Good day and welcome to the Michael Kors Second Quarter 2019 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Katina Metzidakis, VP of Investor Relations for Michael Kors Holdings Limited. Please go ahead, ma'am.

Good morning, everyone, and thank you for joining us on today's second quarter call. With me this morning are Chief Executive Officer, John Idol; and Chief Financial and Chief Operating Officer, Tom Edwards. Throughout this morning's call, we will be referring to Capri Holdings Limited, which is the new name to be adopted by Michael Kors Holdings Limited upon the closing of the pending acquisition of Versace. In addition to this morning's press release, we have posted a presentation, which provides additional financial information for Versace, to the Investor Relations section of our website. Before we begin, let me remind you that certain statements made on this call may constitute forward-looking statements, which are subject to risks and uncertainties that could cause actual results to differ from those that 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 the call will remain operative at a later time and the company undertakes no obligation to update any information discussed on the call. In addition, certain financial information discussed today will be presented on a non-GAAP basis. These non-GAAP measures exclude certain items related to certain one-time costs associated with the Jimmy Choo acquisition and the agreement to acquire Versace and restructuring and non-cash impairment charges primarily associated with underperforming retail stores. Unless otherwise noted, all information on today's call will be presented on a non-GAAP basis and all revenue and comparable store sales will be quoted on a reported basis. To view the corresponding GAAP measures and related reconciliations, please view the earnings release posted to our website earlier today at investors.MichaelKors.com. Now, I would like to turn the call over to Mr. John Idol, Chairman and Chief Executive Officer.

Thank you, Katina, and good morning, everyone. I would like to begin this call by discussing the long-term strategic vision for Capri Holdings. With the announcement of the transformational acquisition of Versace expected to close in the fiscal fourth quarter, we have succeeded in building one of the world's leading fashion luxury groups in just over one year. This is a truly remarkable and historic moment for our company. We could not have possibly envisioned a better family of incredibly strong brands for our group. Looking ahead, we expect the addition of Versace will drive accelerated revenue growth for Capri Holdings. The House of Versace is one of the most storied luxury brands in the world, rooted in Italian glamour and style. The Versace brand has a heritage spanning over 40 years. Fashion has always been at the core of the Versace DNA. Since its inception, the House of Versace has had luxury craftsmanship as well as creativity and innovation at its foundation. For over 20 years, Chief Creative Officer, Donatella Versace, has forged the brand's iconic style, a true visionary with an intuition for how to blend fashion, design, and culture. Donatella continues to honor the rich and storied Versace heritage, while constantly evolving and adapting the luxury house to engage and excite consumers globally. Its unique DNA and signature style has led Versace to become one of the most highly recognized fashion luxury brands in the world. Versace's unmistakable look, which is equal parts bold and refined, evokes both a rock and roll spirit as well as runway glamour. For over 40 years, Versace has built a unique, innovative and powerful communications message that continues to resonate with consumers around the world. The brand also commands a leading social media presence, with 14.5 million followers for Versace and…

Thank you, John, and good morning everyone. We are pleased to report another quarter of results that came in above expectation, delivering net income of $193 million and diluted earnings per share of $1.27. Total revenue of $1.25 billion was in line with guidance and increased 9% compared to last year. This increase reflects $117 million incremental revenue from Jimmy Choo and a 0.8% decrease in Michael Kors revenue compared to last year. Starting with the Michael Kors Retail business, revenue was approximately flat compared to last year. This performance reflects 11 net new store openings and higher sales from stores not in the comparable sales base, offset by a 2.1% decline in comparable store sales, which was in line with expectations. Global e-commerce benefited comparable sales by 190 basis points. On a constant currency basis, comparable sales declined 1.3%. For the Michael Kors Wholesale business, revenue declined 1%. This was ahead of expectation, reflecting stronger than anticipated growth in the Americas. Europe revenue was lower, reflecting our strategy in the region to reduce inventories and increase full-price sell-throughs. Michael Kors Licensing revenue decreased 7% versus the prior year. This reflects continued growth of Access smartwatches and the successful introduction of our new slim fashion watches and jewelry, but this was not yet large enough to offset the overall decline in fashion watches. Now, I would like to provide some regional highlights for the Michael Kors brand during the quarter. In the Americas, revenue increased in the low single digits. Americas Retail revenue increased in the low single digits as well. Comparable store sales experienced a modest decline in the quarter. This was primarily driven by low double-digit declines in inventory levels and higher markdown on certain seasonal fashion products. Our signature logo designs sold well and resonated with consumers,…

Thank you. And at this time, we will hear first from Erinn Murphy of Piper Jaffray. Erinn E. Murphy - Piper Jaffray & Co.: Great. Thanks. Good morning. A couple of questions from me, I guess first on the Michael Kors brand, I would love if you could talk a little bit more about the accessory business trending down low single. I know you're still planning it down that level for the year. Inventory has been a big initiative to keep lean. But what do you need to see to really pivot that back towards growth? And then, when you just think about the business today, how much of the decline in unit versus pricing?

Thank you, Erinn. Good morning. So, the accessories business for Michael Kors, we have two issues in the quarter. First, as you know, for the company, inventories were down approximately 11%, Michael Kors brand only. And in Americas, it was down high single digits. So, we probably, Erinn, were a little too lean on inventory across the group. I think we had anticipated that we could really achieve our sales goals with less inventory. And I think that was a probably a little too lean, as I said before. And the second thing that happened is the logo category has really taken off much greater than we had anticipated. So we are sold out in certain styles in the stores. We're very, very lean on inventory. And that's both in our own retail channels and in the North American wholesale channels as well. You saw that Wholesale did better in North America than we had anticipated and that's, again, we could have done even better than that, had we had additional inventory. So on the one hand, I wish we performed a little bit better, because I think that would have made everyone a little happier. But on the other hand, the customer's resonating for us. So we see that in our database. We see it on our social media. So all of that hasn't changed. We need to get in a better inventory position. We believe we're going to be there for Q3, but it will be more towards the tail end of Q3. We are clearly chasing merchandise and that's not only for North America, but that's for some of the other regions in the world. Europe did a little better than we also thought as well. So we feel like all the indicators are there. We've got…

And our next question comes from Matthew Boss of JPMorgan.

Great. Thanks. On gross margin at the Kors brand level, I guess, what factors account for the change in the forecast to flat versus modest expansion, I think was previously? And maybe, John, just any higher level thoughts or changes maybe that you're seeing on the promotional front into holiday at all?

Sure. Matt, in terms of gross margin and flat versus modest expansion, I think as we looked in this quarter, and our inventory levels were lower, particularly in logo. We did have some markdown activity in our end of season inventory. So, it's a really a reflection of that quarter. When we look at the full year, the first half and second half, we expect gross margins to be relatively consistent with prior year and have actually raised our overall operating margin for Michael Kors brand as part of the guidance outlook. For the first half, net margin is even with prior year and for the second half, we expect similar performance, even with prior year. So, really it's more of a quarterly item related to the second quarter.

Yes, Matthew, on the promotional front, you know as a company close to two years ago, we changed our cadence in North America. And that's really had a very, very strong impact on our business. In our lifestyle stores, AURs rose again in the quarter, so we're very pleased with that. Conversion is actually up in those stores. So, we're not seeing any more or less promotional activity than we've seen before. And we can't comment on to what will happen during the holiday season. But so far, it's been relatively consistent to where we've been in the past.

And we'll move next to a question from Oliver Chen of Cowen & Company. Oliver Chen - Cowen & Co. LLC: Hi, thank you. Thank you, John. Versace is a big opportunity. What are your thoughts on sequencing timing in terms of how you're thinking about product and accessories relative to demand creation on the marketing side? And at the Kors brand, you mentioned the end of season markdowns. We've seen really good product innovation as well as consumer traction, so would love details on what happened with the markdowns in some of the seasonal fashion product. And just lastly, China is a big topic amongst incoming calls that we're receiving. What are your thoughts about the global Chinese customer in terms of the Chinese purchasing goods abroad? And anything you're seeing regarding China, Mainland Chinese purchasing and geopolitical factors as well, that'd be helpful. Thank you.

Sure. Let me take the second question first, Oliver. The end of season markdowns that we saw, unfortunately, they end up being a greater percentage and have impacted the retail gross margin because we did not have enough logo product in particular. Logo product for us accounts for 20% to 25% of sales. And we actually think that's going to climb again. You know what's happening in fashion today, so we planned it at a rate. We've sold through much, much faster than that rate. So, therefore, when we took the markdowns on some of our fashion product, it just accentuates the gross margin when you don't have enough of the other product to sell through at full price. So I think that's really what we were trying to explain. And again, we drove the inventories a little too low in the company. You can understand at 11% down, that was probably a little aggressive on our part in terms of going after the full price sell-through. We believe we'll be in a better shape at the end of Q3. A lot of that inventory is getting here latter part of November into December. So it's not going to have the full effect that we would have liked to have had and hence why you see some of the increase in Q4 because we'll be able to have better positioning, both in our retail and for our wholesale partners. Secondly, I would like to take the China; we see continued strength in the China marketplace and we see them clearly domestically as being very, very strong. We know there are issues in terms of how the government is looking at domestic consumption. And we've always been of the point of view that we're very comfortable working with our clients, whether…

And our next question comes from Omar Saad of Evercore ISI.

Thanks. Good morning. I wanted to ask a follow-up on product strategy, John, and maybe some of the logo comments as well. Maybe you could clarify, is it more classic logo, that incremental demand that you're seeing, where you're kind of chasing on the supply side? Or is it more logo with a twist? Help us understand what specifically you're seeing within the logo category of products. And then, maybe layer that into how you're thinking about the product strategy overall. It sounds like you guys have really nailed, for the Michael Kors brand, digital marketing, the loyalty program. It sounds like product might be that last leg to really amplify the sales growth into next year. But maybe a little bit more details around that would help us clarify. Thank you.

Sure. I'm going to start with product overall. Again, we're very pleased with the new product launches that we've had and the success that we've seen around those new product launches. We think that our innovation strategy has really positioned the company for future growth. I also would like to add that our women's ready-to-wear and our footwear business has been growing basically at double digits and high single digits rates. So again, the customer is resonating with us. And as many of you know also, some of the active footwear is becoming as iconic to some people as accessories is. Again, I don't think that's going to replace it, by any means. But it is certainly a very, very important part of fashion today. And we're one of the leaders in that area. So I feel very strongly about how the company has positioned itself. In terms of logo, it's really, I'd call it, kind of 70%-30%. When I say that, it is our classic logo and it is some of our key shapes in classic logo. And unfortunately, those are the ones that we are – where we do not have enough inventory on. But I might also add that the way that we've layered in logo with our Mercer and our Whitney and some of the other core styles that we have in the line has been equally as strong. And you'll see our holiday campaign. We actually have a Whitney in logo in our advertising. So we're moving very quickly. And you're going to see a major campaign around it for spring season as well. So not only are we following on consumer demand, but we're actually going to be pushing it much, much stronger than we had previously done in the past. And so we think when we get into better inventory position, we'll be in a better place to meet the consumer demand on that product. Thank you, Omar.

And we will hear next from Camilo Lyon of Canaccord Genuity.

Thanks. Good morning. John, just continuing on the logo theme, if you're able to talk more about how much of the shortfall in your logo mix accounted for what happened in the quarter. So if you say that logo mix is usually about 20% to 25%. If you had the right amount of inventory, what would that have roughly been in a quarter? And what level are you willing to let that float as a part of your mix?

Yeah. Thank you, Camilo. First off, we don't really break down that level of detail. What I will say is the following. Number one, our view of our accessories business is that we want to be balanced between fashion and logo. And we had traditionally, as I said, run 20% to 25%. That's been historical for the company. That is accelerating. And, again, the end consumer is really driving that. And it's not only in the traditional products, like when Omar was discussing that before, but we we're seeing it in other fashion products, talked to you about how Whitney and Mercer. In addition to that, we're seeing it in the new Kors #MKGO logo items as well. So she's clearly responding to it. It is a fashion trend right now. And it seems that when we have the inventory there, the consumer is responding to it very strongly. So we will plan the inventories up appropriately to try and get in a better position. But I can only tell you that we know we would have done more business because we would have had more product and that would have filled the customer demand. Thank you, Camilo.

And we will hear from Paul Lejuez of Citi.

Hey, thanks, guys. I think you said third quarter comps are expected to be down low single digits. Any color you can give us on a constant currency basis by region. Also curious, if you can talk about within your North America business, performance in mall stores versus off-mall, maybe outlet, any color you can give on that front. Thanks.

Sure, Paul. On the comp store, again, remember there's going to be a currency headwind that's going to impact us by at least 100 basis points. So that is the primary driver of our now revised guidance to down during the quarter. I think you would see similar trends globally. I think you'd see Asia being up, Europe being down and Americas in the flat to slightly down type of range. So I think the complexion is going to look a little bit like it looked for this quarter. And we think fourth quarter will get a little better, given our inventory positions. So hopefully, we'll see some improvement at that point. In terms of traffic, traffic actually improved for us during the quarter. So we were pleased with that. And we've seen a sequential improvement. It's probably one of the first times we've seen a sequential improvement in traffic in two years. So we're seeing that mitigate/getting better. As I said before, conversion is up. And in our lifestyle stores, AUR is up. So I think we're feeling pretty good about the metrics of the business from a KPI standpoint. We've got some work to do on balancing our inventories to get the right product in the right place. And I feel confident that we'll do that. It's going to take us a little bit of time, given that we've got to work around Chinese New Year. So this is a little issue. So we've got to bring some stuff in a little earlier than maybe we wanted to and maybe we won't get it all here before the Chinese New Year. So we're working diligently around those issues. But I think in general, we feel good. I might also comment that Jimmy Choo had an outstanding quarter. And again, we're seeing real benefits from our initiatives in terms of higher levels of fashion in the footwear business, which has shown double-digit growth. And our initiative on our accessories re-launch is moving along very, very smoothly. And you're going to see the introduction of logo from Jimmy Choo, which will come in the back half of next year. So there's some very exciting product that's going to be coming there. The company has never really had that before. And so there is a significant launch that will be coming from the company around that. So we feel very good that Michael Kors continues on its Runway 2020 trajectory. And that Jimmy Choo, we've absolutely shown that we're integrating that pretty seamlessly. And now, we're delivering exciting new product launches, in particular, in the footwear, are resonating and soon to be in the accessories business as well. So I think you're going to see the benefits of that starting to flow through, in particular in 2020.

And at this time, we'll hear from Kimberly Greenberger of Morgan Stanley. Kimberly Conroy Greenberger - Morgan Stanley & Co. LLC: Great. Thank you so much. Good morning, John. I have a quick follow-up question on inventory and Asia, two separate questions. Inventory, it looks to us like there was more of an inventory composition issue, rather than an inventory quantity issue, just given the fact that the Retail gross margin was down 150 basis points in the quarter. Is that a fair conclusion? And are there any strategies in place that would maybe give the merchants a little more guidance to get that inventory composition a bit more right? And then, in Asia, the 4% growth in Asia revenue this quarter is a deceleration from what's been a double-digit growth rate here for the last three or four quarters. I'm wondering. It sounds like Mainland China is still very strong. Are there other areas of Asia that have softened a little bit, or is it all currency? Maybe if you could just unpack that a little bit, that would be helpful. Thanks.

Sure. I'll take the inventory piece and I'll let Tom take the Asia and currency piece. So number one, the same buying team that's been here at the company for the past 10 or 11 years has been the same team that's been doing this. And so they've seen the business as it goes up and down, et cetera. So we have a very competent team here. Remember, we had a strategy to reduce inventories to improve sell-throughs. And as I said earlier, we probably pulled those inventories back a little too hard versus what we should have. So that's an overall statement. And that wouldn't have been in just handbags, but that would have been in ready-to-wear and active footwear, et cetera. So that was an across the board situation, that we probably should have had more inventory going into the quarter. And obviously, ending the quarter means we don't have the kind of inventory levels that we need to head into third quarter. So we're a little light. That being said, the logo piece of it, I don't think we anticipated the strength of what happened during the quarter. And, again, you head into it thinking you have the right inventory mix and balance. We probably pushed on the fashion a little higher than we did on the logo, because we thought that was what was right for the consumer and for our image. And that balance just has to be readjusted slightly. So I feel good about the team that are here. They have the latitude to buy the merchandise by region, as they see fit. And we think that we've got a really good team to do that and a good strategy. Tom?

On the Asia decline sequentially, Kimberly, it was really an FX-driven event. As we looked at FX and, in particular, the renminbi versus prior year, the dollar strengthened high single digits versus our expectations and certainly versus prior year. So when we look at the total company FX impact of over 100 basis points, as we noted before, it's actually a little larger in Asia, impacting the overall revenue and the comps there.

Okay.

And we do have one other question. We'll hear from Jay Sole of UBS.

Great. Thank you. John, I wanted to ask about your comment you made that you're still seeing a trend towards smaller bags and that's impacting ASPs. Are you seeing the same rate of decline in the bag size and ASPs, or is that trend sort of showing that maybe it's slowing down and you can see visibility into when the bag size stabilizes? And then, secondly, Tom, to your point on the RMB, given that that currency has declined, is there any opportunity from a costing standpoint as you look into next fiscal year where your costs might go down just because that's a favorable impact on your ability to buy product?

Thank you and good morning, Jay. Jay, bag size continues to accelerate. And I think we would have thought by this time that that would have mitigated somewhat and we actually haven't 100% seen that. Clearly, backpacks have come in and made a very, very strong play in the accessories business. I think that's been to the extent of totes, where we've seen a decline in overall totes sales, but a significant increase in backpack sales. But clearly, smaller crossbody bags are, by far, what is driving the consumer, in particular the fashion consumer. And, as I said before, unit sales were actually up in the company during the quarter. So I'm not saying that that's going to go on forever, but it certainly is a trend that doesn't seem to be changing. I don't think we're any different than any of the other luxury good players in the world. We can see it our Jimmy Choo business. Our best-selling bags are smaller bags. And now seeing and understanding Versace, it's the same structure. So it's something we have to live with and we'll continue to go on and grow. On the other hand, we did comment in my prepared remarks that the Michael Kors Collection handbags were doing very well during the quarter. So that is encouraging for us also. It's Michael's vision in terms of runway. And those bags are $1,200 up to $5,000. So we're very pleased that we're seeing traction in that category of merchandise inside of our stores as well. I'm going to take the production piece of it. We're working with our manufacturers on a regular basis. We produce less than 5% of our product today in China and we've been sourcing elsewhere, mainly from a cost standpoint. So we will work continuously to lower our cost of goods. And we're not prepared right now to talk about how that may or may not impact next year, but we work at it every single day of the week. And whether that's in accessories or ready-to-wear or footwear, it's an ongoing priority for the company. Thank you, Jay.

I would now like to conclude the call. I would like to now conclude the call.

Thank you, Mr. Idol.

And say, thank you, everyone, for joining us today and look forward to updating you on our future results and the exciting integration of Versace into our company. Thank you.