Greetings and welcome to the Capri Holdings Limited Fourth Quarter and Full Year Fiscal 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Jennifer Davis, Vice President, Investor Relations for Capri Holdings Limited. Thank you. You may begin.

Good morning, everyone, and thank you for joining us on Capri Holdings Limited fourth quarter and full year fiscal '23 conference call. With me this morning are Chairman and 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 website. 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. Unless otherwise noted, all financial information on today's call will be presented on a non-GAAP basis. These non-GAAP measures exclude certain costs associated with COVID-19 related charges, long lived asset impairments, ERP implementation costs, Capri transformation costs, restructuring and other charges, charitable donations and the war in Ukraine. To view the corresponding GAAP measures and related reconciliation, please view the earnings release posted to our website earlier today at capriholdings.com. Additionally, as a reminder, last year's fourth quarter and full year included an extra week in the fiscal calendar. Therefore, revenue growth rates for the fourth quarter and fiscal year '23 will be discussed on a 52-week constant currency basis unless otherwise noted. Now, I would like to turn the call over to Mr. John Idol, Chairman and Chief Executive Officer. John?

Thank you, Jennifer, and good morning, everyone. Looking back on fiscal '23, revenue increased high single digits and earnings per share increased mid-single digits. These results were measured on a 52-week constant currency basis. While this was not up to our original expectations., many aspects of our business performed well. First, revenue increased across all houses with double-digit growth at Versace and Jimmy Choo, as well as mid-single digit growth at Michael Kors. In fact, we achieved record revenue at Versace and Jimmy Choo in fiscal '23. Second, we accelerated growth of accessories across all houses, with retail sales of women's accessories increasing over 40% at Versace, over 20% at Jimmy Choo and low single digits at Michael Kors. Third, we continued to grow footwear across all brands with retail sales of women's footwear increasing low double-digits at Versace and Michael Kors as well as high single digits at Jimmy Choo. Fourth, we added 12.6 million new names to our database, representing an 18% increase in our total database size. This is the largest year-over-year increase in the company's history. Combined with the growth in our own retail channel, we believe this continues to demonstrate the strength and desirability of our luxury houses. Fifth, we returned $1.35 billion to shareholders through share repurchases, reflecting our strong balance sheet and free cash flow generation. These results demonstrate the power of our business model, the strength of our luxury houses, and the execution of our strategic initiatives. Now I'd like to update you with the progress we made by brand in fiscal '23. Starting with Versace, in fiscal '23, we achieved record revenue of over $1.1 billion, demonstrating the momentum of the brand and the success of our strategic growth initiatives. Versace revenue in fiscal '23 increased 14% in constant currency. Looking…

Thank you, John, and good morning, everyone. Starting with fourth quarter results, revenue of $1.3 billion decreased 3% on a 52-week constant currency basis slightly ahead of our expectations. Net income was $121 million, resulting in diluted earnings per share of $0.97. This was also slightly above our expectations, reflecting better than anticipated revenue and operating margin, partially offset by higher than expected interest expense and taxes. Now turning to fourth quarter results in more detail. Revenue growth rates will be shared on a 52-week constant currency basis unless otherwise stated. Starting with revenue by channel. Total company retail sales increased low single digits. These results were driven by growth in both e-commerce and store sales. We saw continued growth in e-commerce driven by our large and growing database and data analytics capabilities. In the wholesale channel, revenue declined double-digits impacted by lower POS sales in the Americas as well as lapping strong sell-ins in the prior year, as our partners began to build back their inventory positions. Turning to revenue performance by geography. In the Americas, revenue decreased 10%. Retail sales declined low single digits as we saw consumer spending soften across all brands. In wholesale, revenue declined double-digits. In EMEA revenue increased 6% as all houses benefited from continued strong consumer demand. And in Asia, revenue increased 7%, primarily reflecting improving trends in China. Looking at revenue performance by brand. At Versace, revenue decreased 9% compared to prior year. As anticipated, global retail sales increased in the low single digits, but were offset by declines in wholesale. By geography, total Versace revenue in the Americas decreased double-digits, driven by significant declines in wholesale. Revenue in EMEA increased low single digits, reflecting growth in our own retail channel. Revenue in Asia increased in the mid-single digits, primarily driven by…

Thank you. At this time, we'll be conducting a question-and-answer session. Our first question comes from the line of Matthew Boss with JPMorgan. Please proceed with your question.

Great. Thanks. Good morning, John. So maybe could you elaborate on the near-term uncertainties you cited in the Americas? Any notable differences that you're seeing across distribution channels today and then as we look to FY'24, to me, the big question is just the visibility that you have today or what gives you confidence in the retail channel improvement that you're embedding in the guide beyond the first quarter?

Good morning, Matt. So in terms of, first, I'd like to say, I think we are, I'm proud of our results for last year with high single-digit revenue growth, mid-single-digit earnings per share growth on a 52-week constant currency basis, while we definitely saw a negative inflection in the back half of the year for the wholesale portion of our business. I think we're very pleased with what happened at Versace record results for that brand, record results for Jimmy Choo. I've mentioned before Jimmy Choo has grown every year, but it's been basically in existence with the exception of the COVID period. And while Michael Kors saw the largest impact to the wholesale in the group, we still on a 52-week constant currency basis group. So I think and when you look at the overall operating margin of the company at 16%, I think there's a lot of positive things to Capri in addition to the $1.35 billion that we returned to shareholders. So I think the business model is sound. I think the three brands are in very, very good position to grow moving forward. So as it relates to what we see around the world, as we said in both mine and Tom's prepared remarks, Asia has been going very, very well for the company. And now in particular, China, with the reopening, we see a lot of strength there and quite frankly are doing a little bit better than we had even anticipated, which is a good sign. We're also able to get back in with all three of the luxury houses and start to really animate our brands with events. We talked about the Sanya event with Michael Kors very successful. We talked about the Sailor Moon which was much more targeted to Asia, very…

And Matt just one additional point here on the second half for FY'24 visibility. As I mentioned in the prepared remarks, we expect retail to be up high single digits on a constant currency basis. It's really driven by significant strong double-digit growth in China, where we're already seeing the results and great momentum Europe will remain positive, which it's already doing now and the Americas turns to moderate growth. And those are really the components there and John provided all the context, but I wanted to give that in the context of what's really driving it.

And I want to again remind everyone the first two quarters are where we're going to see the significant wholesale declines and that's what we said was going to happen and that's what you see in the Q1 forecast. That's really the greatest impact to our profitability is really around the wholesale declines across the group as the North American department stores really reset their inventory levels. And we know that's the right thing to do for us so that we don't end up, once again, we don't want too much inventory sitting for markdowns. We want to protect brand health and we think we're doing the right things in order to set ourselves up for that success. Thank you, Matt.

Thank you. Our next question comes from the line of Ike Boruchow with Wells Fargo. Please proceed with your question.

Hey, good morning, everyone. A couple of questions on the outlook. I guess, John, looking at the Kors outlook, so you cut $100 million off of that and Versace $50 million. I guess just for Kors specifically, is that incremental pressure in wholesale that you're adding on to that? Or is that some potential weakness at retail versus the outlook at three months ago? And then with Versace is that US consumer weakness at the high end that is leading to that slight revision down and then maybe, Tom, on the gross margin helpful for the year. Just kind of curious the shape, maybe first half, back half, it seems to me like the gross is actually might be front-half weighted in terms of expansion just based on the channel mix. But with wholesale down so much, but I just kind of wanted to get a little bit more clarity there? Thank you.

Sure. I can start. Regarding the change in guidance for revenue for Kors and I'll talk about it in general first for $100 million from $5.8 billion to $5.7 billion, good, the majority of that was driven by a change in FX. So the dollar strengthened versus our prior forecast and we adjusted that. The other piece reflects the trends in North America that we were seeing. So those pieces flow through to Michael Kors and also to Versace. We're seeing great strength in Jimmy Choo and very pleased with that performance. For gross margin for the year, we expect expansion in gross margin in both first half and second half. There's slightly different drivers in it. And in the first half, it's going to mirror what we saw in Q4 where we have transportation, inbound freight, channel mix helping and we'll see that continue into the first half as well as a region mix. And then in the second half, transportation will begin to tail off, but the region, with China growing even stronger, we'll continue to drive results as well as the strategic initiatives that John mentioned across all of our houses, which is underlying our margin growth over the past several years that will continue and drive gross margin in the back half of the year. So again, we expect margin expansion for the year and expected in both halves.

And let me just address one other thing too with Versace. Versace is going to return to growth basically every quarter after this upcoming first quarter. And so we have a couple of things happening. Number one, we have this huge anniversary that we're going up against of the Fendace, which was massively successful. We could not anniversary that. That was impossible thing for us to do. And it happened very, very rapidly. It happened almost in a six-week period of time and quite frankly, if you back out the success of that, we're actually slightly up in Q1. So we just have to live through that and get beyond that. The second thing that is happening and I mentioned it in my prepared remarks and I think I mentioned it on the call before. When we started this journey with Versace, first thing we had to do fix and clean up the stores. We did that. Second thing we had to do was clean up, we cut $150 million of product that was being sold at very low prices and under different labels we got rid of that. Third thing we had to do was to get the accessories business going, which as we talked about. It's been hugely successful for the company. And as you recall, this company went from not even being fairly profitable to very reasonable operating margins, which we are holding at a certain level because we're investing. Third, the fourth thing we did was to get the women's footwear going, which happened much faster than we could have even have imagined and we're very pleased with that. Now we're on to fixing the women's ready-to-wear, which we think we've got a pretty good handle on that and I hope you will see that when…

Thank you.

Thank you. Our next question comes from the line of Brooke Roach with Goldman Sachs. Please proceed with your question.

Good morning and thank you for taking our question. I was hoping you could talk to your efforts to align the cost structure of the business to the current level of demand that you're seeing. What actions are you taking to improve your margins? And can you provide an update on your thoughts to return Capri to an 18% or greater operating profit margin over time? Thank you.

Sure, Brooke. I'd be happy to do that. So for this year, given the large change in wholesale, and we noted this in prior quarters, but we've worked through a number of initiatives to reduce our cost structure and recalibrate the rate of spending on initiatives. We are looking at back-office type activities as well as corporate overhead and focusing on non-revenue driving expenses, projects, initiatives while continuing to invest in marketing and in e-commerce and those initiatives like the replatforming of our e-commerce systems that will help us drive revenue and expand margins in the future. As we look ahead to getting to 18% and we've ultimately given a long-term goal of 20% operating margin, that will really come with, as we noted in this year, gross profit expansion, but mostly of leverage. And the leverage on the SG&A will be driven, first and foremost, by increased store sales densities and then leverage on our corporate activities. Within that, we're going to continue to spend on marketing, and we've increased it in fiscal '23 significantly as a percent of revenue and as a total. And we've also built in an increase in fiscal '24 as that's going to be key to driving our long-term revenue and margin expansion via that leverage.

Thank you, Brooke.

Thank you. Our next question comes from the line Rick Patel with Raymond James. Please proceed with your question.

Thank you and good morning, everyone. Can you provide some additional color on what you're seeing at wholesale in terms of sell-in versus sell-through. We're trying to better understand what guidance reflects in terms of evolving market conditions versus Capri pulling back intentionally to protect its brands. Also, you touched on wholesale normalizing in the back half. Perhaps some additional color here on the direction of revenue growth and which brands we should see the most improvement?

Thank you, Rick, and good morning. Rick, I think we have always been a company that really looks at our, I think, you're, in particular, referring to wholesale, our sell-in versus sell-through. I think we did a great job managing our inventories all the way through COVID and then coming out of COVID and I think we told you that we would sequentially reduce our inventories across the company and I think we did that. And you saw that in our inventory reduction this year at the end of the year. So I think we feel good about our inventory positions that we own in our own retail stores as well as the inventory we own that will be available to ship to our wholesale partners. We monitor it weekly. And so we're really in lockstep with our partners on how that product ends up in the stores. Again, you'll see wholesale will decline much more significantly than what's happening at POS because again we're up against last year. We were restocking the stores at this point in time when they were, quite frankly, below targeted inventory levels. So I think we feel good about that. And as I said, we're seeing some green shoots on some of the new products that we've delivered really across the group. When I look at some of the new Jimmy Choo Totes that just got delivered that you see in canvas and in straw performing extremely well. I'm very proud of everything that, that team is doing. The JC logo on the bags are kind of a very, very strong driver for us. I hope you saw the new campaign with Giselle. We were one of the first companies to really work with Giselle since she's come back to the fashion industry. And…

Thank you.

Thank you. Our next question comes from the line of Simeon Siegel with BMO Capital Markets. Please proceed with your question.

Thanks. Hey, everyone. Good morning. John, did you -- or could you share what AUR was this quarter maybe in marketing as a percent of sales? And then Tom, could you just elaborate at all on how you're thinking about the approach to debt levels and then I think the full year shares were guided above the 1Q. So any color on the repurchases on the other side of that? Thanks guys.

Sure. So Simeon, at Versace, AURs are up, and that's driven by two things, by price increase and by full price sell-throughs, in particular, on our accessories and our footwear. So we feel good about what's happening there. I think I mentioned on the previous call, we will not be taking any more price increases at this point. We took a lot of substantial price increases in Versace. And so I think we're pretty much finished with that for the moment. Jimmy Choo, again, AURs are up. We also took many price increases. We're going to take a few more in Jimmy Choo, but I think that will kind of end towards the third and fourth calendar quarter of this year and we feel we're in a really good position both at Jimmy Choo and Versace, we're going to balance inside of those price points. And I think that's something you've heard me mention about Michael Kors as well. You have to really look at things on a good, better, best strategy and tier your pricing to be able to really reach multiple different consumers who are at different income levels. And so I think we're in the process of fine-tuning that across those two areas. Michael Kors, the average unit retail has not declined. The average transaction has declined slightly and that is driven by we see a significant uptick in smaller bags. So some of the decline that you've seen in our own stores that we reported this past quarter is actually unit sales are up and this is something that we -- as we went through COVID we saw totes. We saw backpacks, we saw large handbags significantly increase in revenues. That has slowed down. And what is speeding up is smaller bags and we saw that with people returning to more social activities going out to parties. And we see this globally. This is not a US situation. And again I think we are -- look to as a company that does read fashion. And again, we have a younger consumer who's been here and a lot of people talk about gaining younger consumers. And we continue to gain younger consumers, but we've already have a, we believe a disproportionate level, that not in a bad way, but in a good way. And so that customer tends to want to have a little more fun and get dressed up a little bit. And we think that, that customer is responding to the fashion that we're delivering. And that's also where I mentioned to you on the hardware. Where we're seeing some of the slightly smaller hardware bags really start to get a lift inside the company. So we're quite pleased with that. And that's just a trend that's happening in fashion. I'll turn it over to Tom.

Simeon, regarding debt levels, first, I'd like to say our debt levels are very manageable, and our leverage is below two times and as we guided, net interest is $20 million for the year expected to be. However, in the past, we've always been balanced between buying back shares and repaying debt. So this is really a return to our usual practice, and in the current environment, we think it's prudent to do so and to manage both with really strong free cash flow, which ended the year last year, about $540 million and expect to continue to generate strong free cash flow going forward. With regard to shares, the full year share count was guided above Q1, and that's due to the normal issuance of shares in the June time frame for our employees as part of long-term compensation. So that's why the year is above the run rate coming out of the prior year, which included the $1.35 billion of share repurchases and that's flowing through.

Thank you, Simeon.

Thanks a lot guys. Best of the luck for the year.

Thank you. Our next question comes from the line of Alex Straton with Morgan Stanley. Please proceed with your question.

Great. Thanks a lot for taking the question. I just had a couple of follow-ups on pricing and promotions. It sounds like you guys had some department store pushback on pricing, but have you observed any of that or sensitivity there in the direct-to-consumer channel. If you have any color on variation by household income level, that also be helpful. I think just finally, it's great to hear that you guys have an ongoing commitment to limited promotions, but how would you describe the broader environment there and what expectations you have embedded into the guidance? Thanks a lot.

Yes. Thanks and good morning, Alex. So, I want to be clear, it wasn't a pushback by the department stores. The consumer and our department store partners, both in United States, Europe and of course, we have them in Japan as well have been terrific. And by the way, have been totally on board with our elevation strategy. So we've had great support from them on that. I would say that we were able to sell higher price points in our own stores better than that what happened in the department stores. And I think part of the result of that or part of the reason for that was we did not have as many sales associates inside the stores to really work with the end consumer on either why the product was more expensive or talking about quality issues et cetera. So I think that's -- and I want to make sure I make it clear that we think that's a big mistake that we made and we're going to correct that mistake very rapidly. This is just a matter of getting the people hired now, and that's what takes time to get that in place. So we really feel like around September, we'll start to have a fully staffed department store situation. Still not up to pre-pandemic levels, but significantly over double what we had going into this past holiday season and our partners feel great about that as well both in North America and in Europe. So I think that, and as I said before, you need to tier your pricing strategy in every -- whether it's the most high-end luxury retailers or brands that are more at the accessible luxury category do that. And I think we're just going to do some tweaking inside our accessories…

Thank you. Our next question comes from the line of Dana Telsey with Telsey Advisor Group. Please proceed with your question.

Hi. Good morning, everyone. John, as you think about the Americas business and your retail store profile, what is the right number of stores? How do you see these remodels transforming the business? And what percentage of CapEx do you think goes into it? Thank you.

Good morning, Dana. First off, as you know, we had closed close to 150 stores over the last few years to get to the right profile. And that really was a result of the e-commerce business. Once we turned on e-commerce, a number of our stores, the volumes reduced quite significantly. We have a very, very strong e-commerce business, as you know, growing. And as I indicated before, we've got a younger customer who's always been part of the Michael Kors profile. And that customer is a bit more digital native. So we've got a few more to go, a few more stores to close, probably another 25 or 30 or so in North America, and then we're done. And then we are going to renovate every single store in North America. We went on the same mission at Versace. I think it's working quite well for us there. We were fortunate when we bought Jimmy Choo, most of the store fleet was renovated. We've got a handful of stores to do there. But Michael Kors, we want to reset the stores for two reasons. Number one, it's time to refresh many of the stores, and we are a few years behind on that, mainly because of COVID. We just didn't feel like that was the right moment to make those investments. And secondly, as we've said, I think in our Investor Day, summer of last year, we're going to upsize the shoe spaces inside of our retail stores. We talk so much about our accessories business. But as we noted, we had very good growth across the whole group in footwear. We've learned a lot from our partners at Jimmy Choo about how to service customer create a really luxury environment for footwear. And we think we can do…

And Dana, I'd add, we guided to a CapEx this year of $260 million. A little over half of that is for stores and renovations that at Investor Day we provided a longer-term number of about 300 a year. So as John was noting, as we finished Versace's store refurbishments, then and remodeling then move into Michael Kors. Will provide more details in the future, but that provides a little context.

Yes. And those new store renovations like they've done in Versace, like they've done in Jimmy Choo, should give those stores a lift, which is another avenue for us for increasing store productivity. Thank you, Dana.

Thank you. Our next question comes from the line of Lorraine Hutchinson with Bank of America. Please proceed with your question.

Thank you. Good morning. Can you quantify peak to trough wholesale revenues at Michael Kors? And just any comments on -- do you think you've taken the business to the right level at this point? Or is there a risk that there's another leg down to that channel?

Well, Lorraine, I would say across the group, we're looking at wholesale very carefully. It runs in that 20-something percentage for us today. And I think over time, we've said we want to see the wholesale business decline happened a little faster to us than we would have liked to have seen happen. And as I said, I think we made some missteps in the fall season and the beginning of the spring around the Michael Kors piece. But we've seen declines in Versace and Jimmy Choo as well as you've heard that reported by multiple luxury companies. So we're not telling you anything that you're not hearing from other luxury companies. And so I think our goal is to stabilize the wholesale business. Our goal is not to grow the wholesale business. And our goal is, quite frankly, to shrink the wholesale business as a percent to total. We're very proud of the partners that we work with today. I think we work with the best stores in Europe and in North America and some of the best specialty stores in the world across all three of the houses. But I think that our future really lies in our own direct-to-consumer business driven by our retail stores first because it's the biggest part of our revenue and second, by our e-commerce business. And one of the things we're really on a very strong mission around. And one of the great things about having the luxury group, the way that we have is, we've learned a lot from each of the different houses on clienteling. And we're starting to really make some very significant inroads and clienteling. It is now double-digit part of the revenue for Michael Kors, which is quite impressive. I don't think we thought we could get to this level this quickly. And that's being driven by technology. We have systems in place now for our sales associates to really clientele with. We're now able to take the data analytics that we've been using and driving for our e-commerce business, and you see we keep reporting growth in our e-commerce revenues. But now we're using that same data analytics to put in the hands for clienteling and direct customer communication, which is becoming a very -- and it will become even a more significant part of our business. So I think that's where we look to the growth again continue to stabilize with our existing wholesale partners but not looking to make that a strong growth engine for the company. Thank you, Lorraine.

Thank you.

So I'd like to thank everyone for taking the time. We ran a little bit over because usually, at the year-end call, it's time to give you a broader perspective. I hope what has come through loud and clear is that we have three very powerful names, starting with Michael Kors, our biggest business in the company. We do believe that, that brand will grow to $5 billion over time. We do believe that we will double our business in Asia, and we do believe that we will continue to grow our accessories and footwear business. And we like what we're doing with repositioning to be more aspirational and to reset the values especially around Jet Set for Michael Kors. Secondly, Jimmy Choo, we are feeling very good about what's happening in Jimmy Choo. In particular, you're going to see operating margin expansion. We've been talking about that for some time. We feel like we're in a very good position. We won't get to probably double digit this year, but we think next year, we will. And as that business gets closer to $1 billion, it's going to be able to generate significant operating profit dollars for the company. And then lastly, Versace, as we've talked about many times, we have our sights set on $2 billion. We feel that we have a very good road map to get there. And we also believe that there's more upside beyond that, and you can certainly see that through some of the very, very powerful names across the globe and we believe that Versace sits in that world. So we feel strong about our future at Capri and we look forward to giving you more feedback on our progress. Thank you very much for joining us today.

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.