Good day. And welcome to the Capri Holdings Limited Third Quarter 2020 Earning Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Jennifer Davis, VP of Investor Relations at Capri. Please go ahead.

Good morning, everyone. And thank you for joining us on Capri Holdings third quarter fiscal 2020 conference call. With me this morning are Chairman and Chief Executive Officer, John Idol Chief Financial and Chief Operating Officer, Tom Edward. 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 one-time costs associated with the Jimmy Choo and Versace acquisitions, restructuring and non-cash impairment charges, transformation costs and ERP implementation cost. 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 reconciliation, please view the earnings release posted on our Web site earlier today at capriholding.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. We continued to be encouraged by the ongoing progress at Capri Holdings, as we execute the strategic initiatives for each of our founder-led fashion luxury houses. While each brand is distinct with its own heritage, they all have consistent philosophies on fashion leadership, and luxury. Our company is led by design visions of Donatella Versace, Sandra Choi and Michael Kors. With the resources and investments of our group, we've made tremendous progress in expanding accessories at both Versace and Jimmy Choo. In fact, in the third quarter, handbags inflicted positively at both houses for the first time since the repositioning of the category. At Michael Kors, our focus remains on rebalancing the brand to position it for growth. Taken together, we remain confident that our three luxury houses position Capri Holdings to deliver multiple years of revenue and earnings growth. Now, looking at our third quarter results. We were pleased that revenue and earnings per share exceeded our expectations. Revenue of $1.57 billion increased 9% year-over-year. This increase reflects the addition of Versace and growth from Jimmy Choo, partially offset by anticipated revenue declines at Michael Kors. Earnings per share were $1.66. Before reviewing brand highlights for the third quarter, I would like to share some of our thoughts on the coronavirus global health emergency and its impact on our outlook for the fourth quarter. This situation is very serious and dynamic. Our thoughts and prayers go out to the people of China and all those affected by this virus globally. The health and safety of our employees is a priority, and we continue to take the necessary precautions to ensure their wellbeing. We can only hope for speedy and positive resolution to this crisis. Given the extraordinary and appropriate efforts taken to contain…

Thank you, John. Starting with our third quarter results. Revenue of $1.5 7 billion increased 9% compared to last year, ahead of our expectations. Revenue growth year-over-year was driven by the addition of Versace and growth from Jimmy Choo, partially offset by anticipated lower revenue at Michael Kors. Net income was $253 million, resulting in diluted earnings per share of a $66, which was above our expectations. Third quarter earnings per share included $0.13 of dilution from Versace. Looking at sales performance by brand, Versace revenue was $195 million and comparable store sales increased in the mid single digits. Total revenue was ahead of our expectations, reflecting better than anticipated comparable sales. We continued to see double digit comparable sales increases in the Americas and EMEA, while Asia declined as trends in Hong Kong worsened. Versace ended the quarter with a global luxury fleet of 208 retail stores, a net increase of 10 from prior quarter. Turning to Jimmy Choo, revenue during the quarter was $165 million, a 2% increase compared to prior year on both a reported and constant currency basis and in line with expectations. Comparable store sales were flat as anticipated with continued growth in the Americas, EMEA and Mainland China. Jimmy Choo ended the quarter with a global fleet of 223 retail stores, a net increase of 17 from prior year. Turning to Michael Kors, total revenue of $1.2 billion was above our expectations and declined 5% compared to last year on both a reported and constant currency basis. Revenue performance was driven by better than anticipated wholesale results. As John said, we worked with our wholesale partners to bring inventory in earlier to help drive better sell throughs. This was partially offset by lower than expected comparable store sales. In the retail channel, comparable sales…

[Operator Instructions] And we will take our first question from Randy Konik of Jefferies. Please go ahead, your line is open.

I guess question for Tom, couple of clarifications. Could you give us some perspective on just how big the watch category is today as a percent of sales? Just so we have some frame of reference of where it is now. I guess second, can you give us some -- you've done a nice job of stabilizing and improving the retail margins in Michael Kors, the wholesale margins have come down a little bit. So kind of give us some perspective on when we should see and how we should see the wholesale kind of margin start to stabilize, what are the levers there and the timing. And then I guess last week, you know you gave us some good really interesting perspective on synergies coming through. I think you said $100 million in fiscal 2021. Just give us some perspective of how you think those synergies, do they more than offset some of the issues going on in China and Asia region. Just how should we be thinking about those synergies offsetting, or partially offsetting some issues continuing in Asia? Thanks guys.

And taking the watch category, it is still a significant part of our business in North America and represents a good portion of our retail business. So we don't share the specific number but from its height in the teens or high-teens and the penetration, it has declined but it's still significant enough where as you can see it's a 200 basis point impact in a quarter for us and has hit that number in the past as well. With regard to synergies and the impact, I think we're really pleased with how our company is coming together and our teams are executing against the transformation initiatives to create a global services and global capabilities. We're going to provide a lot more information on that when we provide our full year guidance on fiscal 2021. But clearly, that's something we're very excited about and we'll talk to you more.

Randy, this is John. I would like to take the margin piece. As you recall, Q4 for us was kind of the moment where we were beginning to see operating margin expansion or forecasting that for really all of our brands. And as Tom said in his earlier prepared remarks, you're going to continue to see that at Versace and Jimmy Choo even with the situation in China. Michael Kors is going to be impacted by that. But what we're seeing is our retail operating margins are expanding, which actually happened in the third quarter and that's a result of our fleet optimization program and also some other things that we're doing with getting better sell throughs in certain categories. And then secondly, the wholesale margins have been under pressure and that's really a result of deleverage, given the size of that business is shrinking. What we were encouraged about during the quarter, as I said in my prepared remarks. We saw an inflection with our departments to our partners in North America as we started to really get inventory in. We worked closely with them to actually move inventories in a bit earlier than we had originally anticipated and that worked. We’re not quite upto LY levels with our partners but we're getting very, very close. And we're seeing our signature initiatives work in that channel, which is what we wanted to see happen. So I think we felt really good about what happened in our Q3, retailer Q4 in our categories. So that was really a good sign. So you've heard us say in our prepared remarks that we feel like we're getting, doing the right things in terms of rebalancing the Michael Kors brand and heading in the right direction. I believe you're going to see that show up in operating margin next year. And we look for operating margin expansion across all the brands next year with the exclusion of the situation in China, which obviously we're going to have to take into our view, especially in Q1 of next year. But feeling very good about all the initiatives we're making on product development and on the cost of goods and how that's going to show up in our gross margins. And then as Tom indicated, you're going to hear some of that synergies that we're getting across the group, you’re going to see that showing up in the operating margin. So thank you very much for your questions.

Thank you. We will now take our next question from Simeon Siegel of BMO Capital. Please go ahead, your line is open.

John, in light of the additional Macy's store closures, can you contextualize how you're thinking about your business there may be across their fleet versus e-com? And then thinking about how you see the revenue opportunity in the Americas, specifically for Versace and Choo. Thanks.

So we all learned about the Macy's closures here in the last 24 hours. From what we understand, let me back up one second, Simeon. We're very pleased with the progress that we're making with Macy's with the Michael Kors brand. We had a very good holiday season with them and so I want to thank them for their partnership and as I said most of our department store partners, we saw some good results. And when we look at Macy's, the majority of our business is done obviously eCommerce being our biggest to work today and then really the top few hundred doors that represents the majority of our business. Again, we're very proud to be in all the Macy's stores and the fleet because we think they're a great partner and doing a terrific job. I don't think that these doors that they've announced, from what we understand, are going to be material to our business. It will have a small impact, but we don't think it's going to be anything significant. And then of course we're looking to see our trend across all of our department store partners continue through our Q4 and then on through the next fiscal year. So secondly in terms of the Americas and Versace and Jimmy Choo, we've seen excellent results. Versace has been strong, all the way through since the day we bought the business here, really showing double-digit growth and I'm pretty excited that we're doing that without having the percentage of penetration of accessories and even though we're very proud of the fact that we inflected and comped double-digit, by the way, positive in Versace accessories. As a percentage, it still has so much more opportunity to grow. So I think we're feeling great about that. And if you…

Thank you. We will now take our next question from Erinn Murphy of Piper Sandler.

John, I just had a clarification for you, first just on the guidance. You guys kept that overall sales guidance by $150 million and I know Corona was $100 million of that. Was the primary driver of the other $50 million, was that North America or FX? Can you just kind of expound on that? And then on Coronavirus, are you assuming that for the quarter, the fourth quarter that the current business conditions today continue through the end of the quarter? And then I know it's small, but how are you just assessing the potential supply chain disruptions, if any? Thank you.

The $150 approximately $150 million is a couple of things. Number one, it's approximately $100 million of what we see in Asia, and I'll come back to that in a second. Secondly, there is a bit of a shift, because as we mentioned earlier that we beat our revenue expectations during the quarter and the majority of that's coming from wholesale shipments and that turned out to be a very good thing for us because that turned into better performance in our wholesale partners. So that's really a shift and obviously we will not get that back in Q4. So that kind of gives you a feeling of the $150 million. The Coronavirus, the way that we've approached this the guidance is that we believe that we have taken the current trends that are happening today and we've assumed that nothing gets better through the end of March. And I think that's a very prudent way to view it. We don't see anything that indicates that, that will change. And in fact, we've already had one change overnight where we'll now close stores in Macau for a few weeks along with the casinos, etc. So, things continue to evolve, but this is our best understanding, given the visibility that we have today. And as we said in our prepared remarks and it's in our press release, if we see additional curtailment of travel, whether that being the tour groups, as you know, China had decided not to have the conducted tour groups leaving, which we think was a very smart thing, and we think that the Chinese government is doing a great job to try to protect their own people and other countries that has impact outside of China, in particular in places like Korea, in Japan and Malaysia and Singapore, obviously, Hong Kong and Macau. So we've factored some of that into this number, if it gets materially worse, the net number could get worse. But we wanted to frame it up to give everyone an idea of what we think it is today and how we see the situation.

You had mentioned the supply chain. So, as I noted in the prepared remarks, we have less than 10% of products of Michael Kors produced in China. For the remainder of our activity, we're really actively working to manage inventory flows and make sure inventory is positioned in the right places and also manage future production. So there is a lot of effort around all of the pieces in that area that the teams are focused on.

And Erinn, let me add one further thing. I think all of us will know more in the next week or two. Obviously, there are many, many cities in China that remain closed until next week and then we'll start to see resuming factory openings, resuming of certain places that are not shipping. So there's a lot of movement that will happen in the country next week. So currently we don't think it will have again a material impact today, but if multiple factories don't open up for whatever the reason is, or there is disruption in freight movement, that could again further impact our forecast. We just don't know, sitting here today, what that could mean.

And then just a follow-up on the logo business for Michael Kors, I didn't hear you talk about it in the script. And I know that's been a strategic move on your part to kind of increase the penetration. How did that perform versus non-logo in the quarter? Thank you.

So Erinn, we actually did comment about it in our prepared remarks. So the Signature business, as we refer to it, was about 30% of our retail revenues during the quarter and about 30% of our wholesale. So we saw a significant inflection in the wholesale versus the second quarter, which was a very good thing, which is what we wanted to have happen. And again, our department store partners are really working closely with us to build out that category. But the second thing that's great for us is that it is a category that we don't need to be as promotionally active in, because it's more consistent and it has longer life and duration. So it's the category with the higher sell throughs in the company today and also the performance is being driven without having to take the level of promotional activities that we normally do when we're moving fashion through the quarters or through the seasonal activity. So again, we're super pleased and we also have a goal to get that from its current 30% level to 40% level and we certainly have the inventory flowing in the spring season to do that. You'll see that probably happen a little later in the quarter, in the first quarter of next year. But we're well on track to achieve that and we think that's also going to have a further impact on our gross margin which will fall down and the operating margin expansion, because of the better sell-throughs, less promotional activity on that product and the way the customer is responding.

Thank you. [Operator Instructions] We will now take our next question from Matthew Boss of JPMorgan. Please go ahead.

This is Grace Smalley on for Matt Boss. Looking at the Michael Kors brand, what do you attribute the lower than expected traffic in North America to in December?

Thank you, Grace and good morning. Grace, we actually were doing extremely well up until the first week of December and then we saw traffic slow and I can't tell you whether it was one week less or whatnot. We obviously then saw very quick surge right towards the end of the holiday season. And so what we made the decision during that period of time was to end the quarter with our inventories cleaner, and so in Tom's prepared remark, we took additional markdowns to be in a really good inventory position, which I think you saw from our statement, inventory is down about 2% and then really setting us up to be in a clean position for spring season. And so we can't tell you what that was, but we certainly did not see that in other regions of the world. It was more of a North American isolated situation for us in Michael Kors. Thank you, Grace.

Thank you. We will now take our next question from Ike Boruchow of Wells Fargo. Please go ahead.

John, first question for you. You talked about the watch business being incrementally, it sounds like you're incrementally disappointed by that. Just curious outside of China and Asia because I know that that's got its own issues but maybe just focusing on the Americas and Europe, because of that incremental pressure from watches, should we not assume that MK comps in those regions can get back to or stay in the positive? And then just to the inventory question before me, given you ended MK inventory looks really, really clean relative to the last six months. What's the visibility on gross margins for MK just kind of going forward? Thanks.

So in Europe, we've been comping positive, we were flat this quarter, but before that we were comping positively in Europe and again we see that as being one of the most healthy regions in the world for us. So I think we view that as being continuing to happen. Watches are very -- there is a very big surge during our third quarter or a retailer fourth quarter. And so it's disproportionate, the amount of velocity that it represents during the quarter. So we were very disappointed in the quarter. We did not think we would drop close to that much in watches. And I would tell you and again, I think you saw it in our prepared remarks, but we have an even greater decline in our tech watches than we had anticipated, and clearly the customer voted for those companies that are more in the tech wearable business than we necessarily are and it's very difficult for us to compete against them in particular where they have an ecosystem that's linked to many other products with the consumer. So we're trying hard but it's definitely an uphill battle. So I think that the watch declines will continue to impact North American comps all the way through next year. It's less of a percentage of the Europe business and it's a de minimis, not a de minimis, but it's a very, very small percentage of the business in Asia in watches comparatively to what North America and to a lesser degree Europe are. That being said, we are working very, very hard. You heard us talk about our men's business, we're really happy with what's happening with men's and men's accessories, in particular. And when we get to Q4 to give you guidance, I think we're going to…

Thank you. We'll now take our next question from Jay Sole of UBS.

John, my first question is about Versace. Could you maybe provide a little bit more context around the performance in Asia. I think going back a few months ago, there is the issue of the T-shirt that had an impact on the business. Are you continuing to see an impact from that or is that changed? And then secondly if you could just talk about the high drifting amount managing cost in China, given what's happening with the Coronavirus. Is there an ability to sort of manage down the cost and then theoretically if the business were to bounce back next year, if the virus goes away, if next year's a normal year. How much of the cost would you be able to re-lever if you had a nice bounce back in sales or how much natural inflation would there be in cost in Asia, going forward?

I'm going to, obviously, I'll take the Versace and I'll take a little bit of the managing costs and then turn it over to Tom. So as I said earlier, we couldn't be any happier than what's happening at Versace. Donatella and her design vision and her marketing prowess are working exactly the way that we had envisioned when we acquired the company and really built that out together. I have to take my hat off to Jonathan Akeroyd and what he is doing with the management team there, implementing our collective strategic initiatives and the customer is absolutely responding to what we're working on. So I think we really feel that Versace is on the right track. We did have a situation in China, where there was, unfortunately, a misunderstanding about the way a product was labeled and that absolutely created a difficult result of our performance in Mainland China. That has been really subsiding and again recently, we had a wonderful Chinese celebrity wear our product, Carina Lau in performance. And so I think that will over time -- we are working very, very hard to make sure that the people of China understand that we respect the One China Policy and believe in their sovereignty. So I don't think that's going to be an issue for us. Obviously, China is a bigger proportion of the Versace business than any of our three brands. So that's going to be painful as we go through and I'm going to say the next six months, because we believe the next two or three months, it's going to take to really get the virus contained. It will go away, it will be dealt with and then there'll be a rebound period. So our thoughts are Q1 we'll probably see not the level of what we're seeing today in terms of store closures and reduced traffic in shopping malls. So that's going to be an impact on Q1 for all of our brands, but Versace is feeling it the largest because of its penetration of overall sales. But it doesn't give us pause for one minute about the acquisition itself and about the potential of what this is going to do for our overall group by being able to add $1 billion with this brand. I think we're super positive about how that's going to impact us long term. And as I said earlier, we actually think that operating margins are going to expand at all of our brands for next year ex this Coronavirus current situation, which we will get through. China will return, and it will be a very key pillar of our growth. And in terms of managing the cost, I will turn that over to Tom.

For costs, we're actively managing costs, but in the short term as you could imagine from the very rapid developments here, the costs are not a lot of that are variable that we could adjust in the short term. However, that said, where there is a possibility, and the fact that there is many store closed and less traffic for items like marketing and other short term events, we're certainly actively managing and reducing those costs. However, as John mentioned, right now, what we're seeing is the $100 million flow through more at the gross margin level, which is the highest in the company, across all of our regions, thus, the impact up for the business. To the extent and ultimately when this recovers, we would expect that margin to come back as well and we'll again be managing cost in the meantime. I don't know that there is any specific inflationary impact that we would be considering during this timeframe, really just the support for the business, as we get back in the market after the virus works through.

Thank you. We will now take our last question from Oliver Chen of Cowen & Co. Please go ahead.

Hi, this is [Joanna] on for Oliver today. Thank you for taking our question. Could you just elaborate on the traffic trends for Michael Kors by channel? How the full price performed versus outlet? And just quick thoughts on the handbags, how did the category perform overall? And how are you managing AURs in light of the hands-free trend? Thank you very much.

In terms of channels, I'll just broadly speak obviously the full price channel has seen for the last almost three years a decline in traffic, although that's beginning to mitigate. Clearly, what you've seen is our online business is growing in every single market and, by the way, including China. We had excellent results at Eleven Eleven and over the holidays, we've gone on to T Mall, we're in a great partnership and we're one of the best performing brands in the luxury pavilion which was very exciting for us. So again I think that's part of the natural migration of where consumers are shopping today. The outlet malls have seen slight traffic declines and again, I think we're not the only one who have commented or seeing that. And part of that is because of eCommerce. Again certain customers who would typically shop in an outlet store might buy something on sale on our full-price channel. So I think that's just part of the natural migration and you see that a bit more in North America, where in Europe and Asia, that's not exactly the case. So I think we're positioned very well as we've mentioned many times, we started our digital and e-commerce journey more than five years ago. We spent a significant amount of money on platforms, distribution centers. We're also bringing the -- Jimmy Choo is pretty good at it. We're going to bring Versace upto the group level and we're, as Tom mentioned, we're going to make further investments in synergies where we're moving certain of the groups together in warehouses. You'll see that happen very rapidly next year in North America, in Europe and in Asia as well. So we're really using the synergies, not only from a financial standpoint, but also to improve…

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.