demographic? Any pushback at all to your proactive pricing initiatives? And have you seen any changes so far to what has remained a rational promotional backdrop in your segment?

Thank you, Matt, for those questions. Number one, again, I want to reemphasize that we believe that we are in both footwear and accessories because footwear is a big part of our growth strategy for this company. Again, you heard about that in Jimmy Choo, and you heard about that in Versace, strong growth. We probably don't talk about it as much in Michael Kors, but you've heard about it in the Investor Day that we think we can add approximately $250 million to that part of our business. So in luxury, it is both accessories and footwear that we think are driving consumer desire, consumer engagement and very important that both of those continue to grow in that mid-single-digit possibly high, but I think more realistically mid-single-digit range is what we think is the appropriate areas. You know that we've taken price increases in the Michael Kors brand for over 2 years, there'll be more coming this fall and some in the spring season. And at Versace and Jimmy Choo, Jimmy Choo started its price increases a little over a year ago, and Versace is starting those as we speak. And I think I've mentioned previously that Versace is probably on the lower end of some of the pricing in particular, in accessories versus our luxury competitors. We have not seen any consumer resistance to those increases. And we think that's really being driven by the strength of our designs from Donatella, Sandra and Michael and the great design teams that we have. The other issue is I think people continue to use accessories as a way to express themselves in terms of their fashion sensibility. And we see that as really being a very positive for the future. I would also tell you that interestingly enough, the resale…

The next question comes from Kimberly Greenberger from Morgan Stanley.

Okay. Great. Thanks for the great discussion and the comprehensive view on revenue. John, I thought that was really helpful. Maybe I'll go to the gross margin because we haven't talked about that a lot here during the Q&A session. Gross margin, Tom, you talked about the higher supply chain costs. First, if you could just look at the year-over-year change in gross margin and help us understand what the merchandise margin performance was as separate from some of those supply chain costs. And then within the supply chain cost, could you break down the elements or even just give us rough buckets on which of those things you view as transitory and could be recovered in future quarters or future years? And which of those cost increases in supply chain do you think are likely to be more lasting or more permanent? We're just trying to understand if we're sort of in a moment in time where there are some temporary pressures on the gross margin that could abate in the future or if anything has sort of fundamentally changed with the cost structure.

Sure. And thank you, Kimberly, for that. Let me start with Q1 because we're really pleased with performance. Gross margin was better than anticipated. And some of the dynamics occurring in the quarter are indicative of how we're looking at the year and how we pace out through the year. And it does touch on the strategic initiatives or as you were referring to them the merch margin as well as the supply chain pieces. So in the quarter, we saw the strategic initiatives continue to deliver, and that's across all 3 brands. That includes increase in full price sell-throughs, our pricing activities growing accessories at Jimmy Choo and Versace. So all of that continued to deliver. And that was, of course, in the quarter, offset by high supply chain costs. And that was almost entirely the decline versus prior year of supply chain as well as the impact of negative FX and lower sales in China, which is a structurally higher margin region. So now as we look at it, and I'll talk about the quarter pacing, we expect the supply chain negative to continue into the second quarter compared to prior year because those costs really started to add up in the third quarter and more in our holiday time frame last year. And then as we move through the increase or the headwind will lessen in the back half of the year for supply chain costs. Through this entire time, we expect the strategic initiatives or merch margins, as you might have been referring to them to be -- continue to deliver every quarter. And that's what will ultimately come through. So first quarter, we expected margin to be down but it was better than expected. Q2, we still expect to be down due to supply chain in the second half as that year-over-year mitigates, we now expect gross margin to be positive year-over-year. And for those items to continue on an ongoing basis. So those we expect through this year and next. On the supply chain side as to what is transitory, certainly, the air freight costs were transitory in the past year, and we hope that we're not in a position with dislocations to do that at any high level. The other piece time will tell as the supply chain environment normalizes, and we get into a new season of contracting. We are taking advantage of the lower delays and a little more not normal by any stretch of the imagination, but better than prior year to use things like less broker usage. But going forward, we hope that supply chain will ultimately become somewhat of a tailwind.

The next question comes from Ike Boruchow from Wells Fargo.

Maybe, John, just on the topic of M&A, there does seem to be some assets out there that do appear attractive. I know come forward has been mentioned in the news of late. But I guess I'm curious, current thinking on the M&A landscape, timing for CPRI. And when you think about potential targets for the business, are you solely focusing on owned brand acquisitions? Or does the idea of a licensing structure appeal to you as well when you kind of think about potential deals?

So first and foremost, as it relates to where we see the greatest value that we can create for our shareholders. It is on executing against growth strategy initiatives. And from what you saw at the Investor Day, we firmly believe that we have the opportunity to take this group to $8 billion. And we feel very comfortable with our initiatives and our goals around Versace to grow that to $2 billion. Jimmy Choo, as you can see by the results, is really starting to work now for the group. And we do think that, that is $1 billion brand for the company. And we do think operating margins are going to start to get into that mid-teens range here in the not-too-distant future. Obviously, this quarter was very good for us. But just on a go-forward basis, we think we understand how we can unlock the value there. And then lastly, Michael Kors, as I said before, we're pleasantly surprised at our results and where we think the future lies. In terms of, I'll call it capital allocation, look, the least expensive company that we could buy right now is . And so our priority is to continue to return our value to shareholders through share repurchases. We think this is still an asset that is considerably undervalued. And based upon that, the Board and myself, I feel that, that is really one of the best uses of our capital. In terms of a third -- another acquisition for the company, we've been, I think, very clear that whatever it is, has to have scale to it because we don't want to buy something that's small and would distract management given we have this very big opportunity in front of us with our 3 existing luxury houses. Secondly, we…

Thank you very much. This concludes today's conference. You may disconnect your lines at this time, and thank you very much for your participation.