Greetings and welcome to the Capri Holdings Limited Third Quarter Fiscal 2025 Financial Results 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]. As a reminder, this conference is being recorded. It is now my pleasure to introduce Jennifer Davis, Vice President of IR. Please go ahead.

Good morning, everyone and thank you for joining us on Capri Holdings Limited third quarter fiscal 2023 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 today’s 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 impairment charges, restructuring and other charges, ERP implementation costs, Capri transformation cost, and costs related to the previously terminated merger with Tapestry, Inc. To view the corresponding GAAP measures and related reconciliation, please review our latest 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. Overall, our business remained challenged during the quarter and we are disappointed with our results. Since the termination of the merger agreement, we have reevaluated our strategic initiatives and long-term growth plans. We look forward to sharing details about our strategies to improve current sales trends and drive future growth at our upcoming Investor Day on February 19th. However, because we are still in the early stages of execution, our near-term performance will remain challenged. Entering 2025, we are optimistic about our path forward. The past year and a half has provided us with valuable insights that are shaping a promising future. Looking ahead, we expect trends to improve throughout fiscal year 2026, positioning us to return to growth in fiscal 2027 and beyond. Now I would like to turn to our third quarter performance in more detail. Revenue decreased 12%, as our results were impacted by softening demand for fashion luxury goods globally, with an outsized decline in China. Our performance was further impacted by our store optimization program, as well as our ongoing reductions in the wholesale channel. At the same time, we made a number of missteps in our efforts to reposition our brands, in particular at Versace and Michael Kors, that negatively impacted our results. Now looking at third quarter revenue trends by brand. Starting with Versace, revenue decreased 15% compared to prior year, as results were affected by the decline in global demand for fashion luxury goods. Additionally, in Fall of 2023, we began to reposition the brand, to place greater emphasis on luxury and craftsmanship, which was more in line with the quiet luxury trend. We have been pleased with many aspects of our repositioning efforts. Our VIC consumers have grown at a double-digit rate as they…

Thank you, John and good morning, everyone. Overall, our business remained challenged during the quarter, and we are disappointed with our results. We recognize that this performance does not reflect the true potential of our three iconic luxury houses. Our results were impacted by the overall slowdown in the fashion luxury market, as well as by some of the strategic initiatives we previously put in place at Versace and Michael Kors that did not perform as expected. Since the termination of the merger agreement, we have reevaluated our strategic initiatives and long-term growth plans. We look forward to providing a more detailed update on our plans at our upcoming Investor Day. Now, turning to third quarter results in more detail. Total company revenue of $1.3 billion decreased 12% versus prior year. By channel, total company retail sales declined low double digits, with e-commerce down high single digits. The impact of our store optimization program negatively impacted retail sales in the low single digit range. In the wholesale channel, revenue declined low teens due to overall softness in the channel, as well as our prior initiatives to reduce our wholesale exposure. Turning to revenue performance by geography. In the Americas, revenue decreased 11%. In EMEA, revenue declined 9%. In Asia, revenue decreased 20%. Now looking at revenue performance by brand. At Versace, revenue declined 15% compared to prior year. Global retail sales decreased low teens, while wholesale declined double digits. By geography, total Versace revenue in the Americas decreased 21%. Revenue in EMEA declined 13%, while revenue in Asia decreased 11%. At Jimmy Choo, revenue decreased 4% compared to prior year. Global retail sales were approximately flat to last year, while wholesale declined mid-teens. By geography, total revenue in the Americas decreased 10%. Revenue in EMEA increased 9%, while revenue in…

Thank you. [Operator Instructions]. Our first question is from Simeon Siegel with BMO Capital Markets. Please proceed with your questions.

Thank you guys. Good morning. I'm sure you're thrilled to be taking our collective questions again, but it is very nice to speak to you again. So John, how do you view the competitive and promotional environment now maybe versus a couple of years ago, anything you've seen that's changed and maybe any noteworthy sell-in or sell-through divergence as you're seeing at wholesale? And then Tom, just the flat gross margin guide for Q4. Any thoughts on gross margin into next year and maybe what you expect net debt to look like within the 2025 and 2026 guidance? Thank you.

Good morning Simeon and we're excited to be back and speaking to everybody today. I think we have a lot more clarity on our strategies moving forward and we're excited to share that with you on February 19th, not only the guidance that we talked about today, but some additional future guidance as this company returns to revenue growth and to profitability levels that we think are more representative of how these brands should be performing. The competitive landscape, I'll start first with the Versace and Jimmy Choo landscape. I don't think it's any more or less promotional in that group of European competitors. I think that we're all obviously feeling the effects of that significant slowdown in China. And I don't think that we see the recovery yet on the horizon. I think there's a lot of conversation about that it will happen in the second half of next year. We think the declines will have a sequential improvement, but we do think there will still be a significant decline in China, in particular, in our fiscal year. And then in terms of the Michael Kors, the more of the American competitors, I would say it's not any more or less, again, promotional. I think the consumer is very choiceful. And I think that's what we've really learned over the past six months in particular. When you look at the Michael Kors business, unfortunately, our AUR is down and I think we talked about that on the previous call where we had raised prices significantly over the last 24-plus months, and that was successful coming out of COVID and then the customer got more and more choiceful. And unfortunately, we had to be more promotional because we had to get to the price points where she would buy the…

Simeon, when you talk about the gross margin, if you look at Q4, there are some puts and takes in there. We're seeing some benefits for, as John mentioned, for lower markdowns in store for Versace and other quality of revenue efforts. On the other hand, we still have this product that was bought in for the prior strategy and where we're adjusting pricing for that, that is an offset. So we expect flat margin in the quarter. As we look at fiscal 2026, we do expect margin improvement, modest gross margin improvement and that will happen as we buy into the new strategy and our new pricing architecture. So as that moves through starting in Spring and then more fully in Fall and holiday, we expect to see higher full price sell-throughs and higher AURs, which will then support higher gross margins. So we expect a progression there. And overall, for the year, a modest gross margin improvement.

Simeon, I don't think I answered the wholesale part of the question. Let me just take that for one second. So our wholesale business, if you recall, has been impacted by really three things. First, we raised our prices and changed our strategies really at more at Versace and Michael Kors. And I would say that had significant impact of our wholesale businesses and our customers not feeling that, that was the right strategy for them to develop and grow with. Secondly, I think that you're aware that in particular, in Michael Kors, we reduced distribution points and again, to improve our quality of sale that was about a $200 million reduction for us in this fiscal year. We would have liked to have seen that flow back into our retail business but did not. But we are carrying forward with that and that initiative will be finished by the end of this Spring season that we're heading into right now. So we think that -- and we've shown our lines, as you've heard in Tom's prepared remarks to our wholesale clients and they are very pleased with the direction that we have taken with product first, secondly, with price architecture. And we believe that the wholesale declines will slow. And in fact, probably in the second half of next year or the upcoming fiscal year will actually be flat/see some small increases. And so we're already working with our partners on planning that strategy. And I would say we're making good progress, and it's nice to see them coming in here, feeling that the -- both the Versace opportunities that we've positioned and the Michael Kors opportunities are something that they want to lean into. Thank you, Simeon.

Simeon, I'll handle the debt question. With regard to Q3, we came in below our year-end forecast at $1.1 billion in net debt. We still expect at year-end, approximately $1.2 billion normal timing of working -- cash flows and working capital as we buy Spring inventory. So we continue to expect a similar year-end number that we shared earlier. For fiscal 2026, our business is very strong, and we expect to generate strong free cash flow. I would expect the ending debt for fiscal 2026 to be lower and I'd say at this point, approximately $200 million, but that leaves us plenty of cash to invest in our strategies and to drive the business as we invest in things like data analytics and begin our store renovation program for Michael Kors. So those are, of course, the first priorities, but we will then continue to reduce debt as we move forward.

Great, thanks so much guys. See you in a couple of weeks.

Thank you. Our next question is from Bob Drbul with Guggenheim Partners. Please proceed with your questions.

Hi, good morning. If I could just follow up a little bit on some of the pricing and the strategic pricing initiatives, I guess specifically with Kors and Versace, can you just talk more around like levels or the changes in the declines or the reductions in AUR, ASP? And then the other question that I have is just around the marketing plans, I think, around Kors you mentioned, I mean is there going to be a big change in level of spend around Kors or it's just a reallocation of the dollars that you're spending? Thanks.

Thanks for the question, Bob and good morning. So let me start with the marketing first in Kors. So I think you heard us say in our prepared remarks, the company tried to work on something that was called the transformation plan. And I think the intent was good intent. The strategy was not received well by our Kors customer and, quite frankly, a different customer that we were trying to reach out to. After our -- looking at our consumer insights, our data analytics, the customer really came back to us and again, we did some outside research as well and said, this is what we believe Michael Kors stands for. And in fact, everyone came back and said, "We believe you're a company that's about Jet Set”. And we had data from -- also from some very, very large companies that we partner with in our marketing that said it was the third or fourth most searched term for the brand in totality. So after looking at all that data and how the customer reacted to our previous strategy, we have gone back to really celebrate our heritage, which is Jet Set. And there's a new kind of mantra around that, it's traveling the world in style, and you're going to see all that work on February 19th. We've also done some consumer research around that and the sentiment is very positive. And it's all looked at through a modern lens. And so we're excited about how we think the customer is going to react to that. As it relates to -- the marketing spend will be, I would say, different from what we've done in the past. And again, I'd rather not get into that detail today, but we'll share that information with you on February 19th…

Okay, thank you.

Thank you. Our next question is from Ike Boruchow with Wells Fargo. Please proceed with your questions.

Hey, good morning everyone. Good to hear from you again. A question for Tom and then a question for John. I guess the revenue trajectory has been a little bumpy in the past couple of quarters. And then obviously, based on the fourth quarter guide, obviously, there's channel dynamics. I guess my question is, as we move into the cadence of next year, should everything kind of linearly begin to get less bad or could we expect more lumpiness? And then just a follow-up for John. I guess I'll just ask, I mean, there's been speculation around the sale of Versace and/or Choo for a few months in editorials and what have you. I mean, I guess, are you able to cop there, how should we be thinking about the portfolio, how you're envisioning the portfolio, anything you can share there would be helpful? Thank you.

Hi, so starting off with the revenue trajectory for 2026, I think as we said, we see a retail flat to maybe slightly positive excluding FX and the store closure impact. And as our strategy has come into place and we're buying into them and getting the right product at the right price, we do expect to see a progression through the year of sales. On wholesale, we are still seeing the tail end of reducing our distribution and also the need to ramp up and selling in for Spring and more importantly, for Fall/Winter next year. So we'd expect wholesale to start the year negative and then to improve as we get later into the year.

And again, I could -- just finishing on that, for Q4 of this year the greatest impact for the company in revenue decline on a percentage basis is really the wholesale. So this is going to be what we believe our last very, very large and significant decline in wholesale. Again, we've worked with our partners in the wholesale channel, we've been able to affect some of that relationship and the idea of increasing some of the bookings. You'll see some of that happen in Q1, and it will really accelerate in Q2, Q3, and Q4 next year as we'll be able to ship into a lot of the strategies that we've talked about on today's call. And that's really across the board. That's all three of our houses as well. As it relates to our assets, first and foremost we're a public company, and we always are looking at shareholder value. We know we have two highly valuable assets in Jimmy Choo and Versace. We like you have read a lot of the speculation that's been out in the marketplace. I think I said on the last call, we're always going to listen to interested parties who may or may not have an interest in these assets. Currently, that's not what our strategy is. Currently, our strategy is we're going to build three businesses and we think as again, we've got three incredible assets. and where people are interested in parts or the whole, we will always have that conversation. But that is currently not our focus or currently, our focus is on meeting with you all on February 19th and sharing what our strategies are for growth with three incredible fashion luxury houses.

Thanks.

[Operator Instructions]. Our next question is from Brooke Roach with Goldman Sachs. Please proceed with your questions.

Good morning and thank you for taking my question. John, I was hoping you could elaborate on the expectation for retail to improve to flat to slightly positive, excluding FX and some of the store closures. Can you help us understand what assumptions are embedded with there -- within that, the most important strategies that you're putting into place, and when and what you're assuming for traffic increases and the impact of your marketing plans relative to Kors like-for-like improvements in product that you have better visibility to? Thank you.

Good morning Brooke and thank you for your question. So Brooke, I would say the first thing always for us is an amazing product. And I'm very excited by what our teams have put together at all three of the houses in terms of product innovation. And again, our own retail buying teams have seen this product, in particular, for Fall that's where the markets that we're in today. And they have given really incredible response to what we're doing. And so I think that we feel that we have a pretty good understanding of what we need to do to excite the customer. We're not going to be perfect at that. But we feel in a much better place than we did a year ago sitting here at this time. Secondly, I think the marketing initiatives and I'll start with Michael Kors. As I said to you, we've done a lot of work internally as well as research externally. And we think our heritage and leveraging our heritage and in a modern -- under a modern lens is going to really have an inflection with how the consumer interacts with the brand. That being said, you've seen that all three of our luxury houses have had very strong database growth. So there's tremendous interest from our customers and the database growths are people who are purchasing from us. So we're seeing that as a very good lead indicator. And I think what we're seeing with, let's call it, high single-digit traffic decline that we've seen at many of the brands less so in North America, more so in Asia, etcetera. We're looking for that to flatten out next year, and that will be driven by our marketing initiatives and how we're bringing people to our stores or to our…

Thank you so much.

Our next question is from Oliver Chen with TD Cowen. Please proceed with your questions.

Hi John. You mentioned quiet luxury on the call earlier. Just curious about your thoughts on the evolution of that relative to core and signature and what you're doing at the Michael Kors brand with where you want to go with fashion execution? Also, as you think about outlet versus full price segmentation or thoughts around that, that would be helpful, too? Thanks a lot.

Sure, thank you. Good morning Oliver. I want to first start with Versace on that question because I think, as I stated in our opening -- my opening remarks, it's almost two years ago that we started to really reposition the Versace brand. And we made a decision that we were going to lean into luxury and craftsmanship, more the history of the origins when Johnny and Donatella founded the company. And we made quite a statement with our fashion show out in Los Angeles. And we believe very, very deeply in that strategy. We are cleaning up the Versace business. We have some other announcements we'll make on the next call on further things that we're doing to position this brand as a pure luxury brand and competing at the very highest essence of fashion luxury. And we're staying -- we're keeping our head down. It's painful, but we're keeping our heads down and we're going to stay the course on that strategy. We have a very balanced full price-to-outlet structure in I believe all of our businesses in Jimmy Choo and in Versace. We're in -- whether it's in full price centers, where we sit with the best luxury brands and in the outlet centers, we sit with the same as our competitors. So we're -- we believe, very tight with our distributions. Both of these companies have approximately 220 doors each. And we think that's the right distribution. Ultimately, that could probably be closer to 300 over time, but we're kind of going to keep our heads very steady with the store networks that we have today. And there's no question the quiet luxury trend is still in place, and you know the brands that are performing extremely well around that initiative. We did quiet Versace down…

Thank you.

Thank you. Our next question is from Paul Lejuez with Citigroup. Please proceed with your questions.

Hey, thanks guys. Tom, curious if you can give a CAPEX number for next year, just sort of what you're thinking about? And then, John, for you, just at a high level, I'm curious if as you went through the merger period, how much of that distraction and uncertainty contributed to what we're seeing in the business today, were your hands tied in any way, things you want to do, actions you wanted to take but you couldn't, what were those and how easy is it to get some of that in motion and is that kind of what we're seeing today? And then just last, any big holes in leadership that still need to be filled that you could share with us?

Good morning Paul and thank you for your question. I'll start with the merger. And again, not a lot really to comment per se on that. But it was highly distracting for the management team and I think as we've said in our previous call and in this call, there was a lot of work and energy and effort that went into the management teams preparing for that potential merger. And so I would just say it's highly, highly distracting, and we didn't have as much time to work on our longer-term strategies. And I would say that there was some confusion about what strategy should I be working on given where the company was going to be at whatever period of time. But we've obviously put that behind us and I think we're super engaged, and I have to compliment the senior leadership team at all three of our companies for rebounding very quickly, putting in place strategies that we think are going to drive the business. I think Jimmy Choo has always been relatively clear about how they -- where they're going to go and how they're going to get there. We'd like a few more weddings to happen right now. We'd like people to dress up in a few more high heels, but we're feeling that trend is coming our way. So we're feeling optimistic. As I just mentioned before, the Versace strategy, we feel quite confident that we're on the right path once we really start to anniversary some of the -- in particular, some of the quality of sale initiatives. And that's something that goes back to Brooke's question. We'll kind of anniversary most of that by the end of calendar year this year. Some of that will actually anniversary in the beginning of Fall…

Paul, regarding CAPEX, for this year, fiscal 2025, we expect to spend approximately $125 million in CAPEX, and that's for systems and store -- limited store openings. For next year, we're looking at about the same range and that will support the beginnings of the Michael Kors renovation program for our stores. Some very focused store openings. We're closing many more stores than we'll be opening next year, after this year closing over 100, next year, we expect to close approximately 70. And then we'll also be investing in areas like e-commerce and data analytics. So it's approximately the same year-over-year.

Thank you guys, good luck.

Thank you. Our next question is from Dana Telsey with Telsey Advisory Group. Please proceed with your questions.

Hi, good morning everyone. As you think about and you were just mentioning, Tom, the retail store changes that are going on, how are you thinking about outlet versus full price in terms of what you're opening or closing? And when you think about the marketing spend that you're investing, John, how are you thinking about it by brand and are there any other metrics that you're looking at in terms of new customer acquisition that you're targeting to gauge the business as it progresses? Thank you.

So good morning Dana, and let me start with the stores and Tom was -- our CAPEX, Tom, was correct. We're going to continue to invest in upgrades to our technology inside of our company. We spent hundreds of millions of dollars over the last few years and in particular, on our e-commerce and our data analytics capabilities. And so we're in a very good position there. And we're just going to have to spend less going forward as a percentage because of the amount of effort and technology that we brought into the company over really the past two and half to three years. So we feel good about that, number one. Number two, we are going to close some 75 stores next year. The majority of those will be full price stores and the majority of those will be Michael Kors full-price stores. And we think that we, again, have a very good balance between full price and outlet stores. We are not opening new outlet stores, so the distribution and store count that we have today will remain flat over the next few years. And we're going to work very hard to across the group, and we've said this in my prepared remarks and Tom's, we're really looking at -- once we finish most of our store closures, which should be by the end of next year -- next fiscal year that we're really looking at densities and productivities inside the fleet that we will have. And so the point that I wanted to make is the majority of our CAPEX around stores will go to actually store renovations. And it's early days, but we are encouraged by the new store concepts, and you'll see those when you -- at our presentation, we're encouraged by some of the early results that are taking place there, and so we're going to put more investment as a company into our retail fleets, than we will into where we've been outsized investment in IT and technology over the last three years and now we'll go more into CAPEX. Inside -- the Michael Kors store fleet in particular, we've really renovated most of the Versace fleet. It's probably 90% renovated. Jimmy Choo is about the same. So we're going to really target the majority of our investment around the Michael Kors store fleet. And then lastly, in terms of marketing spend, depending on the brand, we're spending between 7% and 8% on marketing. It can go higher than that depending on how we see the results of certain initiatives that we're putting forth. And Dana, I would rather leave that piece of the initiatives to our Investor Day because we have some very interesting tactics that will be as forthright with you as we can without sharing too much with our competitors, but we're definitely looking at how we market through a different lens even than what we did this past year.

Thank you.

Thank you Dana. And I would like to thank everyone for joining us on this call today. We look forward to seeing you on February 19th to share more of our longer-term strategic -- our longer-term strategies. And additionally, we will be speaking to you about some of our longer-term guidance as we return the company to revenue and operating earnings growth. Thank you very much.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.