Ladies and gentlemen, greetings, and welcome to Capri Holdings Limited Second Quarter Fiscal 2026 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jennifer Davis, Vice President of Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining us on Capri Holdings Limited Second Quarter Fiscal '26 Conference Call. With me this morning are Chairman and Chief Executive Officer, John Idol; and Interim Chief Financial Officer, Raj Mehta. 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 statements made during this call will remain operative at a later time, and the company undertakes no obligation to update any information discussed on today's 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 impairment charges, Capri transformation costs, restructuring and other charges, store renovation program costs and transaction-related costs. To view the corresponding GAAP measures and related reconciliation, please review our latest earnings release posted to our website earlier today at capriholdings.com. Additionally, the company has classified the results of operations and cash flows of its Versace business as discontinued operations. Unless otherwise noted, all information on today's call relates only to continuing operation. 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. With the Versace sale expected to close in our fiscal third quarter, we are now fully focused on the growth of our 2 iconic brands, Michael Kors and Jimmy Choo. We plan to use the proceeds of the sale to repay the majority of our debt, substantially strengthening our balance sheet and providing greater financial flexibility to both invest in growth as well as return capital to our shareholders in the future. As we stated in our press release earlier today, given our planned reduction in debt levels, and the signs of stabilization across our business, our Board of Directors has authorized a new $1 billion share repurchase program, which the company expects to begin implementing in fiscal '27. Now turning to our fashion luxury houses. We continue to advance our strategic initiatives across Michael Kors and Jimmy Choo to unlock their full potential. We are encouraged by the early signs of recovery at our fashion luxury houses and remain optimistic about the direction of the business. However, we recognize that it will take more time for the full effect to be reflected in our results. Despite the dynamic global macroeconomic environment, we are on track to stabilize our business this year while establishing a solid foundation for a return to growth in fiscal '27. Now turning to second quarter results. We are encouraged with the continued sequential improvement in trends, which resulted in revenue, gross margin and operating income exceeding our expectations. However, our results were negatively impacted by $0.20 per share versus our original guidance due to a higher-than-anticipated effective tax rate related to our valuation allowance position. Looking at results in more detail. Total company revenue decreased 2.5% versus last year to $856 million on a reported basis. At Michael…

Thank you, John, and good morning, everyone. Before we begin, I would like to remind you that today's financial results exclude Versace, which was reclassified as a discontinued operation. My discussion today will reflect results from continuing operations, and our financial statements have been adjusted for prior periods to exclude Versace. Now looking at our second quarter results. Revenue, gross margin and operating income exceeded our expectations, driven by better-than-anticipated performance at Michael Kors as our strategic initiatives begin to take hold as well as a wholesale timing shift. However, a higher-than-anticipated effective tax rate versus our original guidance due to our valuation allowance position impacted net income by $24 million and earnings per share by $0.20. Turning to our second quarter results in more detail. Total company revenue of $856 million decreased 2.5% versus prior year on a reported basis and 4.2% in constant currency, representing a sequential year-over-year improvement relative to the first quarter. Looking at revenue by channel. Total company retail sales declined mid-single digits. In the wholesale channel, revenue increased high single digits, primarily due to shipment timing. Turning to revenue performance by geography. In the Americas, revenue decreased 7%. Revenue in EMEA increased 1% and revenue in Asia increased 12%. Looking at revenue performance by brand. At Michael Kors, revenue decreased 1.8% compared to prior year on a reported basis and 3.3% in constant currency. Global retail sales declined at a similar rate to the first quarter. Similar to prior quarters, store closures negatively impacted retail sales in the low single-digit range. Wholesale sales increased low double digits due primarily to shipment timing. By geography, sales in the Americas decreased 7%, revenue in EMEA increased 4% and revenue in Asia increased 25% due to higher wholesale shipments. At Jimmy Choo, revenue decreased 6.4% compared to…

[Operator Instructions] Our first question comes from the line of Matthew Boss with JPMorgan Chase.

So John, could you speak to global reception that you're seeing to the Michael Kors full price retail repositioning, elaborate on drivers of full price channel comps turning positive in the second quarter? And then just any change in momentum in October or opportunity you see for the brand versus a year ago during holiday?

Thank you, Matt. Number one, I think we are pleased with the fact that the business -- we're starting to see stabilization in the Michael Kors business. As you know, our full price comps turned positive during the quarter and we believe that's a response, the consumer response to our strategic initiatives. That starts first with our branding. And we think that the way the consumer is seeing the modern jet set marketing based around the traveling the world and styles and really, we're doing that from a storytelling point of view through our Hotel Stories delivered with a large group of influencers is really helping consumers engage with the brand and the storytelling of the brand. So that's the first very positive sign. And as I said in my prepared remarks, we're seeing consumer sentiment really increase very nicely and brand awareness. The second area is our product. And as our real kind of focus is on standout style. We want to make sure that when we're delivering product, it's first on trend. But secondly, Michael has a very, very strong point of view on style and styling. And as we've reinterpreted that for a more modern point of view, the consumer is really engaging with us on that. And so again, we're very pleased. And as we've said in our previous calls, we've spent the majority of our initiative around the full price initiatives in the company because we think that's where the consumer will first see us, lean into us. And we saw that really globally in terms of the increases in comp. And what was also very exciting for us, really, when you said the drivers, the biggest driver was actually our accessories business, which turned positive during the quarter. And that's being driven from 3…

Our next question comes from Brooke Roach with Goldman Sachs.

John, I wanted to dive a little bit deeper into the outlet business as you reposition promotionality and product. What's the profile of the consumer that's engaging with you in North America today? Are you seeing any signs of price sensitivity or stronger or weaker engagement in any particular income or age cohort as you execute the outlet repositioning? And how should we be thinking about the time line and path to improvement for total North America given the green shoots that you're seeing in the full price channel today?

Thank you, Brooke. I would first say that we anticipate sequential improvement in the retail -- in our retail channel for both Michael Kors and Jimmy Choo in the back half of the year. As I said, in the full price, we're feeling very good about what we see happening. We feel the same way about Jimmy Choo. We had a very nice performance in our full price in Jimmy Choo as well. And I think we're going to see the same type of sequential improvement. In terms of the outlet, let me first answer the other part of your question. There's no question that the Gen Z customer and consumer, in particular, is more price sensitive, and we've seen that. And actually, some of our strategic pricing architecture, we didn't really understand this in the beginning, but it's really leaning into and helping us get more Gen Z consumers. They are more price sensitive than Millennials and [X’s] and Boomers. So we think that our strategy of making sure that we're at really focused strategic price points across all products, not just accessories, but in footwear and ready-to-wear -- remember, we significantly reduced our prices in ready-to-wear even much more than we did in our handbag business, and that's working really well for us. And in fact, our wholesale partners are starting to roll out our ready-to-wear again, after we kind of repositioned the pricing without touching any of the quality or anything in the product. So that's really working well for us. We are -- as I said to you before, two things or three things are happening in the outlets. Number one, we are actually strategically raising prices in the outlet business, and that's both from actual price increases and from the reduction in our promotional activity.…

Our next question comes from Ike Boruchow with Wells Fargo.

Two from me. Just first on the tariffs. So I think you said 120 basis points headwind in the second quarter. Could you just let us know what's baked in on tariffs for both 3Q and 4Q? And then the follow-up is for John. Maybe just on the wholesale, up low double digits, but you mentioned there's a $20 million shift in there. Could you just comment roughly what's the growth rate for MK wholesale ex shift? I mean my math is flattish, but I'd love to get that clarified. And then, John, how are you viewing that channel just organically ex shifts into 3Q and 4Q from a revenue standpoint?

Thanks, Ike. Our expectations around the tariff headwinds for the full year remain largely unchanged. We still expect the unmitigated tariff impact to be approximately $85 million for the full year. And as you said, in the second quarter, our gross margin was down 130 basis points and 120 of that was related to the tariffs. We saw the tariff headwinds a little bit less than anticipated, and that's really due to the timing of sell-throughs of tariff impacted inventory. As we look at Q3, we're expecting gross margins to be down 200 to 250 basis points, and there's a greater weight of inventory that has the full amount of tariffs. So you're going to see a larger impact of that build in Q3 and then further into Q4. But more importantly, as we look forward, we expect to see continued benefits from our strategic initiatives and tariff mitigation efforts. So looking to fiscal '27, we anticipate to offset a majority of tariff impact. And that, coupled with our strategic initiatives around driving higher full price sell-throughs and higher AURs will lead to gross margin expansion next year.

Wholesale offset shipment-wise, and I'll take the retail part of it.

Yes. So we did see in the second quarter, there were $20 million of Michael Kors wholesale shipments that ended up going out in Q2 where we were forecasting them to go out in Q3, so that's really just a timing shift between the quarters. What we're really proud of, and John spoke to earlier, is the retail sequential improvement that we'll see in Q3 as well as Q4 coming out.

Yes. And I think I said in my prepared remarks that we actually saw quite a step change in the wholesale point-of-sale sales. We're starting to get that business turned around. So it's no longer double digits. It's single-digit decline. Again, we're not calling a victory at this point in time, but there's no question, things are starting to get better. We have -- our partners, as I said on the last call, are very excited about doing shop renovations with us, so that's -- we've got a pretty significant program rollout going on there. I've been out visiting with our teams to all the major -- all of our major partners, and we'll conclude some more actually next week in Europe. And there's absolutely positive sentiment for our strategic initiatives and for the brand in general. And as you know, the -- I think there's been obviously a very, very significant move by many stores to the higher side of the luxury business. That business has definitely seen a slowdown. And so the more entry levels of luxury, where Michael Kors plays in particular, and some other competitors, I think there's a very strong renewed interest in that category as customers are more choiceful. There's no question that they're looking at price value relationship. And what's so interesting is in all 3 of our companies in Michael Kors and Jimmy Choo and Versace, all 3 of our full price businesses are actually significantly better than they were a year and even 2 years ago. And it's a bit more in the off-price channels where the customer is -- they're really, really being selective on pricing. So we think that we're seeing our wholesale partners look and want to lean into this strategy with ourselves and other people who are…

Our next question comes from Aneesha Sherman with Bernstein.

John, last quarter, you commented that in the full price channel, you've kind of stabilized the assortment in terms of price points and selection. Are you still seeing AUR increases in full price? Can you comment a little bit on volume versus AUR that's driving that positive full price comp? And then in the guidance for the back half of kind of minus high single digits for Michael Kors, what's embedded in that? You said earlier that about 2% of it is from the timing shift. For the remainder, are you assuming continued positive full price comps with wholesale and outlet being negative? A little bit more color on that would be helpful.

Okay. I'll take the full price part. I think there might be a misunderstanding on the guidance for the back half, which Raj will walk you through. On the full price AURs, they're actually down slightly. And again, remember, that's because we lowered our price points. So full price sell-throughs are up significantly. Price points are down -- our AUR is down slightly. We knew that would be the case given the fact that we took some fairly significant price adjustments in our strategic pricing architecture. I would also point out to you that when we end the year, our inventories, while they will be up slightly in dollars, that's an impact of the foreign exchange rates and the tariffs. Our units are going to be down very significantly. So again, quality of sale, we feel super good about that and think that will continue on. I'll let Raj speak to you about the guidance.

Yes. And as far as the guidance in the back half of the year, I think we were referring to it sequentially improving, not turning positive. So I think we're pleased with what we're currently seeing in the business and the trends. And as John mentioned, it's going to take time to inflect to positive in the retail channel and be positive, and we won't see that until next year in our overall retail channel. So we'll see sequential improvement continue into Q3 and Q4.

Sorry, just a clarification, Raj. My question was specifically on full price. So you're seeing positive comps in the full price business. Are you assuming continued positive comps in full price for the second half with wholesale and outlet then driving the total into negative territory?

Yes, that's correct. That is correct.

Our next question comes from Rick Patel with Raymond James.

Congrats on the progress. Can you help us with your expectations for revenue by geography as we think about the back half? What's the right way to think about the progress being made in the Americas and EMEA? And Asia did quite well in Q2 for Michael Kors. What would you attribute that to? And how sustainable do you think that growth is?

Rick, so we kind of don't guide by geography on a go-forward basis. What I will comment to is the following. Number one, in Michael Kors, Europe is clearly the best performing part of our business, and we anticipate that to continue. And again, Europe never had the kind of declines that we had in North America. And it's interesting, even without store renovations, et cetera, the product and the consumer reception to the new product introductions has been very, very strong, very quickly. And so we're super pleased with that. Also, the outlet business over there is actually relatively stable versus the North American outlet business. And we definitely are seeing -- let me break out Asia into 2 parts. Japan remains flattish, but still has been positive coming out of last year. And that's -- there's some currency issues going on there. So we still feel very good about our business in Japan. China is definitely seeing an improvement. It's modest, moderate, but we are seeing some very significant consumer engagement. Our storytelling is resonating. There is no question that the consumer is now -- our best-selling products in the United States and in Europe are now the best-selling products in Asia. That wasn't always the case over the last couple of years. And some of that was self-inflicted. And so we're definitely feeling like we're going to get some momentum -- continued momentum in our business in China and in Southeast Asia. In Jimmy Choo, I would say that North America is very, very strong for us and getting stronger. And it's interesting in Jimmy Choo also our retail partners are really leaning into us. Our -- the -- again, the higher -- some of the luxury competitors have raised prices very, very significantly. And while we have raised prices as well, we represent an area where I think that our very core partners, not only in North America but around the world, want to protect. And then our new handbag strategy is also off to a great start, both in our own retail stores and at the wholesale level. So North America for Jimmy Choo represents a very exciting opportunity for the company. Europe has been stable and kind of growing. We've got some work to do in both Japan and in China. And that is more of an issue for us than I'd say the trend that we see happening in the regions.

Our next question comes from Bob Drbul with BTIG.

Just two questions for me. The first one, John, in terms of your team, what team do you need in place as you continue to move the company forward from where we are? I know that Raj is still interim. And I guess the second question is for Raj, which is, can you expand a bit on sort of the net interest income, the currency hedging as you look into the future and how the company is positioned from that. Sometimes those numbers are a little confusing to us?

We have a great team in place. We'll start out with -- at Michael Kors, we have a man called Michael Kors. He's been here for 44 years. He's been here since the start, and he continues to be our kind of visionary for the brand. And I think the product that he and our design tech teams are putting out now is some of the best that I've ever been associated with company. So I'm really proud and happy with what's happening there. We've got strong teams around the world who are helping us implement our strategies. And then we've got great teams in place for everything from our worldwide logistics to our production, to our finance teams. And yes, Raj is the interim CFO, but we got great people who are here working with Raj. And so I'm really proud and our teams are, I think, doing a great job. And to also say to you, our previous situation was quite disruptive for the company when we went through an 18-plus month period of time, where people weren't exactly clear about what was happening and now they are. And I think they're resolute in getting our company back in a positive direction. And so we're excited about finishing up fiscal '26 on a -- while it will be down. I'll call that a positive note because we're going to stabilize this business. And really, we're looking forward to fiscal '27 when we think we're returning to revenue growth and some very strong operating income growth, which I think will be very important for our shareholders, but also important for our teams inside the company.

Thanks, Bob. So we continue to receive income from our net investment hedges, as you mentioned and the hedges really related to intercompany investments in our European subsidiaries. We pay out interest rates in euros, and we received interest payments in USD. So that's sort of the pickup that you're seeing. And then on the other side, when we receive the proceeds from the sale of Versace, we expect to substantially reduce our debt levels, which will result in lower interest expense, and we'll have minimal debt on our balance sheet. So you'll see a lot of the interest expense go away and really the interest income continue with our net investment hedges.

I'd like to thank everyone for joining us today, and we look forward to continued exciting news about Capri and how we are moving forward. And we thank you for your opportunity to spend time with us today and look forward to updating you more in the future. Thank you all.

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.