Greetings, and welcome to the Capri Holdings Limited First Quarter Fiscal 2026 Financial Results Conference Call. [Operator Instructions] Please note, this conference is being recorded. I would now like to turn the conference over to your host, Jennifer Davis. Please go ahead.

Good morning, everyone, and thank you for joining us on Capri Holdings Limited First Quarter Fiscal '26 Conference Call. With me this morning are Chairman and Chief Executive Officer, John Idol; and Interim Chief Financial Officer, Raj Mehta. Before we begin, let me remind you that certain statements made on 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 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 Capri transformation costs, restructuring and other charges and transaction-related costs. To view the corresponding GAAP measures and related reconciliation, please view our latest earnings release posted to our website earlier today at capriholdings.com. Additionally, the company has classified the results of operations and cash flows of its Versace business as discontinued operations. Unless otherwise noted, all information on today's call relates only to continuing operations. I would also like to note that in today's 8-K, we included supplemental quarterly segment data for fiscal 2025. 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 are encouraged by our first quarter results. Trends improved sequentially, leading to both revenue and earnings per share that exceeded our expectations. This performance demonstrates the progress we are making as we execute against our strategic initiatives to reenergize our fashion luxury houses. While still early, we are beginning to see signs that our strategies are working. Although the global macroeconomic environment remains dynamic, we are on track to stabilize our business this year while establishing a strong foundation for a return to growth in fiscal '27. Now looking at our first quarter results. Total company revenue decreased 6% versus last year to $797 million on a reported basis and earnings per share were $0.50. Our results reflected a sequential improvement in trends across all regions. At Michael Kors, first quarter revenue decreased 6% on a reported basis compared to prior year, with similar trends in both retail and wholesale. In our retail channel, we are starting to see encouraging signs of momentum. First, traffic trends in our full-price stores improved sequentially. Second, we achieved stronger full price sell-throughs on new styles. And third, AUR trends continued to improve sequentially, turning positive in our full-price channel for the first time in 3 years. We view these as early but meaningful indicators that our strategies are gaining traction. In the wholesale channel, performance at point of sale improved sequentially. Wholesale shipments also saw a sequential improvement versus prior quarter but continued to be impacted by the broad-based softness in the channel as well as our prior initiatives to reduce wholesale exposure. As a point of reference, we have exited 30% of U.S. department store doors over the past year. We anticipate the majority of wholesale door reductions will be completed by the end…

Thank you, John, and good morning, everyone. Before we begin, I would like to remind you that today's financial results exclude Versace, which was reclassified as a discontinued operation. My discussion today will reflect results from continuing operations and our financial statements have been adjusted for prior periods to exclude Versace. We continue to anticipate the sale of Versace will close in the second half of calendar 2025. Now looking at our first quarter results, total company revenue of $797 million decreased 6% versus prior year on a reported basis and 7.7% in constant currency, representing a sequential year-over-year improvement relative to the fourth quarter. Net income was $60 million, resulting in diluted earnings per share of $0.50. Performance exceeded our expectations driven by better- than-anticipated results at both Michael Kors and Jimmy Choo as our strategic initiatives begin to take hold. Results also reflect a discrete tax benefit. Now turning to first quarter results in more detail. Starting with revenue by channel, total company retail sales declined mid-single digits. In the wholesale channel, revenue declined high single digits, reflecting continued broad-based softness in the channel as well as our prior initiatives to reduce wholesale exposure. Turning to revenue performance by geography. In the Americas, revenue decreased 9%. Revenue in EMEA increased 6%, while revenue in Asia declined 15%. Looking at revenue performance by brand. At Michael Kors, revenue decreased 5.9% compared to prior year on a reported basis and 7.3% in constant currency. Global retail and wholesale sales decreased mid-single digits. Store closures negatively impacted retail sales in the low single-digit range. By geography, sales in the Americas decreased 8%. Revenue in EMEA increased 9%, while revenue in Asia declined 16%. At Jimmy Choo, revenue decreased 6.4% compared to prior year on a reported basis and 9.2% in constant…

[Operator Instructions] We'll go first to Matthew Boss with JPMorgan.

Congrats on the sequential improvement. So John, on Michael Kors, could you elaborate on recent sell-through trends on product launches across direct-to-consumer and wholesale maybe where the product assortment stands today relative to back half opportunities? And any initial signs of demand elasticity or how best to think about pricing power for the brand?

Matt, and thank you for that nice comment about our sequential improvement. At Michael Kors, as you know, from our previous calls, around October, November of last year, we made a decision to first change strategic storytelling around Michael Kors to focus again on Jet Set but through a modern lens, and that was through our hotel stories and traveling the world in style. So the first results are that we're seeing consumers very much engaged with that storytelling. The second thing that we did was we changed our marketing approach and leaned much more heavily into influencers and into certain social media channels where we might not have had as great of a presence, and you're going to see that continue to grow throughout the fiscal year. And as we are seeing these improved results from marketing through those channels and seeing the consumer response, we are increasing certain of our marketing spend whether that's in channels or in totality from our original budgets inside the company. So it's nice to be able to see results. And it's nice to be able to see that we can put our foot gently on the accelerator as we're seeing the consumer respond. And the last point around that is we have a very robust consumer insight program that's been going on now for close to 2 years. And so we really understand a lot more about the consumers' intent around the brand, around engaging with the brand and now engaging with the product that we think is the right product. So the last part of what we did is we analyzed our sell-throughs and for the prior 18 months to when we started making changes, which really most of which happened kind of from January on. We saw our discounting actually…

Our next question comes from Brooke Roach with Goldman Sachs.

It's great to hear the commentary regarding the positive AUR and pricing strategy trends. Can you talk a little bit about how you expect that to translate to margins into the back half of this fiscal year and into FY '27. Can you help us talk through the puts and takes of the tariff mitigation opportunity over time as you look to offset some of those incremental costs? And where you see the largest opportunities in gross margin ahead?

Look, I'm going to let Raj take that. But before he does, I just want to say, I think the company has done an excellent job since we started the year, we've had approximately $85 million of tariff impact to the company, and we just gave our guidance where we've raised our revenue and we've been able to hold our operating income. And I think that's a testament to some of the things that Raj is going to talk about in our margin. But it's also a testament to the fact that the teams are doing a great job with our cost reduction programs throughout the organization, our store -- our fleet optimization programs, which we talked about in our prepared remarks. So there's a real focus on continuing to reduce the SG&A impact in the company. And next year, we feel very strongly we're going to create leverage with modest revenue growth, Raj will talk about some gross margin growth and then really being able to hold that SG&A relatively tight. And so we think there's going to be a significant inflection in next year, again, assuming that our strategic initiatives at both Michael Kors and Jimmy Choo continued to bear fruit and show this in particular, back half improvement where we anticipate not being 100% positive, but pretty close to it, and that will be a real sign for where the company should be able to leverage off of for fiscal year 2017. But let me turn it over to Raj for the gross margin piece.

Thanks, John, and good morning, Brooke. So obviously, as John stated, there have been -- the tariff situation has been extremely fluid. And we've now incorporated some additional new information into our guidance. We now anticipate approximately $85 million of unmitigated tariff impact in this year, up from our previous estimate of $60 million. And then as we look at the quarter, in the first quarter, gross margin was approximately flat to last year. We saw some puts and takes in reference to the resetting of our pricing and approximately a 30 basis point impact of tariffs, offset by some upside in channel mix. And then as we look to the second quarter, we're forecasting to be down approximately 250 to 300 basis points as we'll see increased tariff impact as well as the continued impacts of the pricing strategy that we previously spoke about. And then the higher tariff impact is going to continue throughout the quarter and throughout the year. The second half will see some offsets from the benefits of our strategic initiatives as we realized some of the offsets of the mitigation efforts that are related to creating cost efficiencies with our sourcing partners, sourcing optimization and targeted price increases. And then as we look to fiscal '27, we expect to return to gross margin expansion, and that's really going to come from our strategic initiatives around driving higher full-price sell throughs and AURs coupled with our mitigation efforts. Thanks, Brooke.

And Brooke, let me add one further note as well. One of the things that you're going to start to see in the back half of the year and certainly into next year's, we have reduced our promotional cadence, in particular, in our outlet channel. We're down approximately 35% in storewide promotional activity. That's having an impact on revenue. We know that we're going to continue that strategy. We're very focused on improving gross margin. So to improve gross margin, we need to reduce the sale activity. That's the first thing. Secondly, we have done some things, in particular, related to the Daigou channel, where the company has had a history of servicing that channel as do many of our competitors. And we have reduced the discount there significantly. And therefore, that has also reduced revenues because of our reduction of that. And again, we think that's a good thing for us. It's healthy long term. It reduces product that flows to certain air channels, both inside the United States and outside and we're going to look to really tighten that considerably going forward. So that will have an impact, in particular in our outlet channel. So we're going to work our way through that over the next year. And we hope to see gross margin improvement from that and AUR. As we've said to you previously, we're very focused on raising the AURs in the company and that will be one of the initiatives around doing that. Thank you, Brooke.

We'll go next to Ike Boruchow with Wells Fargo.

Congrats, John, on the sequential improvement. A couple of things from me. Just from a modeling perspective, John, are you guys -- in your guidance, are you baking in growth in any quarter this year at Michael Kors in either the retail or the wholesale channel? And then to that point, which channel would you expect an inflection to hit first? And then just a quick follow-up is just once the Versace sale closes, just can you give us a high-level perspective on what you expect the balance sheet to look like? Are you going to go 0 debt? Just an update there would be helpful.

Sure. So there is no growth -- obviously, there's sequential improvement, but there is no year-over-year growth plan in any of the channels yet. I would say the first channel that we're anticipating seeing that is in our full price channel, and we're getting close to that right now. And that's a very good indicator, as you know. If you've got the full price channel working that's an area where you can really kind of solidify the rest of the company. And again, we moved very quickly last October, November around the full price, it was making sure that we got different product to the floor more quickly. We took a very focused approach to our strategic pricing architecture and that is absolutely paying off. We did not -- we weren't -- just couldn't move as fast to do that in the outlet channel. And so that's going to come into -- you're going to see that new product flowing into the outlet channel, really in the fourth calendar quarter of this year. So more of our third quarter fiscal where you're going to see that product flowing in a lot more newness and at higher price points. So we're doing a lot of things in the outlet channel that might impact us from a revenue standpoint. But from a health standpoint, it's going to be much better for the company from an AUR standpoint, from less promotional activity and just a lot more newness. Additionally, in our outlet channel, us, like many of our people who are in our world, we will be introducing our full price product into the outlet channel in September. So this is a program called Icons. And inside of that will be three of our best-selling full-price handbag groups, we've seen in that channel…

Yes, regarding the Versace gross sale proceeds, as we stated previously, we expect the Versace transaction to close in the back half of this calendar year. And as I spoke about, we plan to use the proceeds to substantially reduce our debt. So post the deal closing, we expect to have minimal debt remaining on our balance sheet. And then as the business stabilizes, we'll look to reevaluate reinstating a share repurchase program. So we feel really good about having a strong balance sheet as we approach the end of the year.

And the last on that Ike as well. I think we've said in our previous calls, we intend on spending about $350 million over the next 3 years on our store renovation program. And we're going to have not only the cash from the transaction, but actually we'll be returning to a better free cash flow situation, in particular next year. So we want the money to really invest in the business to get the top line of this company going again. We are starting to see some very nice returns on the $100-plus million that we spent over the last couple of years on our data analytics and replatforming our e- commerce areas. So again, we want to be strategic about how we invest, but we have some very clear plans because we think that revenue growth -- very healthy revenue growth is the most important opportunity for this company. And then we create that leverage that I talked about before holding the SG&A very, very tight, and then as Raj mentioned, some gross margin expansion next year based around, first and foremost, our better full price sell-throughs, which we're already seeing engaging with the customer; second, reduced promotional activity and then third, mitigating with our manufacturing partners who have been great. They're already working with us, we are going to get some of that benefit in this year. That's already included in our guidance, but they have been terrific in helping us through what will be for every company, a challenge to work through the tariffs, but we're committed to that. And I forgot on strategic price increases, which for us will really start in our fiscal year -- our fiscal fourth quarter, that's when you'll start to see some of that, and they will be modest, thank you, Ike.

Moving on to Oliver Chen with TD Securities.

John, as we look forward to the sequential improvement opportunity to continue what handbag families might be most important? And how would you help us dissect traffic relative to AUR looking ahead? And then a quick follow-up. The store renovation sounds quite compelling in terms of what you're doing there? What are some of the principles or frameworks and what you want to see to continue to elevate the brand.

Thank you, and good morning, Oliver. So I think what we discussed in our, again, prepared remarks was in the full price, there's 3 handbag families. There's Laila, there is Lolita and there is Bryant which are bags that are already in the pipeline today and have seen some of the highest sell-throughs this company's had in 4-plus years. So that's really encouraging for us. The other thing that is starting to happen is we do have events that we -- that where we periodically will put the entire assortments in our store on sale. We are removing certain products from those sales, and they have not impacted the sell-throughs at all, which has been terrific. So we're going to take higher, we're going to see more of the assortment and remove them from certain sale activities inside of our store, really, again, reinforcing the importance of a platform to the consumer. We're very excited about a new group coming out for the fall season, which is called Hamilton. You may remember, it's a legacy group from this company. It's been redesigned and quite interesting in our consumer insights, it has ranked now the high -- before we've even shipped the piece, before we've gotten any sell-through results, it's had the highest response from the consumer in terms of the product and the marketing that we've given to this research, and so we are very excited about what that will mean for us. We really need to stay more focused and not try to introduce as much new product and really spend a lot more time on the storytelling on the products that exist inside of our families. So we feel good about that. And hopefully, at this time, when we speak on our next call, we'll be able to…

Our next question comes from Rick Patel with Raymond James.

I'll have my congrats on the progress. Can you expand on the evolving U.S. distribution as you shrink exposure to U.S. department stores and leaning into retail, are you seeing signs that consumers are following you into the retail channel? And then just bigger picture, how are you envisioning the role of wholesale versus retail over the long term?

So a couple of things. Number one, on retail, I think you saw in our prepared remarks, we said we're going to close about 75 million stores this year, which should more or less complete the fleet optimization program for Michael Kors. There'll be a few more in fiscal year '27, but nothing of this magnitude. . And quite interestingly, we are actually doing something different right now. We are going back and looking at certain malls that we've actually left. What we have seen is when we close a store in an area or a location, we are not recapturing that business, either at an outlet store that's nearby or in e-commerce. So we know there are customers we're not servicing and in certain markets, we may have left the market with our own store as well as the department store. So we've exited the market completely. And I'll give you a good example, that's Manchester, England, as a good example where downtown Manchester as a brand doesn't exist any longer. So we're in the process of opening -- reopening a freestanding store in that area. We now know the sizes that we need to really open a store that's between 1,500 and 2,000 square feet, and we have some pretty good understanding on the economics around what we need to do to be profitable in those stores. So I'm hoping that when we start to give you guidance for fiscal year '27, you're actually going to hear about modest store growth in certain areas of the U.S. and in certain areas of Europe where we have left markets, and I'll talk about wholesaler in a second, but where we think we have an opportunity to engage and these are going to be fairly large markets. They're not going…

Our next question comes from Aneesha Sherman with Bernstein Research.

Great to hear all the positive comments on this call. John, I want to ask about Jimmy Choo. It's historically been a different core category, different brand heritage, different sourcing mix from Kors maybe some of those differences may be narrowing as you grow the handbag assortment and if you grow footwear of course. But can you talk about how you think about the value added and Jimmy Choo the portfolio? How does it complement core, where is it incremental? And would you ever consider divesting of this brand as you did with Versace?

Thank you, Aneesha. So let me start with the last part of it. Jimmy Choo is not for sale. We do not have an intent on selling Jimmy Choo. And in fact, we're excited about the growth opportunity that Jimmy Choo represents for the company. . When we bought Jimmy Choo many years ago, one of the reasons, first, we bought it is because it has an incredible name and history and heritage with the fashion luxury consumer. It's highly recognized. And it is in the shoe business, and we thought we would actually learn a lot from them, which we have. And I might add also, over the years, I'm not sure this has been clear, but we've actually bought 2 manufacturing facilities. So we produce over 50% of our own product in-house. We are truly vertical with Jimmy Choo two beautiful factories that we have in Italy. And we've just built a brand-new spectacular R&D center for our employees there to work out of, so Jimmy Choo in very good shape. Store fleet is in excellent shape. We spent a lot of money over the years renovating the stores and hopefully, you get a chance to see our new flagship on Madison Avenue. It's fantastic and doing really well. And so the investments we've made, now we can leverage. We bought the company knowing that we could add some value to that, in particular, around accessories, which is something we think we know a little bit about. We got distracted over the last couple of years. Again, the merger did not help things. People didn't spend as much time focusing on that. We are completely reengaged on the accessories side. There's a very big opportunity for Jimmy Choo. We're in a luxury consumers wardrobe today. We're in their…

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.