Good day, everyone, and welcome to the Capri Holdings Limited Second Quarter 2020 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Jennifer Davis, VP of IR at Capri. Please go ahead, ma’am.

Thank you, Shannon. Good morning, everyone, and thank you for joining us on Capri Holdings Limited’s second quarter fiscal 2020 conference call. With me this morning are 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 Web site. 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. In addition, certain financial information discussed today will be presented on a non-GAAP basis. These non-GAAP measures exclude certain items related to transaction, transition and integration costs associated with the Jimmy Choo and Versace acquisitions, restructuring and non-cash impairment charges. Unless otherwise noted, all financial information on today’s call will be presented on a non-GAAP basis and all comparable store sales numbers will be presented on a constant currency basis. To view the corresponding GAAP measures and related reconciliations, please view the earnings release posted on our Web site 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. Capri Holdings has in a short period of time assembled an outstanding family of founder-led fashion luxury houses. The diversification of our portfolio is a key component for our long-term growth strategy. Now, I’d like to update you on the progress we are making developing our fashion luxury group. Starting with Versace. We continued to execute against our five strategic growth pillars. First, we are building on Versace’s luxury runway momentum driven by Donatella’s fashion vision. Second, we are enhancing the brands powerful and iconic marketing. Third, we are rapidly increasing the brands global retail footprint toward our goal of 300 stores. Fourth, we are accelerating our e-commerce platform to improve our capabilities. And fifth, we are expanding our accessories and footwear businesses with compelling new collections, including our Virtus group featuring the recently introduced Barocco V signature logo. Turning to Jimmy Choo. We continue to make progress on our strategic initiatives. Starting with footwear innovation, the brand is seeing positive trends for active footwear, a key growth category. Our strategy to expand accessories penetration remains on track with very encouraging results from new groups, including our recently introduced VARENNE JC signature collection. Lastly, due to our successful store expansion, we recently raised Jimmy Choo global fleet retail goal to 300 stores and are making significant progress towards that target. At Michael Kors, we are extremely pleased to see an inflection point in our business with positive comparable store sales in the second quarter reflecting improving trends in the Americas and continued growth internationally. Our accessories category has seen a sequential improvement which indicates that our product innovation strategies are resonating with consumers. We are successfully executing against the brands repositioning efforts to attract and engage millennials and Generation Z consumers, with Michael’s optimistic…

Thank you, John. Starting with second quarter results. Revenue of 1.44 billion increased 15% compared to last year, in line with our expectations. Revenue growth was driven by the addition of Versace and growth from Jimmy Choo, partially offset by anticipated lower revenue in Michael Kors. Additionally, revenues were impacted by unfavorable foreign exchange translation as well as greater than anticipated impact on developments in Hong Kong. Net income was 177 million, resulting in diluted earnings per share of a $1.16, which was below our expectations. Our earnings were negatively impacted by higher than anticipated expenses in the quarter due to timing as well as greater than anticipated impact from developments in Hong Kong. Second quarter earnings per share included $0.01 of dilution from Versace. Looking at revenue performance by brand, Versace revenues were 228 million and comparable store sales were flat compared to prior year. Total revenue was ahead of our expectations, reflecting higher contribution from new stores and greater wholesale shipments, partially offset by lower than anticipated comparable sales. Comparable sales increased double digits in the Americas and EMEA, but declined in Asia primarily reflecting greater than anticipated challenges related to the situation in Hong Kong and consumer reaction in China to an incorrectly labeled product. Versace ended the quarter with a global luxury fleet of 198 retail stores, a net increase of two from prior quarter. Turning to Jimmy Choo. Revenues during the quarter were 125 million, an 8% increase compared to prior year. On a constant currency basis, total revenue increased 10% versus prior year. These results were in line with our expectations, reflecting higher contribution from new stores and greater wholesale shipments offset by a mid-single digit decline in comparable store sales. Comparable store sales were impacted by significantly weaker than expected performance in Hong…

Thank you. [Operator Instructions]. Our first question will come from Randy Konik of Jefferies.

Thanks a lot. Good morning, everybody. So I guess, Tom, I want to ask you a couple of questions; very helpful detail both you and John. Just on the watch headwind, you said 130 basis points. If I recall last quarter, the watch headwind I believe was 200 basis points. So that 70 basis point reduction in headwind, should we assume that kind of trajectory going forward on a sequential basis? Just trying to get a sense of when that headwind starts to absolutely subside from the watch category. And second, you gave us some really good prospective on Kors margins by channel distribution. It sounds like very nice inflection in the retail channel operating margin that’s going to continue going forward. Just curious of how much – since that’s come down a lot over the years and you’re now starting to comp positive and we assume the watch headwind starts to abate, how much room or expansion do we think we can kind of get towards with the retail side of the fence within Kors? And then on the wholesale, should we expect the reduction in operating margins in that channel to start to kind of flatten out as we get into next calendar year? Thanks.

Hi, Randy. Good morning. It’s John Idol. I’m going to take the first part of the question regarding watches and Tom will discuss the margins in the second part. First off, we were extremely pleased in the quarter to see Michael Kors retail business globally return to low-single digit growth, which was ahead of our expectations. And as we mentioned in our prepared remarks, our international business both in Asia and in Europe saw very, very healthy growth for us which has been a continuation of what we’ve seen. But what was most exciting is that the Americas returned to a flat comp and really that was driven by the sequential improvement in our accessories and again even further led by our signature initiatives, which is something that we I think told you a few years ago. We kind of made a mistake. We had pulled back from that classification and really had tried to make that less meaningful to our assortments, and that was wrong. So we’ve course corrected and in our own retail we’ve seen some very strong selling that we’re extremely pleased with. And we’re seeing that resonate across other products beyond accessories as well. So that’s really what kind of drove the positive for Michael Kor. And again, even more importantly we saw that in the face of headwinds for both FX and for what you saw in Hong Kong. The watches continued to decelerate. Again, it’s becoming unfortunately every quarter a smaller percent of our overall business. It’s still meaningful, but it is continuing to in effect shrink. I don’t think we can sit here and tell you whether we think the deceleration in a quarter will be 100 basis points or 200 basis points. That’s really driven more by consumer demand. And there’s no…

Hi, Randy. So from a margin perspective, I think we had previously discussed Michael Kors as being stable over time when we had provided a little longer-term guidance. And what we’re seeing now is extremely encouraging as we look forward and see what is happening in the quarter. As I mentioned, the retail operating margins already has started to inflect and to be positive and expand in Q2. We expect that to continue into Q3 and beyond. And that’s really supported by the growth in accessories – an improvement in accessories. Longer term retail operating margins are also supported by our growth in Asia which is a higher margin region for us. And of course the store fleet optimization that we’re going through where we noticed that we were closing 50 stores this year, unprofitable stores and opening profitable stores. So that will help us. In addition, we’re going to be generating cost savings and ultimately synergies across our portfolio. So that will support both retail and wholesale. On the wholesale side, what we believe will help longer term and near term will be improving the signature mix in that channel which we’ll be doing as quickly as possible through this quarter and holiday season and beyond. And as that business begins to stabilize, deleverage will also moderate. So we do believe that this sets up Michael Kors brand very nicely for Q4 expansion in margin.

Thank you, Randy.

Very helpful. Thank you.

[Operator Instructions]. And our next question will come from Erinn Murphy of Piper Jaffray.

Great. Thanks. Good morning to you all. John, I guess my question is on the Versace business. Could you help us and just break out what you saw between Hong Kong versus Mainland China in the quarter? And then how are you planning that region for the balance of the year? And then specifically in the Mainland, now that you’ve removed that mislabeled product, are you seeing any signs of improvement? Thanks.

Good morning, Erinn. Thanks. So Versace, I want to start out by saying that the integration is going very, very smoothly. I think you saw the integration that we had with Jimmy Choo went very smoothly. We’re seeing the same exact thing in Versace. I also want to remind everyone that we have been in a process and are almost through shutting down two of the lines in the company; one was called Collection and the other one was called Versus and that was almost $100 million in revenue that we are exiting in order to focus on the Versace collection, which we think is the right way to position this company from a luxury standpoint. I also want to add that the new store renovations that we have seen, we talked about that on the last call, are really performing at very high double digit rates after we renovate these stores. So we’re extremely pleased. And we have an intent to renovate most of the store fleet globally over the next few years to really position the brand for a more modernized look and Donatella has been really leading that not only with the design vision but also product innovation and really getting some incredible stories for our associates inside the stores to really work with. And again, I have to give a big callout to – we have an incredibly talented group of people inside of our stores who have been working very, very strong in clienteling and engaging with our customers. So we’ve seen double digit growth in North America, double digit growth in EMEA and in Asia unfortunately there was first this situation that started to happen in Hong Kong which as we said before I don’t think any of us thought would reach the levels…

Thank you.

Our next question will come from Matthew Boss of JPMorgan.

Thanks and congrats on the return to positive comps at Michael Kors.

Thank you, Matt.

John, I guess maybe larger picture, are you seeing any improvement in the overall North America accessible luxury handbag category? Maybe if we were thinking about customer traffic, tourism and promotional levels, do you fully attribute this accessories inflection to more company specific products and marketing execution on your side?

So, Matthew, I would answer that two ways. Number one, we see the North American consumer as relatively healthy and quite frankly over the last two years I’d say we have two things that happened to us. One is completely self-inflicted and that was the removal of the MK Charm from product that was walking away from our signature categories that was certain design issues where we probably could have been in a better leadership position. I have to say we have a team in here, a new team working side by side with Michael and it’s kind of very exciting what’s happening here. The product looks spectacular. The consumers’ resonating with it and we talked about certain new products, we have three or four core groups that are starting to really resonate in line, and it’s been a while since we’ve had that type of level of assortment happening. So I’d put the first category into self inflicted and we need to work more on our design leadership. And Michael has really led the way in the past for us on that and it’s been sensational. And the second thing I would say is we needed to refresh our marketing campaigns and again Michael really took that as a vision and has been just sensational. We’ve obviously been leading that with Bella Hadid and our whole new vision of what jet-set means and it’s a more modern vision. So I think those two things are leading to better consumer response for us. And I put that amongst the backdrop of the American consumer we think is healthy. That being said, you still continue to have the issue of store traffic. We saw an inflection in this quarter where we saw traffic change. That’s obviously we think being driven by…

Our next question will come from Omar Saad of Evercore ISI.

Good morning. Thanks for taking my question. John, I wanted to ask a follow up on Versace. I’m trying to understand how big the impact is Hong Kong versus the T-shirt? It looks like when you guys are talking about I think 180 million is the forecast for 3Q and we look at the run rate in 1Q and 2Q, we’re well over 200 million. And presumably 3Q given the high DTC percent as normally would be a big quarter for the brand. So maybe you guys could help us understand, kind of bridge those gaps and what the underlying effect is of the Hong Kong versus the T-shirt on the kind of plan for Versace over the next couple of quarters? Thanks.

Yes, I’ll take part of that and then I’ll turn it over to Tom as well. So, again, I want to be very clear that Hong Kong for the company group has had a far more material impact than we had ever thought, in particular I said last call I didn’t think it would have a material impact and in fact now here we are sitting on this call saying that it is having a material impact. So we are seeing revenue decline across all three brands in the region north of 50%. So that is incredibly painful for us. And obviously that’s going to have an impact on Versace in the region. We’re not going to weight the difference between the two separate issues, but I also want to mention that the month of December actually is sitting in Q4 which traditional would be a very large quarter for Versace. So some of that is weighting what you’re seeing in the revenues. We’re still pretty close to our original objectives for the brand for the year. Again, we can’t determine to Erinn’s question earlier when we will return to a positive comp in the region in Mainland China as it relates to the T-shirt issue. But we definitely see it starting to subside. And again, is that one quarter, two quarters, three quarters, I don’t think we can measure that today. But I think we’re confident that we will see that return. And as I said, as we’re starting – we’re just starting our renovation program in China and one of the first stores that we renovated we’re seeing very strong double digit comp store growth from that. So I think we’re feeling that that will over time mitigate. And I’ll turn it over to Tom.

Sure. I’ll just add a little color commentary. In addition to December and the overall China impact, be it Hong Kong or Mainland China for Versace in Q3, there are also some FX headwinds that will continue in Q3 through Q4 for that business and then versus prior year for the company as a whole. And as John mentioned earlier, we had exited Versus and Collection which were large wholesale businesses that shipped a lot in those quarters, so we’ll be building that up with the luxury line over time with the Versace.

Thanks.

Thank you, Omar.

Our next question will come from Michael Binetti of Credit Suisse.

Hi, guys. Congrats on returning the Kors brand to positive comps, it’s nice to see. But I just want to ask you. You’ve commented on this a little bit, but you beat your plan on Kors same store sales, but total sales were a little below, so wholesale was a miss. You made some comments there. How are you thinking about the wholesale channel, particularly in North America and when do you think that can start to mirror the return to growth you’re seeing on the retail side? I know for a few quarters now you said – and you said in the comments today you’re trying to action some accelerated signature into that wholesale channel. I feel like you’ve been trying to get that up to speed for a while now. Is there anything regulating your speed into that channel and how do you look at the wholesale channel in North America when it could try to pivot to growth and help contribute a little bit more to the brand?

Thank you, Michael. Good morning. I’ll give you some color on the global wholesale channel and then we’ll look at the North America wholesale channel. So on the global channel, there’s been some obvious issues with department stores around the world whether there’s been closures, whether there’s been bankruptcies, they have created disruption. So there’s been a fair amount of disruption in the channel itself that we’re feeling on the global basis. Also remember, some of our impact that you’re hearing about in Hong Kong we will also feel in the wholesale channel because we have partners in that area in particular who are in the duty free retail market. So they’re going to be impacted by this as well. In terms of the – so on a global scale, that channel is not particularly healthy. On the North American scale, our partners when you look at our business inside of – whether it’s men’s wear, footwear and women’s ready-to-wear, those businesses are relatively healthy. So it’s been two categories. It’s been our accessories business and then of course the watch business. The watch business we don’t ship from a wholesale standpoint, but our accessories business we have. And as I said earlier, we’ve self inflicted many of the issues that have happened in our accessories business. We’re starting to see the same thing happen in the wholesale channel that we saw in our retail business. In particular, over the last 60 days, we are starting to see an inflection in that channel where the declines are beginning to slow and we are seeing our full price business expanding and growing and that’s been absolutely driven by signature. So the same thing that we are doing in our own channels where we moved much quicker we are now doing in our wholesale channel in North America. And I think we said in our prepared remarks last quarter on the Q&A that we felt that would be really – you’d see more of an inflection of that in Q4. So we’ve got the inventory heading into that channel in this quarter and we’re going to start to see we believe some change in the results there. So I’d say while the channel itself in North America is not as healthy as it used to be, it’s still an opportunity for us to get back to stable. And that was what our original goal was at the beginning of this year. We were not able to achieve that goal as you know and that will be once again our goal for next year is to stabilize our revenues in that channel. And we believe we’ve got a path to do that in particular given the response that we’re seeing from the consumer with our product.

Thank you.

Our next question will come from Kimberly Greenberger of Morgan Stanley.

Great. Thank you so much. John, I just wanted to follow up on that last question. So it sounds like you are starting to see some improving North America wholesale traction and I’m wondering is that sufficient to get the wholesale margin to stabilize or do you require some additional cost-cutting efforts there? Is there anything else, any other action you might be able to take to help sort of stabilize that wholesale margin that feels like it’s the drag there? And then I just wanted to follow up on the store closure discussion. John, you said you’re getting towards the end of the store closure program for Kors. I’m wondering if you’re expecting any additional closures in fiscal 2021. And then Versace, I think you mentioned you’re expecting to remodel the global fleet for Versace over the next few years. How many of the existing stores would you expect to be repositioning during that remodel process, meaning moving to a different location as opposed to remodeling in place? Thank you.

Thank you, Kimberly. On the wholesale side, I want to be clear again. We do not see the wholesale business stabilizing this year, so we will continue to see revenue declines in Q3 and Q4. And as we said, Q3 will be the largest, during the year, revenue decline. We said that in our last quarter and we still believe that to be the case. We do think that the inflection that we’re seeing with better performance and hopefully we’d see that continue through Q4 will begin to set us up for a better year next year and hopefully a stabilized business in that channel in North America. I don’t think we can comment to whether that will be the inflection point that we will be able to create leverage or not in that channel. I think as Tom said earlier, we’re very pleased. We’re starting to make progress on operating margin expansion in retail and really the offset to that has been the wholesale margin. At a point in time, retail being larger than wholesale, that inflection will help to potentially drive operating margin expansion for Michael Kors. We’re not ready to tell you when that would happen, but that’s obviously where we’re trying to head. In terms of the Kors store closure program, as I said, the majority of that will be done by the end of this year. We’ll still have more stores that will close next year. It will be small and that will be more or less augmented or offset by our store openings that we continue to do in Asia in particular. But what we’re going to see is the fruits of a full year of this store closure program that will help our operating margin next year in terms of cost reduction, and…

And just one additional comment on Versace. So year-to-date, we’ve opened, Kimberly, 24 new stores and the closures are really – because the net doesn’t appear to be as high, the closures are really the latest at exiting the Versus line and closing those retail locations.

Thank you, Kimberly.

Great. Thank you both.

Our final question will come from Oliver Chen of Cowen and Company.

Hi. Thank you for taking our questions. This is Jungwon for Oliver. Could you just provide more color on the pace of getting to that 40% signature penetration rate in retail? And how are you thinking about the right level of signature product penetration in the wholesale side as well? Thank you so much.

We’re fairly comfortable we’re going to reach that 40% rate probably in Q4 – just somewhere between Q4 and Q1 of next year. So we’re really positioned in our own stores to get there and the inventory will be there to be able to do that. And I would also tell you it might not stop at that level. When you look at our luxury European competitors, they were in much higher penetrations than that in their assortment. And again, quite frankly, we’ve been behind, self inflicted, but we’re feeling like we’re making up some real progress. And again, I want to give a big acknowledgment to Michael and our design team who are just doing a spectacular job with the product right now and our leadership of that division as well. And as I said, it will take a little longer in the wholesale channel. I think we would be closer to Q4 when we saw that, maybe a little drifting into Q1, but our own stores we’re going to be there probably 90 days at least quicker than we will see in the wholesale channel. Thank you for that question. I’d like to just close on saying that we are very pleased with the results on the initiatives that we have put in place at Versace, at Jimmy Choo and at Michael Kors. And in particular at Versace and at Jimmy Choo we are starting to make significant progress in our accessories initiatives, and as you know those are very important to our long-term success. We believe that the portfolio of fashion luxury houses that we’ve assembled are some of the best in the world and that they will give us the opportunity to continue to accelerate our revenues. And as move into fiscal 2021, we think that we will see a lot of initiatives bear fruit that will give us an opportunity to expand our earnings per share growth on a multiyear basis. Thank you all for joining the call today. I look forward to speaking to you soon.

That does conclude today’s teleconference. Thank you all for your participation. You may now disconnect.