Capri Holdings Limited (CPRI) Q1 2022 Earnings Report, Transcript and Summary

Greetings. Welcome to Capri Holdings Limited First Quarter Fiscal 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Jennifer Davis, Vice President of Investor Relations. Thank you. You may begin.

Good morning, everyone, and thank you for joining us on Capri Holdings Limited first quarter fiscal 2022 conference call. With me this morning are Chairman and Chief Executive Officer, John Idol; and Chief Financial Officer and Chief Operating Officer, Tom Edwards. Before we begin, let me remind you that certain statements made on today’s call may constitute forward-looking statements, which are subject to risks and uncertainties that could cause actual results to differ from those we expect. Those risks and uncertainties are described in today’s press release and in the Company’s SEC filings, which are available on the Company’s website. Investors should not assume that these 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 costs associated with COVID-19-related charges, ERP implementation costs, Capri transformation costs, restructuring and other charges. Unless otherwise noted, all financial information on today’s call will be presented on a non-GAAP basis. To view the corresponding GAAP measures and related reconciliation, please view the earnings release posted to our website earlier today at capriholdings.com. I would also like to note that we have accompanying slides posted on our website. Now, I would like to turn the call over to Mr. John Idol, Chairman and Chief Executive Officer.

Thank you, Jennifer, and good morning, everyone. Last month, we shared Capri Holdings’ growth strategies and long-term outlook during our Investor Day. The initiatives that supported our growth opportunities centered around five strategic pillars, which are being executed at Versace, Jimmy Choo and Michael Kors. These pillars form the foundation that position Capri Holdings to deliver multiple years of strong revenue and earnings growth. I would like to take a moment now to review our five strategic pillars. First, we plan to maximize the full potential of our three distinct fashion luxury houses. While each brand is unique with its own heritage, they all have consistent philosophies of fashion leadership and luxury. Second, we will create the most innovative and exciting fashion luxury product, led by the design visions of Donatella Versace, Sandra Choi and Michael Kors. Third, we will create compelling communication to deepen consumer desire and engagement with each of our luxury houses. Fourth, we will leverage our seamless omnichannel capabilities to accelerate revenue growth. And fifth, we will build upon our corporate values with communities, both internally and externally. We are already successfully executing against these strategies and are encouraged on our progress. Now, turning to first quarter performance. We were pleased that revenue, gross margin, operating margin and earnings per share all significantly exceeded our expectations. These results were driven by strength across all three of our luxury houses as they continue to deepen consumer desire and engagement, adding 10 million new consumers to their databases. Total revenue in the first quarter increased 178%, reflecting robust growth across all channels and regions. Additionally, gross margin expanded 90 basis points and operating margin reached 20.8%, both meaningfully better than anticipated. As a result, earnings per share of $1.42, was well-ahead of our expectation. Moving to first quarter performance by brand. Starting with Versace. We were pleased with results which were materially ahead of our expectations. Revenue increased 158% in the first quarter, demonstrating the strength of the brand and the success of our strategic growth initiatives. All categories performed well as Versace’s bold and fearless designs were positively received by consumers. In women’s accessories, we saw continued improvement with sales more than double prior year. Consumer response to the La Medusa and Virtus collections was strong. Overall, we are excited with the traction in accessories and the category is growing much faster than we anticipated. We are confident in our ability to position Versace as a leading luxury leather house and expand accessories revenue to $1 billion over time. Footwear also delivered strong performance with sales more than doubling prior year levels. In April, we introduced our new Greca Sneaker for men and women, which features the iconic Greek key pattern. The consumer response to this new addition in our active family was positive. In women’s dress footwear, Versace is expanding its authority as we execute on our initiative to build a core offering focused on our iconic brand codes. Additionally, we saw strength across both men’s and women’s ready-to-wear. Seasonal offerings incorporated the Trésor de la Mer pattern, which was featured in the Versace Spring 2021 Runway Show. We also continue to expand our core lines, which incorporate iconic house codes to increase sales and broaden Versace’s reach. Moving to brand awareness and consumer engagement. Versace continues to deepen consumer desire. The brand’s summer campaign, La Vacanza, took the iconic, Very Versace look to the Italian Riviera. The campaign showcased the crystal clear waters and blue skies of Liguria featuring iconic fashion from the summer collection. We were very encouraged to see a return of in-person red carpet events during the quarter, a wonderful sign of recovery and an opportunity for Versace to once again adorn the world’s most famous celebrities. Versace’s presence on the red carpet was extensive, dressing celebrities including Lily Aldridge, Hailey Bieber, Dua Lipa, Zendaya, Nick Jonas, Leslie Odom Jr. and Usher. In June, Versace launched a mini capsule in collaboration with Lady Gaga’s Born This Way Foundation. The capsule included a readdition of an Atelier Versace jacket that Lady Gaga wore on tour as well as unisex T-shirts. The capsule sold out within hours and a portion of the profits were donated to Lady Gaga’s Born This Way Foundation. We are also thrilled to have global superstar Dua Lipa featured in our fall campaign, where she will introduce the new La Greca collection. The pop culture icon has over 90 million followers on her social media accounts. Dua Lipa epitomizes the Versace brand with her impeccable style, fearless attitude and universal appeal. These initiatives, among others, help to drive a 24% year-over-year increase in Versace’s global database. Overall, Versace’s strong first quarter results speak to the strength of the brand and reinforce our confidence in the luxury house’s long-term growth potential. Moving to Jimmy Choo. Results were well ahead of our expectations, with revenues increasing 178% as we are beginning to realize the benefits of our strategic growth initiatives. In accessories, sales showed robust growth as we continue to focus on our three key hero handbag families: VARENNE, Madeline and Bon Bon. Sales of women’s handbags increased over 150% in the first quarter. In footwear, we have seen strong signs of recovery in dress styles as people are returning to work, attending events and enjoying special occasions. Our casual offerings represent a significant growth opportunity and continued to perform well in the quarter. Results were led by the success of our new sneaker introductions in DIAMOND Light and DIAMOND X STRAP As we shared at our recent Investor Day, one of Jimmy Choo’s strategic growth initiatives is its core collection. This permanent collection of accessories and footwear was launched at the end of June and is centered on three design fillers that represent Jimmy Choo’s DNA, Crystal, Pearl and JC Monogram. The core collection enables us to translate our brand codes across product categories and consumer communication to create a recognizable and authentic identity for Jimmy Choo. Additionally, growth in the core collection will enable us to expand gross margins over time. The initial reaction from consumers has been encouraging. In terms of brand awareness and consumer engagement, Jimmy Choo’s summer 2021 campaign features our beach capsule collection and celebrates the summer holidays with laid back glamour. To launch the beach collection, Jimmy Choo hosted 10 influencers in [indiscernible] China or a social media activation event, using the hashtag ChooTravels. The activations generated over 14 million views on Weibo. Jimmy Choo had a strong showing on the red carpet. Celebrities wearing Jimmy Choo included Beyoncé, Viola Davis, Laura Dern, Lizzo, Reese Witherspoon and Zendaya. With the return of weddings, Jimmy Choo has enjoyed unique success in user-generated content on social media, specifically in the bridal sector. The IdoinChoo hashtag is a top trending bridal hashtag on Instagram. In June, Jimmy Choo collaborated with Billy Porter to create a capsule to coincide with the Pride. To mark the collection’s release, Jimmy Choo donated a portion of the proceeds to support the Trevor Project, whose mission is ending LGBTIQ youth suicide. Our glamorous product and engaging marketing helped contribute to a 14% year-over-year increase in Jimmy Choo’s global consumer database. Overall, we’re optimistic about Jimmy Choo’s future growth opportunities. We have the key building blocks to expand our assortments to meet all of our consumers’ needs every day, anytime, anywhere, from formal to casual across accessories and footwear. Now, turning to Michael Kors. Our first quarter performance was better than anticipated, with revenues increasing 184% compared to prior year, reflecting broad-based strength. We continue to increase signature penetration across all product categories by expanding our offering and developing new designs. Overall, signature represented 36% of the assortment compared to 30% last year, helping support higher gross margins and AURs. With our signature strategy, we continue to create desire as our iconic Michael Kors branding resonated with consumers. Now, moving to accessories. Revenue in our retail channel increased triple digits, globally, as consumers responded to the fresh updates but continued to energize our signature styles. In footwear, casual performed well as we excited consumers with laid back yet lux styles offering iconic Michael Kors branding. Consumers also responded positively to core styles updated in signature. Looking at women’s ready-to-wear, we saw strong results in MKGO, which capitalized on our consumers’ active lifestyle. Turning to men’s. First quarter sales increased over 300%, driven by accessories. The men’s business remains one of our fastest-growing categories at Michael Kors. In watches and jewelry, we continue to see strong performance. Revenue in watches was driven by traditional styles that are true to our DNA with bold, sophisticated and distinctive designs. In jewelry, we have seen a positive consumer response to our elevated assortment, focused on sterling silver, precious metal platings and semiprecious stones. In terms of brand awareness and consumer engagement, we continued our highly successful, the Eye Must Travel campaign, which reflects Michael’s love of travel and our consumers jet set lifestyle. For summer, the campaign again featured quintessential jetsetter Bella Hadid and was filled with color, sun and sea, which are also trademarks of the Michael Kors jet set lifestyle. Michael Kors drove strong consumer engagement across social media platforms in the first quarter. We used influencers to create local relevance and generate global buzz around the launch of our new Bradshaw accessories collection. These influencers generated more than 153 million impressions across the social media platforms. In June, we activated our campaign around Pride, celebrating Michael’s lifelong support of the LGBTIQ community. We launched a dedicated Pride capsule that featured a rainbow wave pattern and heart logo. A portion of the profits were donated to OutRight Action International, which works to advance human rights for the LGBTIQ community globally. In China, Michael Kors took over the Paramount Theater in Shanghai in celebration of Michael’s 40th Anniversary Show. The event began with a preshow greeting from brand ambassador Gao Yuanyuan, followed by the live stream of the show, which featured in-studio commentary from brand ambassadors, Wang Feifei and Lareina Song. As a result, the show generated 26 million views in Asia. These marketing initiatives continue to highlight our brand pillars of speed, energy and optimism. This helped contribute to a 20% year-over-year increase in Michael Kors’ global database. Overall, we are extremely optimistic about the future growth of Michael Kors. The strategies we put in place over the past two years have been generating high consumer engagement as well as attracting new and younger customers. Additionally, we continue to elevate the brand positioning at Michael Kors, which is driving higher profitability. In total, Capri Holdings’ first quarter results significantly exceeded our expectations, demonstrating the power of our three luxury houses and the execution of our strategic initiatives. The strength we are experiencing today is a direct result of the dedication, focus and talent of all of our employees around the world. Looking forward, we are pleased with the progress our luxury houses are making towards their strategic goals and the pace of their revenue growth. While it is clear, the world will continue to see challenges as the global pandemic evolves, including regional closures and temporary restrictions, we believe the ultimate path to recovery remains strong. As we have shown, Capri Holdings has the proven ability to successfully navigate these challenging times. Capri Holdings, with our three powerful luxury houses, is positioned to deliver multiple years of revenue and earnings growth. Now, let me turn the call over to Tom.

Thank you, John, and good morning, everyone. Starting with first quarter results. Revenue of $1.25 billion increased 178% versus prior year, meaningfully exceeding our expectations. Performance was driven by better-than-anticipated results across all brands and regions. Net income was $221 million, resulting in diluted earnings per share of $1.42. This was above our expectations, reflecting better-than-anticipated revenue, gross margin and operating margin. Looking at revenue trends by channel. Total company retail sales increased 135%. These results were driven by robust e-commerce sales, which increased approximately 60% as well as strong store sales. Retail store sales improved sequentially, reflecting increased traffic trends and clienteling initiatives. In the wholesale channel, revenue improved sequentially as sales rebounded compared to the initial impact of the pandemic, last year. By geography, the Americas was the strongest performing region with total revenue increasing 304% versus prior year. In EMEA, where an average of 25% of stores were closed during the quarter, revenue increased 148%. And in Asia, revenue increased 55%, despite restrictions and store closures that impacted numerous countries. Turning to revenue performance by brand. Versace revenue was $240 million, 158% increase compared to prior year and above our expectations. Global sales in our retail channel increased 141% with e-commerce sales increasing triple digits. Store sales also increased in the triple digits. By geography, the Americas was once again the best performing region with revenue increasing 480%. Revenue in EMEA increased 222% and revenue in Asia increased 29%. Versace ended June with a global luxury fleet of 208 retail stores, a net increase of four from prior year. For Jimmy Choo, revenue during the quarter increased 178% to $142 million, well above expectations as we began to benefit from our strategic growth initiatives. Global sales in our retail channel increased 153% with e-commerce sales once again increasing triple digits. Store sales also increased materially. By geography, the Americas was the best-performing region with revenue increasing 533%. Revenue in EMEA increased 213% and revenue in Asia increased 86%. Jimmy Choo ended the quarter with a global fleet of 233 retail stores, a net increase of 5 from prior year. At Michael Kors, total revenue of $871 million increased 184% compared to last year, also exceeding expectations. Global sales in our retail channel increased 130%. E-commerce sales increased strong double digits, while retail store sales also increased significantly. Wholesale revenue increased substantially year-over-year as shipments normalized in the first quarter of fiscal 2022. However, wholesale revenue remained well below historic levels, in line with our strategic initiative to have a smaller wholesale business, while improving profitability. The Americas was also the best performing region for Michael Kors, with revenue increasing 278%. Revenue in EMEA increased 109% and revenue in Asia increased 61%. The Michael Kors ended the quarter with a global fleet of 820 retail stores, a net decrease of 2 from prior year. Now, looking at total company margin performance. We were pleased with gross margin expansion of 90 basis points. This improvement reflected better-than-anticipated performance in the retail channel across all three brands, including material increases versus prior year at Versace and Jimmy Choo, driven by a strategic initiative. However, as anticipated, wholesale penetration was approximately double prior year levels, resulting in an overall lower gross margin for Michael Kors in the quarter. Operating expense as a percent of revenue was 47.2%, better than our expectations as higher revenues resulted in increased expense leverage. On an absolute basis, operating expense increased approximately $140 million versus prior year, primarily reflecting the significant increase in revenue, which generated higher variable expenses. Additionally, the increase reflected reinvestments in our business as sales recover as well as the unfavorable impact of foreign currency exchange rate. As a result of higher gross margin and lower operating expense as a percent of revenue, total company operating margin of 20.8% was above our expectations. All brands’ operating margins also exceeded our expectations, reflecting both, better gross margins and operating expense leverage. At Versace, operating margin was 20%. At Jimmy Choo, operating margin was 7.7%, and at Michael Kors operating margin was 27.6%. Now, turning to our balance sheet. We ended the quarter with cash of $356 million and debt of $1.3 billion, resulting in net debt of approximately $1 billion. Total liquidity at the end of the quarter was $1.4 billion. Looking at inventory, we ended the quarter with $760 million, down 20% compared to prior year. Going forward, we expect to build inventory to support sales growth over the remainder of the year. During the first quarter, we repurchased approximately $50 million worth of shares and have an additional $350 million of availability remaining under our share repurchase authorization. Now, turning to guidance. Before going into detail, I would like to take a moment to provide some perspective around our full year outlook. We are increasing our revenue guidance primarily to reflect the higher-than-expected first quarter results and stronger anticipated sales in the second quarter. We remain cautiously optimistic about the balance of the year, even though we are seeing some store closures and regional restrictions as the pandemic continues to impact certain regions of the world. In addition, we are experiencing increased delays in receiving merchandise and challenges at the factory level due to temporary closures. However, the current situation is incorporated in our outlook for the year. Now looking at full year fiscal 2022 guidance. We forecast Capri Holdings revenue of approximately $5.3 billion. This assumes Versace revenue of approximately $1.025 billion, Jimmy Choo revenue of approximately $550 million and Michael Kors revenue of approximately $3.725 billion. As a reminder, guidance includes approximately $75 million associated with 53rd week. For gross margin, we now expect approximately 100 basis points of expansion for the year, an increase from our prior guidance of 50 basis points. This increase reflects stronger first quarter results as well as gross margin expansion in each quarter of the year, despite higher transportation costs. We continue to forecast operating expense of approximately $2.6 billion. This reflects lower-than-anticipated expenses in the first quarter, offset by additional investments in the remainder of the year. As discussed during our recent Investor Day, we believe it is important to support our future growth and build momentum into fiscal 2023. Therefore, we will be reinvesting approximately $25 million to $30 million in marketing, e-commerce and regional growth initiatives. As a result, we now expect an operating margin of approximately 16%, an increase of 200 basis points relative to our prior guidance. For Versace, we anticipate an operating margin in the low-double-digit range. For Jimmy Choo, we expect an operating margin in the negative low-single-digit range. And for Michael Kors, we anticipate an operating margin in the mid-20% range. Turning to our expectations around certain non-operating items. We now anticipate net interest expense of approximately $5 million, an effective tax rate of approximately 17% and weighted average shares outstanding of 156 million. As a result, we now expect to generate diluted earnings per share of approximately $4.50 for fiscal 2022. Turning to our second quarter guidance. We expect total company revenue of approximately $1.25 billion. We forecast for Versace revenue of approximately $260 million, Jimmy Choo revenue of approximately $120 million, and Michael Kors revenue of approximately $870 million. We now anticipate our second quarter operating margin will be approximately 13%, an increase of 200 basis points relative to our prior guidance. This reflects a 50 basis-point increase in gross margin versus last year, as well as expense leverage on our higher revenue forecast. For Versace, we now anticipate an operating margin in the low-double-digit range. For Jimmy Choo, we continue to expect an operating margin in the negative low-double-digit range. And for Michael Kors, we now anticipate an operating margin in the low-20% range. Turning to our expectations around certain non-operating items. Interest expense is forecast to be approximately $1 million. Our effective tax rate is expected to be approximately 12%. And we forecast weighted average shares outstanding of 156 million. As a result, we now expect diluted earnings per share of approximately $0.90. In conclusion, we are pleased with our first quarter results and the momentum of our business. This performance reflects the strength of our fashion luxury houses and execution of our strategic initiatives. As the world emerges from the pandemic, we remain confident that Capri Holdings is positioned to deliver multiple years of revenue and earnings per share growth as well as increased shareholder value. Now, we will open up the line for questions.

[Operator Instructions] Our first question is from Omar Saad with Evercore ISI.

Good morning. Thank you for taking my question. Excellent job, pretty much on all fronts. Congratulations. I wanted to follow up on the Versace strength and the Choo strength. Did you guys talk about any sort of customer response, wholesale customer response or marketplace response you’re seeing on the La Greca signature print? And I was also wondering with Choo, is the strength sneakers and heels -- heel product or is it really kind of shifting back towards the heel product side? Thanks.

Thank you, and good morning, Omar. By the way, I’m joining you for today’s call from Paris, France, where we have just a little over a month ago opened our brand-new world flagship for Versace, which I might say is spectacular. So, it’s quite exciting to be here to see that. Omar, to answer both of your questions, first, on Versace. As we discussed in our earlier prepared remarks, the momentum that we’re seeing in accessories is really -- it’s coming much quicker than we had anticipated. And the two new collections that we introduced, first, the Virtus, which is the Barocco V, it’s really selling across not only accessories products but really strong in footwear, belts and on some of our ready-to-wear categories. So, that real initial design, that was very early days from Donatella has been, quite frankly, a huge success for the Company. And then, she came right back with really pushing this new La Medusa collection, which obviously takes our Medusa icon and really puts it in the forefront. And that collection has far exceeded our expectations. And quite frankly, we’re having trouble keeping up with demand in the stores right now. So, that’s, I guess, to some degree, a good problem to have. And again, we’re seeing that resonate across men’s shirts and belts and other product categories. So, really quite pleased with that pillar for us. And now, before we’ve even landed La Greca, which is the overall signature pattern, the signature of La Greca on our sneakers in both Trigreca and the La Greca sneaker are -- again, we’re having trouble keeping up with demand, which is not something we ever anticipated to position to be in right now. So, the good news is, is that the pillars that we’ve kind of put in place today are already absolutely resonating with customer, and interestingly, resonating with a younger customer as well, which is something we’ve hoped for. And you can see that the database grew by 20%, which is really quite extraordinary, because these are all growing on top of what were large increases over the kind of the last 18 months. The response from our own teams, our own stores, to La Greca coming has been really strong. And importantly, the wholesale channel for us which again, is not the cornerstone of our business, but an important part, has reacted very, very strong to this. And I think what they’re pleased about seeing with all of the pillars that we’ve been introducing is, there’s a real rhythm to Versace now where maybe in the past, we were a little bit more full fashion driven and we didn’t have enough core products. And again, our large competitors have those core products, which really you can generate a lot of revenue and also you can generate a tremendous amount of gross profit. We now have those. And it’s a matter of us executing against that. And I think we’ve told you, and we’ll talk more about it in our upcoming call in October, is that the launch of La Greca is going to be very, very powerful. I mean, this will be 365 degrees. Super excited about the fact that Dua Lipa, who is one of the most famous music artists in the world, has agreed to be the face for Versace for our campaign. And with her 90 million-plus fans and along with our huge following, I think we’re going to make quite an impact around the world. So again, I just -- we’re so pleased and I hope some of you -- most of you on this call are based in New York, please go to see our new Green Street store, which opened a few weeks ago. It’s a smaller version of our flagship here. But you’ll really see the whole thing come together right there. And of course, La Greca will be there in September. Jimmy Choo: Two things are happening at Jimmy Choo. First, we’ve seen a return to socializing, obviously, in the United States. We’re starting to see that in Europe. We’ve been on a very, very strong run in China with Jimmy Choo really during the entire pandemic. The balance of Asia is a bit challenged for all of the Company’s brands just because of closures. So, where we’ve seen reopenings occur and people resuming, socially engaging with one another, the dress business is really quite strong. I would say it’s not really the go-to work part of the dress business, but it’s more things around parties, around -- especially casual for the summertime, people going away on holidays. And then lastly, bridal has really bounced back very, very strong for us. And that’s a big business for Jimmy Choo. So, we’re feeling quite good about that. But on the other side, the casual part of our business, which, as I’ve commented before, has really not been a strength of the Company. We’ve really made huge inroads, in particular in our sneakers and our DIAMOND franchise, which has really taken hold. Again, we’re having a little difficulty keeping up with demand on that. Again, I guess, to some degree, a good place to be. But, we’re learning how high is high on that category. And I just want to end with Jimmy Choo. We talked a lot about the accessories growth, too, which was about 150%. Again, our core groups are really starting to resonate. And we have a new introduction that will be coming for spring from our -- we’ve hired one of the most talented individuals from one of the major luxury groups who is now designing our handbags and the new product that’s coming is really quite spectacular. Plus, we have the JC Monogram that will be coming. So, I think we have a lot in our arsenal with Jimmy Choo to really start accelerating that business. And I think the product will be there starting for fall and beyond. So, thank you, Omar.

Our next question is from Kimberly Greenberger with Morgan Stanley. Please proceed.

Great. Thanks so much. And thanks for the great overview. My questions this morning are for Tom. Tom, I’m wondering, can you just talk about the much better gross margin performance that you’re seeing? I know wholesale is coming back, but you’ve reduced it compared to historical levels. It was a real sort of notable inflection in your guidance today and obviously the beat here in the quarter. So, can you just dive into that a little bit more? Are you sort of purposefully suppressing the exposure that you’ve got to wholesale to basically reposition the brand? And are you seeing any impact? Maybe you can just talk about some of the headwinds that you’re seeing from the shipping delays and the factory delays that you’re currently encountering. And if you’ve got any visibility on timing on those, that would be great as well. Thanks.

Sure, Kimberly. Thank you. Thank you for those questions.

Let me just say one thing before I turn it over to Tom. Kimberly, the growth in the quarter, I just want you to be really clear, was first led by the great performance at retail. So, I just want you to know that. The second thing that happened in the quarter, because I think this will add color to your -- Tom’s commentary, is the wholesale business in North America, which is the biggest piece of our wholesale business, has actually rebounded very, very positively. Still not running at the rates that we’re seeing in our full price business, but the sell-throughs are excellent. We’re seeing consumers return into the stores -- into the department stores, which I have to tell you is really exciting to see. So, I just want you to get a feel for the color that it’s not just happening in our retail stores, but people are absolutely returning to shopping in department stores. Sorry, Tom. Go ahead.

Thanks, John. And Kimberly, looking at the gross margin, it really was driven by retail. Wholesale was also above expectations. And it’s all about full price sell-through. So, we saw great performance across all brands with better full price sell-through and Michael Kors signature was a larger portion of the business, at Jimmy Choo and Versace accessories, as well as some pricing at Jimmy Choo and Michael Kors. And that was -- we’ve seen gross margin expansion despite the wholesale mix being higher and higher transportation costs. When we look at wholesale, we have already said that we want that business to be smaller than it was in the past and more profitable. And that’s really where we’re coming out. When we look at the year, we were at a 25% penetration in the prior year. We expect that to be similar. So, wholesale is going to grow off of a smaller base, but being smaller that’s more profitable. And in the first quarter, we saw off of a very low base that was impacted by COVID, we expect that growth to level off in the second half, in line with our strategy. You had asked about delays of receipts and factory closures. As noted in the prepared remarks, we are seeing delays, but that is really built into the current forecast. So, we’ve anticipated the situation will continue. We have built it into our expectations. And despite that, we’re still expecting to grow margin on the gross margin line every quarter this year.

Great color. Thank you so much.

Our next question is from Ike Boruchow Wells Fargo. Please proceed.

Hey. Good morning. And let me add my congrats. Great job, guys. Tom, so just to stick with the gross margin, on the decline in Kors, understandable on the channel mix. Could you maybe just give us some color on where does the gross margin sit maybe relative to two years ago? Just kind of curious how much expansion you’ve seen relative to fiscal ‘20? And then, John, as a quick follow-up. You gave some details on the outlook for the business at your Analyst Day for next fiscal year. I’m just curious, I mean, such a robust start to this year. Can you say if there’s an area in the model right now where you’re already seeing the most potential upside to that $5 number for next year to come from? Thank you.

Sure. Mike, I’ll take the first part. When we look at gross margin versus a couple of years ago, Michael Kors is significantly above where it was in that pre-COVID world. And that’s really due to those initiatives that we’ve been talking about coming to fruition. It’s inventory management and lower SKUs and more tightly managing our product to drive full price sell-throughs. Signature continuing to increase and then pricing actions, particularly in the accessories line. And that will continue to occur through the year and drive margins as we look into next year. So, well ahead of where we were historically on the gross margin line.

Yes. And I’d just like to add one thing for everyone on this call. I think we mentioned this some time ago. With Michael Kors, we are not focused on LLY, and really because we’ve reset the business and what our expectations are for the business. So, it’s going to be hard comparing it when we’re trying to have a smaller wholesale business. And I also might add that even when we’re looking at LLY, there’s still situations in Japan and Southeast Asia and Australia and Europe, which are -- we are not back by any stretch of the imagination to full prior year levels. And unfortunately, many of you on this call know that the Delta virus is spreading the variant. And so, I think that will probably slow down some of our expectations around Europe rebounding as quickly as we would have liked to have seen. But on the other hand, we see North America going much quicker than we’ve seen. And we see strength in China, where again we’ve had strong double-digit growth across the entire group. So, there’s going to just be puts and takes as we go through this. But again, I want to remind you, Michael Kors, we’re kind of not focused on where we were two years ago. We’re only focused on our expectations, more profitable business, growing in a way that’s really focused on full price sell-throughs and growing categories, not just accessories as we talked about in our long-term strategies, where we see opportunity to grow some of our ready-to-wear businesses, men’s accessories. So, the complexion of Michael Kors is going to feel different from that standpoint. And Ike, as it relates to fiscal year 2023, I think that’s too early for us to point to that. Obviously, the first quarter was well ahead of our expectations. Tom mentioned in his prepared remarks, we’re seeing continued strength in the second quarter. On the back half of the year, we’ve just got to see how some closures look or restrictions, as this Delta kind of moves through some of the economies around the world. We feel quite optimistic that even if there are bumps over the next 3, 4, 5 months, that we think the world is on its way to recovery. And again, we think that our products are resonating with the consumers and we think our brand strategies are really quite clear. And as you know, we talked about -- we did not change our brand strategies as we went through COVID. We did decide with Michael Kors to make things a bit more smaller and more focused. But at Versace and Jimmy Choo, we never feared from what we were trying to achieve. So, I think it all bodes well for the future. And I think the results are kind of speaking for themselves. So, thank you for the question, Ike.

Our next question is from Matthew Boss with JP Morgan.

Thanks and congrats on a great quarter. So, maybe two-part question. On operating margin, Tom, as we think about the bridge between today’s 16% operating margin forecast for the year relative to the 14% prior, have you changed back half assumptions at all really today, or is this really first and second quarter? And then, John, on the continued digital strength and then the sequential improvement that we’re seeing at brick-and-mortar as the world reopens, I guess, maybe larger picture, where are you most optimistic across the brand portfolio as we think about changes in customer behavior after the pandemic relative to before?

Matt, thanks for the question. And looking at the operating margin going from our prior guidance of 14%, we’re really pleased to increase it to 16%, and it’s really a combination of factors. It is the over delivery in Q1 and Q2 as we look at that quarter. When we look at the back half of the year, I would say we’re reinvesting some of the benefits that we saw in lower spending, lower expenses in the first quarter into the back part of the year. So that’s about $25 million to $30 million that we want to reinvest in order to drive the business and continue to position us and further build momentum into fiscal year ‘23. So, I think that this is a balance. We’re very pleased to be increasing the guidance, but also want to make sure we’re doing the right things to support our business to achieve that longer-term growth. We’re expected to deliver double-digit revenue growth and mid-teens earnings per share growth over a longer period of time.

Good morning, Matt. So, great question you asked, by the way, which really dovetails into Tom’s remarks just now. Obviously, the e-commerce business for us is growing rapidly, basically in every region of the world. And we want to continue to spend the money to fuel that business. And what’s great about that is we get a few things. First off, we drive customer engagement. Secondly, we build our databases. And we think we’ve got a fairly sophisticated team that’s working with our data analytics and the way that we’re working to drive customer growth and engagement, as I said. All of that is something that, I think, we have a pretty good idea on how we can do and we’ve got a good feeling for that. And all three of the brands really were able to -- and Versace, we can grow these accessories too, as I said in my prepared remarks, $1 billion. And that’s a very realistic number. And if we look at the penetration of where that is, even in our e-commerce channel today from Versace, we have so much room to grow. So, we can drive that business. And at Jimmy Choo, same thing, accessories and our footwear and our casual footwear capabilities. At Michael Kors, we have really a huge opportunity in our ready-to-wear categories online, in particular, where those could be much bigger percentages of our business and also very profitable for us. So, I think we feel good about our capabilities from a digital standpoint. We feel good about our capabilities from an omni standpoint and we’ve made those investments over the last few years. We’re continuing to make a lot of investments around that. On brick-and-mortar, we’re pleased with what we see happening in North America in terms of traffic, also happy with what we see happening in China. Again, Europe, we all wish things would go a little faster. We’re just going to be -- that’s going to depend on how countries open up and how the new green passport for Europe really works and allowing people to move country to country. So, I’d say, we’re optimistic but cautiously optimistic on the actual brick-and-mortar traffic part of the business. Hopefully, we’ll see Europe have that same kind of lift we’re seeing in North America. Thanks, Matt.

Our next question is from Lorraine Hutchinson with Bank of America. Please proceed.

I just wanted to ask -- to follow up a little bit on the reinvestments. You’ve spoken a lot at the Analyst Day about reinvesting any sales upside into marketing. And it sounds like you’re doing that for some of it. But, as we think about the rest of the year, should we continue to think about any further upside being reinvested or do you feel like you have a good enough base in terms of the store openings, the marketing, the campaigns that you have planned for the remainder of the year.

Well, Lorraine, I think we’re obviously very pleased with our revenue growth and our earnings per share growth, operating margin growth, et cetera. So, I don’t think we have a absolute desperate need to see the operating margin expand beyond this new 16% guidance. And truthfully, if we saw significant revenue upside again over the next few quarters, I don’t know that we would 100% flow it all through. We might spend more on overall marketing and brand building and other initiatives for the Company. I think that what we want to do is to continue to build for 2023, 2024, which I’ve said to you at our Investor Day, we’re going to do over $7 billion with this Company, and there’s more to come even beyond that. When you look at -- Versace is going to do over $1 billion this year. And when we look at our projections, things are looking really good for that luxury house. Things are picking up at Jimmy Choo. So, in our business, you need to invest to continue to grow your business. And I think that’s the smart thing for us to do. And hopefully, if we continue to see the type of sell-throughs that we’ve seen across the group, hopefully, you’ll see some of that also flow to the bottom line. But, I don’t think that’s our absolute priority right now. Our absolute priority is to continue to make sure that all three of these luxury houses are building stronger and stronger bases, so that as we look out into the future, we’ll be looking at a much bigger number than $7 billion in terms of revenue. And as we’ve said, long-term operating margins that will hopefully have something, the two plus in front of it. Thank you, Lorraine.

Our next question is from Paul Lejuez with Citigroup.

It’s Tracy Kogan filling in for Paul. I was wondering what you’re currently seeing in 2Q. You mentioned revenues were strong, but you are guiding the quarter two I think down 13% versus two years ago, which is a pretty big deceleration versus what you saw in 1Q. So just wondering if what you’re seeing now is what you’re guiding to, or if you’re just assuming that things moderate as the quarter progresses? Thanks.

Tracy, I’m going to let Tom touch on that. But remember, you can’t go by what happened in Q1. Q1, most of the world was completely shut down. So, I think while we’re extremely proud, and I think we’ve had one of the best performances of a luxury group globally by the results, I think that we were up against some major closures. Again, Q2, we have to be cautious. Europe is not open. Japan is closed. Most of Southeast Asia is either under lockdown or -- while, stores may be open, there’s very little business transacting there. Australia is starting lockdowns. We have big international businesses. And while North America is really robust, as we’ve said in our remarks, and China is moving ahead very nicely, we’ve got some other issues still to deal with. And so, I think we need to be very cautious. But, at the same point in time, as we said, we’re off to a good start in the quarter, and we like the way the consumer is responding to our product from all three of the luxury houses. But Tom, do you want to comment?

Sure. And Tracy, I’d just refer and reiterate something that John mentioned a little earlier that having reset our business strategies and objectives and in particular, for Michael Kors, we really do believe the forecast is the more appropriate benchmark to evaluate our progress. And with Michael Kors, we’re planning for a smaller but more profitable business. And these quarterly fluctuations versus LLY are really hard to look at because of wholesale already planning to be lower. And wholesale, of course, was up a lot in Q1. So, the variations are really wholesale driven. When we look at retail, it continues to improve on a sequential basis across our houses, and we expect that trend in retail to continue in Q2.

And one last thing, Tracy, we promised some time ago that in fiscal ‘23, we would be above pre-pandemic revenue and above pre-pandemic earnings per share. On the earnings per share side, we’re going to be ahead of our original expectations. So, we’re really pleased with our profitability. Obviously, we’ve got a lot more runway to go with profitability, and you can understand that because as we -- as our revenues increase, we’re going to create leverage. Yes, we’re going to spend some of that on marketing. But as we get into ‘23 and whatnot, we’re going to create a lot of leverage. And we think that’s going to be exciting for the group and for our shareholders. Thank you, Tracy.

Our next question is from Simeon Siegel with BMO Capital Markets. Please proceed.

Congrats on really nice results. Hey John, did you say how was AUR this quarter? Could you share your perspective on maybe just the broader promotional landscape now and how do you think that will look into holiday? And then to the point about the lack in jewelry strength, just any color you can talk to us about broader licensing over the quarter and then where you see that going over the year? Thank you.

Sure. Thanks, Simeon and good morning. Simeon, we made a decision really just going back kind of almost two years ago that we were going to walk away from trying to chase every competitive environment situation around promotional activity. And we’ve stayed firm to that commitment. And I think -- well, we know, I don’t think, I know that what you’re seeing in the gross margin performance is not only full price sell-through, but it’s just -- we’ve got considerably less activity around certain discounting that we did. Really it was more of a North American situation. Second, which is a huge issue. We don’t have the inventory to do that. And so, I can answer the question for everyone right now, because I keep hearing this question come up. It’s not going to -- I don’t care if our competitors do it. It doesn’t matter. We don’t have the inventory to do it. So, it won’t happen. And not only that, we just don’t want to do it anymore. And we’re going the opposite direction. As you’ve heard, we’re raising prices on Michael Kors. And by the way, I mentioned on our previous call, we’re going to raise prices again for spring season next year, prices are going to go up considerably. And also in Jimmy Choo, we’ve talked about that as well. So, we’re going the opposite direction. And I hope I can kind of close the door on that conversation because I don’t think it’s -- I don’t think -- I know everyone is waiting for that to happen again. That won’t happen for us, given the way we’ve purchased product, where product is flowing today and given where we think our brand is positioned. We’re going up, not down. So, that’s really our clarity on that topic. Watches and jewelry, I’m sorry. Watches and jewelry. Wow. It’s all I can say is, wow. I’m shocked at what’s happened in our brand-new flagship store here in Paris. And same thing we’re hearing in North America that I commented to about in the last call. It’s definitely a new customer. So, all of our very kind of bold Michael Kors watches in particular, really the more expensive watches are selling through very, very, very strong. And that’s a result of a younger customer who is really finding Michael Kors. And that’s what we’re finding really almost globally. It’s -- a new generation has discovered us. It’s almost -- to them, we’re a new brand. And they’re the ones who are really driving our signature business and accessories, our watch business. And interestingly, in our jewelry business, as you probably are aware, we exited what we consider to be the fashion jewelry business and went to sterling silver product line, which is more elevated, more -- a lot more expensive. And that is doing really, really well globally. So, we’ve finally got some nice traction on that business, both in our own stores and at our wholesale partners around the world. So, good things are going to come for us. And I want to thank our partners at Fossil. And last thing I’ll just mention is, for the group, licensing revenues were up very significantly. As I’ve commented before, we have one of the largest fragrance businesses in the world with Versace and our partners at EuroItalia have done an amazing job. Our business is above LLY. And the same -- Michael Kors, our business is really up, I don’t know, 50%, 60% in fragrance with the new launch of our new pillar. And so all things are really clicking for us on our license business, and we’re pleased to see that on a global basis. Thank you very much, Simeon.

Our next question is from Erinn Murphy with Piper Sandler. Please proceed.

I wanted to follow up on Versace and specifically just on the margin profile. June historically is not the biggest quarter, but you’re already at 20% EBIT, John. So, curious if there’s any changes of how you’re thinking about the long-term 20% guide, particularly given how robust the demand has been across accessories. I know it’s early days, but you’re clearly building a pretty robust platform there. Thanks so much.

Well, Erinn, I’m not surprised you asked that question because we were prepared for it. We knew everyone would be asking that question, and we kind of ask ourselves that question, obviously. I just left our CEO, Jonathan Akeroyd, here in Paris. And, look, we know what our competition does. And we know the really strong competitors are between 25% and 40% operating margin. As I’ve mentioned on our Investor Day, I believe, one of the biggest things that will create leverage at Versace is higher revenues in our flagship stores. We have the right locations, we have the right amount of space, we don’t need to build bigger. We could literally do 4 times more business in every one of our stores and still not be probably half the dollars per square foot of our competition. That shows you how much runway we have to really go at Versace. And you know the numbers of our competitors. And so again, we have a very tight store base today, a little over 200. We’ll get to 300 over time, but that’s going to be super tight. We’re looking at productivity. And as we drive that productivity, we will drive profitability. And again, I don’t want to say we’re surprised, we’re presently -- we’re pleased that we’re moving much quicker on the accessories than we thought. So, if that continues on like this, the obvious answer is yes, we’re going to move quicker than what we thought and that we presented at our Investor Day. But, I think, we’ve got to, again, be cautious. We’re still not out of the woods. Versace is a very big business in Europe, and we’ve got to get consumers back into the stores in Europe. Well, that’s not the case here. And when we see that, you’re going to see a very, very big lift again in operating margins for Versace. So, I think it’s a great question you asked. And we’re definitely seeing a path to that 20% operating margin for Versace. I can’t say whether it’s going to be quicker or not, but I think we’re much, much more confident over the last 90 days. And again, we need to see La Greca get into the stores, see how that does. But if it does and it gets in and it clicks, then we’ll really -- we’ll be off to the races. Thank you, Erinn.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing remarks.

I want to thank you all for joining us today on our first quarter earnings call. I would like to most importantly say thank you to all of our management and employees around the world. Our results are a direct reflection of all of the hard work and energy that they’ve put forth. And without them, we would not be achieving the success that we’re having today. So, I want to thank them in particular. And I’d like to thank everyone else for joining us today. Stay safe. End of Q&A:

Thank you. This does conclude today’s conference. You may disconnect your lines at this time. And thank you for your participation.