Greetings, and welcome to the Capri Holdings Limited Second Quarter 2023 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jennifer Davis, Vice President of Investor Relations. Please go ahead, Ma'am.

Good morning, everyone, and thank you for joining us on Capri Holdings Limited Second 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, impairment charges, restructuring and other charges. To view the corresponding GAAP measures and related reconciliation, please view the earnings release posted on 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. John?

Thank you, Jennifer, and good morning, everyone. We were pleased with our second quarter performance as Capri Holdings delivered strong revenue growth and record earnings per share. Results were driven by momentum across all 3 of our luxury houses, reflecting the continued execution of our strategic initiatives as well as the power of our brands. While we remain confident in our long-term growth potential, we are now more cautious in our revenue outlook for the remainder of fiscal 2023 due to an increasingly uncertain macroeconomic environment, foreign currency headwinds and the ongoing impact of COVID-related restrictions in China. Accordingly, we will carefully manage our business by focusing on profitability and controlling expenses. Despite near-term headwinds, we will remain focused on executing the strategic initiatives that we presented at our recent Investor Day to drive sustainable future growth. Before turning to second quarter results, I would like to welcome Emmanuel Gintzburger as our new Chief Executive Officer of Versace. He has a proven track record of building global fashion luxury houses. We believe his experience and vision for Versace will help us further accelerate our growth plans and strengthen our strategic initiatives. We look forward to you getting to know him in the future. Now turning to second quarter performance. Revenue was in line with our expectations, increasing 9% on a reported basis and 18% in constant currency. Operating margin of 19.8% was above our expectations, reflecting better-than-anticipated gross margin and diligent expense management. We delivered record second quarter earnings per share of $1.79. In terms of customer acquisition, we added more than 12 million new names across our databases versus the prior year. This is the largest year-over-year increase in our history, demonstrating the strength and desirability of our brands. Now looking at second quarter group revenue trends by geography.…

Thank you, John, and good morning, everyone. Starting with second quarter results. Revenue of $1.41 billion increased 9% versus prior year and 18% in constant currency, in line with our expectations. Net income was $245 million, resulting in diluted earnings per share of $1.79. This was above our expectation primarily reflecting higher-than-anticipated gross margin and diligent operating expense management. Turning to revenue performance by brand. At Versace, revenue increased 9% versus prior year and 28% in constant currency. Global retail sales increased double digits in constant currency. By geography, total revenue in the Americas increased 12%. Revenue in EMEA increased 10% on a reported basis and 28% in constant currency. Revenue in Asia increased 2% on a reported basis and 20% in constant currency, reflecting strong growth in Japan and Southeast Asia, partially offset by an expected decline in China. For Jimmy Choo, revenue increased 4% to prior year and 15% in constant currency. Global retail sales increased double digits in constant currency. By geography, total revenue in the Americas increased 13%. Revenue in EMEA increased 2% on a reported basis and 20% in constant currency. Revenue in Asia decreased 2% on a reported basis but increased 12% in constant currency, reflecting increases in Japan and Southeast Asia, partially offset by an expected decline in China. At Michael Kors, revenue increased 9% compared to last year and 15% in constant currency. Global retail sales increased high single digits in constant currency. By geography, total revenue in the Americas increased 16%. Revenue in EMEA was flat on a reported basis but increased 15% in constant currency. Revenue in Asia decreased 5% on a reported basis but increased 7% in constant currency, reflecting strong growth in Japan and Southeast Asia, partially offset by an expected decline in China. Now looking at total…

[Operator Instructions]. Our first question comes from Matthew Boss with JPMorgan.

Great. So John, as we consider the increased caution that you're now embedding in your back half guide, have you seen any notable softening in demand across your brand portfolio to date at direct-to-consumer? Maybe could you elaborate on the $100 million Michael Kors wholesale reduction? And then just how do you see current inventory levels for the accessories category positioned into holiday?

And so I'll first start talking about our own retail channels. In North America and in Europe, we're seeing very robust sales in both of those markets. We're actually quite pleased in our own channels. And as it relates to our direct-to-consumer/e-commerce part of the business, that's actually trending extremely strong. You could see by the level of database increase that we had at Michael Kors, which was 17%. And that's on a very, very large database already. We're definitely attracting consumers. We're engaging with consumers, and we're seeing very strong results. We were also pleased with what we're seeing happening with our accessories business. As you know, we've traded -- we've really been moving the positioning of that part of our business up as we're elevating the brand, in particular, in Michael Kors, although we have been taking price increases at both Versace and at Jimmy Choo. And that's all been going very well for us. So in our own direct-to-consumer channels, we're feeling very positive. I would put one caveat on that, that's China. China, we have actually seen a slowdown. We saw that happening about a month, 1.5 months ago, where things have actually gotten a little more difficult. And that's predominantly because of the COVID restrictions, and we are having various either cities or malls open and close. And it's been causing a great deal of difficulty, and I'm sure you've seen the data. Actual internal travel inside of China is down as well, domestic travel. So we've taken a much more cautious approach even than where we were before on China, and we think that it's going to take time for that region to recover for us. In terms of the wholesale channel, we have seen some slowing in that channel over the last few…

Thanks, Matt. And on inventories, we feel really good about the quality of the inventory. And that's in total and for accessories and believe we're in a great position for holiday. And this compares to last year when we really didn't have the inventory that we wanted or needed. So we feel like we're in a much, much better position. And in terms of inventory levels, as I mentioned in the prepared remarks, up 36% versus prior year but only 10% versus pre-COVID. And that's a significant decline from where we were in Q1 and right in line with our expectations. So as we look forward, we continue to work through inventory and expect levels to be down sequentially and end the year below the prior year.

I think that's an important note what Tom just said is we -- I think, have been giving you all a view into how we were planning inventories. We moved up deliveries dramatically. We moved up our design calendar. We flowed merchandise here to be ready for the fall season, but also to make sure that we didn't have vessels that were continuing to be stuck in different places. And so that cadence is something that we're going to stay with. And therefore, that was a year-long inventory adjustment. And again, I just want to remind everyone, we anticipate inventories to be below LY in Q4, which we think is really a testament to the great management of all of the production teams and the design teams in our company as well as the retail planning team. So we feel excellent about that. And I think that, that's going to bode well for our margins going forward.

Our next question comes from Kimberly Greenberger with Morgan Stanley.

Okay. Great. I wanted to ask about the gross margin results here. You are obviously navigating through some significant supply chain headwinds, but the results keep coming in sort of better than expected, John. And I'm wondering if that some of the pricing initiatives that you're engaging in? Or what do you -- to what do you attribute that better gross margin performance? And then Tom, on the -- I know -- I think the cost pressures in gross margin have been primarily inbound freight. Are you seeing any product cost inflation that's not the inbound freight? And when do you think -- I know that global freight rates are falling. When do you think we sort of get through the last of the headwinds on inbound freight?

I'm going to really let Tom address both questions, but I just thought I'd touch on the price increases. So as you know, we started price increases in Michael Kors almost 3 years ago as again, we were elevating the brand. And we're really pleased with what we've seen happen in particular with our new Parker collections and where we've been focusing on hardware. Again, as I mentioned in my prepared remarks, the Signature part of our business has been terrific. And that's really lended towards a higher gross margins for us because it's more a carryover product and clearly resonating with the consumer, reaching 50% of our revenues in Michael Kors, which is where we thought -- where we wanted to and projected to be. And now we're seeing a very nice uptick with the hardware strategy, both in accessories and in footwear. Footwear, we achieved high single-digit growth in our retail channel and then accessories, mid-single digits. So that's I think bodes well for what we're doing from a strategy standpoint, also says that the consumers responded positively to not only product, but they haven't pushed back on the pricing piece. I do want to say that we will take one last price increase for spring, and then we're going to pause our price increases in most of the group for fall season. And we'll see what happens beyond that. Again, we've raised prices very significantly over the last 3 years at Michael Kors. And in Jimmy Choo and Versace, we've done it pretty quickly actually. So we think we're in a great place. And I think you're seeing that flow through our gross margin. And that was in spite of -- I think you recall we had between 300 and 400 basis point increases in our cost of goods around freight. So thank goodness, we had put those strategies into place. That's really been holding up. And then lastly, we have reduced, and again, in particular, in Michael Kors, the amount of promotionality that we've had in the business. We've been stepping that down over the last 2 years. And we're going to step it down a fairly significant amount next year as well. So all of that, we, again, continue to hope shows up in the gross margin. But let me -- let Tom talk to you about the cost and the freight.

Sure. And then, Kimberly, a little perspective on your gross margin. It is all being driven in terms of the upside by the strategic initiatives. If I look at Q2, our supply chain headwinds, which we knew would be there, were pretty much right in line with what we expected. Costs are higher than last year. And as we look forward, and as we've said before, in the second half, we expect that supply chain costs versus prior year will be a little lower because we're comparing against our highest cost levels and times when we aired product for prior holiday. It doesn't necessarily mean they're coming down dramatically. It just means we're comparing against a much higher period. So as we look at the second half, we look at the strategic initiatives continuing. And as you said and mentioned, they are delivering. And they continue to deliver very nicely above expectations. Supply chain will be a positive. But we have Asia, in particular, China, which is a very high-margin region as a headwind as well as our FX. That all said, we do expect gross margin to be up in the back half. And we felt confident based on our Q2 results and our outlook for the future to raise our guidance for gross margin for the year by 50 basis points. So feeling good on that side. In terms of product costs, while there are pockets of cost increases, we don't see a material cost increase. We're looking forward, and that may be one of the benefits of the stronger dollar at some level. So the last question you mentioned was when will we through the freight cost increases? And I maybe provide a little perspective on what we're seeing out there. As opposed to last year when there were long delays, we were not seeing delays at this point. However, we're remaining cautious because we still have to get through potential port shutdowns if there are COVID-related restrictions and the normal buildup heading into Chinese New Year. So really, I think this is something we'll take a closer look at and monitor as we look at next year and renew our annual contracts for our freight carriers.

[Operator Instructions]. Our next question comes from Omar Saad with Evercore.

I was hoping maybe you could elaborate a little bit on the slowdown you're seeing in wholesale but not really in DTC. Any thoughts on why you're seeing a bit more of a slower trend in that channel versus DTC channel? And then maybe, John, you could talk a little bit more detail about the data and analytics. You've mentioned several times in the call, it seems like you're hitting a tipping point in terms of your capabilities there.

Sure. So Omar, I can only speak to -- we understand our own traffic, both online and internally at the store level. Our traffic on all 3 of our houses is up very significantly. And you can also see that by the capture. You look at the numbers of Versace's database up 40%; Jimmy Choo, up 30%; and Michael Kors is up 17%. Those are, I think, pretty spectacular numbers. And again, I take my hat off to our teams, and it's really the storytelling that they're doing around great product innovation led by Michael and Donatella and Sandra. And I think the product in the company is looking really good. And I'm quite bullish on how good the product is looking and how good the stores are looking. And I'm also seeing a lot of our data capture comes from point of sale. And our sales associates are so engaged right now, and you've heard us talk a lot about clienteling. And the group is getting better and better at that. We have a group-wide tools in place that the sales associates can now really do a much better job of clienteling and capturing names. So we're seeing that strategy. It's been working for the last 2 years, and it's gaining even more steam. And so I'm very excited about what that means for us because, again, if you look at customer lifetime value, that's going to be very significant for us on a go-forward basis. We're also seeing traffic hold up relatively well in our stores. And again, I want to speak to North America and to Europe. We're not seeing the same in China. And in fact, we're seeing traffic decelerate in the region. And we're hopeful that, that will begin to change at some point in…

Our next question comes from Ike Boruchow with Wells Fargo.

I'm actually going to go to Tom for this one. I kind of want to just focus on the balance sheet and on the interest expense that you guys are currently seeing going back to the summer, Tom, I think you guys were expecting about $35 million in interest income. Now I think you said it's $6 million interest expense. Can you just walk us through the components of the balance sheet that are moving around with interest rates rising, what's floating, what's not? And just kind of how we should think about the run rate of payments? And does that impact how you think about capital allocation? It sounds like you just bought $100 million in stock quarter-to-date. So it sounds like the answer is no, but I just kind of wanted to double check on that.

Yes, I'll start with that, Ike, which is we're really comfortable with the strength of our balance sheet and free cash flow generation as well as the levels of debt that we have on now and the leverage rate, which is very, very manageable for us. So we have pivoted, as we noted in Investor Day, to return cash to shareholders first versus pay down debt, given the value we believe that exists in our share at the moment. So we'll be continuing to focus on that as we move forward. And then what you'll see is a little higher year-over-year debt balance, net debt balance as a result of that. And we believe that's the right position to be in under the current circumstances. In addition, you noted that interest expense has increased versus our original guidance, and it's really a couple of things. The first and foremost, interest rates are higher. So we're just paying more on revolving debt. We do have a bond out there that's at a fixed rate. Our revolver is at a variable rate. So that is impacted by that as well as higher debt balances. The last part is a little lower interest income that we are generating from certain hedges that we had in place that are no longer in place, and we'll be revisiting them in the future. So that's the really the 3 puts and takes related to that, but it's really managing and buying back shares that we want to focus.

Our next question comes from Simeon Siegel with BMO.

It's Dan on for Simeon here. Just to get your thoughts on where industry promotions and inventory go over the near term. And then given the successes you've had on the price and architecture, what guardrails you have in place there?

Simeon, can you repeat that question? We kind of didn't understand you.

Just your thoughts sector-wide where the promotions and the inventory go over the near term here, and then just how you protect the pricing and the Kors gains that you've had?

Okay. Look, we can't speak to the sector-wide or industry. Different companies are going to take different positions on their inventory or their sales trend. So we can't control that. And we have a strategic vision for our 3 houses, and we believe that's working. We believe that's resonating with the consumer. And I want to point to Versace as a starting point. You look at what we've put in place in terms of trying to build and make Versace a luxury leather house. Our accessories business increased by 60% in our own retail channel during the quarter. That's extraordinary. And I'm really -- again, I take my hat off to the entire design team back in Milan and all of our sales associates around the world. And they're really starting to gain some significant traction in that category, and our women's footwear business has been strong as well. I looked at Jimmy Choo. And with the launch of our new Avenue collection around VARENNE, our accessories business was up by 30%. And of course, Michael Kors in the mid-single digits, given what we've put in place around that strategy. So we don't want to do anything to damage that. These are strategies that are working. And to Kimberly's earlier question, another tailwind that we're getting is the more we develop accessories, the higher the margins are for the company. And again, if you look at where Versace's operating margins came in much, much higher than we had anticipated. And again, we're making great headway in that business in terms of profitability. We're 1.5 years or so ahead of what our original expectations were. And so that's a real testament to the product, also, again, our sales associates. And Jimmy Choo, the operating margins are moving forward. We're making some gross margin gains there as well. So there's so many good things happening for us that, yes, there might be some challenges this holiday season, but we're not going to try to overreact to that. And I think the more we stay focused on our strategies, the more the consumer will have a desire for all 3 of our luxury brands. Thank you very much.

Our next question comes from Oliver Chen with Cowen.

John and Tom, nice job in a tough environment. On the topic of inflation, you reflected upon it earlier. I just would love your thoughts on how that is impacting the consumer and also the physical store traffic, any color between outlet and full price and what you're seeing with traffic as well.

Thank you, Oliver. And I do want to acknowledge for the entire group. We think, obviously, last month was -- last quarter was really an extraordinary quarter for us. On a constant currency basis, the group was up 18%. And that's really, I think, speaks volumes to, again, our strategic initiatives and how the consumer is responding to that and how our talented employee base is really executing against that. So I appreciate you recognizing that. In terms of -- I'm going to start with store traffic. Store traffic is, as I said, it's relatively good. And actually, we're seeing a bit stronger store traffic in the full price versus the outlets. And so we think that all, again, bodes well for a good holiday season. And we feel -- still feel very good in our own channels, in particular, about what will happen in North America and in Europe. Again, much less confident in what will happen in China. But I wanted to say on balance for that, we're seeing very strong traffic in Japan and in Southeast Asia, where it's been able to offset some of that decline that we've had in Japan -- I mean, in China. And I would also say, Australia as well, it's been quite robust. In terms of the inflation, I think that what we hear anecdotally from people in the stores is more here in North America, they're concerned about interest rate rises. And they're concerned about some of the costs. Many people are incurring costs again going back to work and commuting and all those expenses where they didn't have a lot of that this time last year. So we're hearing that, whereas in Europe, we're hearing a great deal of caution around energy. As you, I'm sure, have read and have been hearing about, energy costs are up substantially in Europe. And so we would have thought things would have slowed down a little bit in Europe, and we haven't seen that yet. That doesn't mean that it's not going to come. But again, we're going to keep our eye closely on that. And I think the consumer kind of got a bit more open later than it was in North America. So I think we're still seeing the positive of that where people are traveling throughout Europe. And as you are aware, the major cities in Europe are seeing quite a robust lift with people traveling, mainly Europeans traveling but also Americans traveling over to Europe. So again, we're hopeful, but we are cautious knowing that the consumer is facing higher interest rates, higher energy costs and in many cases, higher food prices as well. And that will eventually have some impact. So we go into this with our eyes wide open and remain with a solid conviction around staying with our strategic objectives. Thank you, Oliver.

Our next question comes from Adrienne Yih with Barclays.

Great. And really a great accomplishment in a very tough environment. So kudos to the team there. I believe this is probably going to be for Tom. I really want to focus on the wholesale piece of it. The total top line sales come in about $150 million. I think you talked about a $100 million reduction from the wholesale piece primarily from Kors for the annualized. I guess my question is what did it do? What was wholesale in the current quarter? Did it grow? Was it flat in the current quarter? Apologies if I missed that. And then your fiscal third quarter, December is typically your lowest sellout, right -- sell through in wholesale. So what season is that for at retail? And if my calculation is correct, that's a good heavy double-digit decline in wholesale like 20% or so. So if you can help me understand those numbers, that would be great.

Sure. Adrienne, maybe I could take a step back on our guidance versus our original and then walk through how wholesale fits into it. At the beginning of the year, we provided guidance for revenue of $6.1 billion, and we're now at $5.7 billion. And really, the difference is mostly FX. It's about $225 million of FX, 75 of challenges in China related to restrictions and now $100 million of wholesale. I'd point out on a 52-week basis, constant currency for the year, we're growing 9%. So even with those challenges, we believe that the teams and the businesses are really delivering and controlling what they can. With regard to wholesale, of the $150 million, $100 million is wholesale, the other half is FX and China. In Q2, wholesale was positive. In Q3, we expect it to be down as a result of this change primarily for Michael Kors. And as we looked at our guidance, while we do not break out wholesale and retail embedded in our previous guidance, wholesale is expected to be up very modestly for the year. Now for the year, we're expected to be down. And in Q3, I'm not sure particularly if you could repeat the last part of your question on Q3 as to the seasons that it related to?

Yes. I was wondering, so if you're selling through December, the order book, right? So the retailers are ordering for late spring, summer? Is that how it is? Is that what they're placing their orders for?

Adrienne, let me grab that for you. So one thing. In Q2, the reason why wholesale was up slightly for the group was because we were still facing delays in inventory from our . So we were really getting everybody into position for the fall season. And then as we saw things begin to slow down over the last few weeks, we made the decision. Let's just hold off. Let's not try to put this inventory in place that's going to possibly take away from all the good that we've done. In terms of the order book on a go-forward basis, again, we work very closely with our retail partners. And I would say it's a complete kind of a joint action plan. So we're just looking at sales and retail trends. And our partners pretty much work with us. Business is up by X, then we flow inventory up by X. If it's down by Y, that we slowed down by Y. So we've got the inventory in place for a modest increase next year in wholesale on the retail side of things. We'll see how things play out. Again, there's nothing there that would give us any pause from an inventory standpoint. Again, the wholesale business across the group is kind of in that approximate 25% range. So it's not going to really impact our inventories dramatically one way or the other. So we feel good about how we're going to end the year. We feel good about where we've positioned ourselves going into next year, and we already took a cautious approach to next year in the wholesale channel, given what we know today. So inventory management is key for us. Margin is key for us. Thank you very much.

Our next question comes from Brooke Roach with Goldman Sachs.

John, I'd like to follow up on some of the earlier comments about the momentum that you're seeing across your business within some of the various income demographic cohorts. I think you mentioned in a prior question differences in traffic just between your mainline and your outlet stores. But can you provide any additional context on how that's translating through to brand momentum to total sales and to your expectation for the holiday season?

Yes. Thank you for the question, Brooke. As I think I indicated, traffic is the highest for us right now across the group online. We're very pleased with what we're seeing happening there. And again, I believe that's our team's tactics and how we're engaging with the customer. I hope you've been watching our whole kind of reset with the Jet Set imagery around Michael Kors. I think that's really resonating. I think that Jimmy Choo's Time to Dare campaigns and very excited about having Kendall Jenner as our face for this fall season. And we just launched with Iris Law. Again, we're really attracting fashion customer, an excited customer about wanting to be a part of that brand. And then, of course, Versace, there's never a shortage of excitement around Versace. And we're really focused on our accessories business, and I think the marketing initiatives around there are working. We're hearing, again, from our sales associates in the stores. There's a much younger customer coming to Versace right now and a customer who's coming in just for the accessories. Now we haven't had that in a few years. It started last year with about 1.5 years ago with the launch of La Medusa, but we're now starting to see this regularly and consistently. So I think that, that's driving a lot of the engagement around our e-commerce site. And then in terms of traffic, I think people are back in store shopping. I think that's going to be the interesting part about the holiday season. I do believe people are shopping and looking and getting their lists together. And I think we're going to see something happen here in the next week or so. Hopefully, we get a little cold weather in North America and in Europe, that would be helpful. And lastly, I can't speak to the differentiation between the traffic levels. The traffic levels are still good in the outlet channel, but they're just better in online and full price. And I think that bodes well for the customers' financial health and what we're seeing, again, in North America and in Europe. Thank you for that question, Brooke.

On that note, I would like to say thank you for everyone joining us today. We're very pleased with how the second quarter turned out for Capri. We're also very confident in the 3 luxury brands, Michael Kors, Versace and Jimmy Choo, and the strategic initiatives that we've put in place. And we are, again, very dedicated to keeping that as our guiding light. And again, we look forward to speaking to you over the next two quarters. And we think the year will end up being a very strong year for the company, and we look forward to the future. Thank you.