Capri Holdings Limited (CPRI) Q2 2026 Earnings Report, Transcript and Summary

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 Kors, second quarter revenue decreased 2% on a reported basis compared to prior year. In our own retail channel, year-over-year trends were consistent with the first quarter, while wholesale trends improved sequentially, turning positive primarily due to shipment timing. In our retail channel, we continue to see signs of momentum with a sequential improvement in trends in our full price channel across all regions. In fact, comps in our full price channel turned positive in the second quarter, demonstrating that our strategies are beginning to take hold. Consumers are responding to our modern jet-set lifestyle marketing, standout styles and updated pricing architecture. In the outlet channel, revenue was impacted by our strategy to improve our quality of sales through reduced promotional activity. Additionally, the outlet channel assortment continues to reflect the previous product strategies, which emphasized core and basic styles. More modern on-trend styles will be introduced in our third quarter with a more substantial update planned for the fourth quarter. Now looking at total Michael Kors retail sales by region. In the Americas, revenue was negatively impacted by our quality of sales initiative in our outlet channel, which we believe is an important step to strengthen brand health and increase AURs over time. In Europe, trends remained strong with year-over-year increases consistent with the first quarter. In Asia, trends were also similar to the first quarter, though we saw a modest sequential improvement in China. Now looking at wholesale. Revenue at point of sale, while still negative, saw a meaningful sequential improvement in trends. Turning to brand awareness and consumer engagement. We continue to reinforce Michael Kors modern jet set lifestyle positioning with our brand vision of traveling the world in style. Through our Hotel Stories franchise, we are bringing the joy of travel and the discovery of new destinations to our consumers each season. For fall, we traveled to Rome with English actress and singer, Suki Waterhouse; actor, Logan Lerman and our new global brand ambassador, Chinese actor and singer, JC-T. The campaign highlights falls must-have looks, including new interpretations of our iconic Nolita, Leila and Hamilton groups set against the timeless backdrop of Rome's historical landmarks. During the second quarter, we amplified our storytelling through local activation and immersive experiences. We also continue to enhance our social media strategy by broadening our presence across a wider range of platforms and deepening partnerships with influencers. This is enabling us to connect with consumers through authentic relevant voices in fashion and is reigniting brand desirability. According to our consumer insights, we have continued to see a further increase in brand affinity. Additionally, Michael Kors iconic runway shows cast a powerful halo over the brand, reinforcing our leadership in fashion luxury. The Spring/Summer 2026 Runway Show in September drew a notable audience of celebrities and a powerful network of global influencers. Supported by a strong social media amplification, Michael Kors generated 5.5 billion impressions globally and was the second most engaged fashion brand during New York Fashion Week. These activities contributed to a 9% year-over-year increase in Michael Kors global consumer database. With our advanced data analytics capabilities, we are leveraging the strength of our extensive consumer database, which now exceeds 90 million to create deeper, more personal connections with consumers. Now turning to product. Guided by Michael's creative vision and enhanced by data analytics, we are delivering exciting on-trend fashion with standout style. Additionally, we have refined our pricing architecture to better align with historical levels and are seeing encouraging results from this strategy. In accessories, consumers continue to respond positively to new introductions that celebrate our iconic brand codes and aligned with our new strategic pricing architecture. For Fall 2025, we introduced new accessories groups, including the Hamilton Moderne, a reinterpretation of the brand's iconic 2009 "it bag", along with exciting updates to our successful Leila and Nolita styles. These groups are experiencing strong full price sell-throughs, driving growth in accessories in the full price channel. In footwear, trends improved sequentially in our full price channel. We saw strong performance in new fashion boots, while casual footwear gained momentum. Consumers responded positively to new sneaker styles that represent modern trend-right evolutions of proven historical bestsellers as we blend timeless appeal with modern style. Looking at ready-to-wear. Revenue in our own retail channel increased driven by the strong consumer response to seasonal styles that captured Michael's effortless glamor. The fall assortment balanced trend-right designs and tideless wardrobe staples with dresses and outerwear performing exceptionally well. Turning to men's. Revenue in our own retail channel was approximately flat. Men's sportswear styles performed well as we continue to focus on timeless essentials with a modern edge. Next, I'd like to review our store renovation plan, where we are redefining our luxury retail experience with a warm residential design. Our stores remain a cornerstone of our brand and a key driver of our sales recovery, playing a pivotal role in enhancing the client experience and revitalizing growth. Over the next 3 years, we plan to renovate approximately 50% of our store fleet and key department store locations as part of our ongoing investment in brand elevation and retail excellence. We recently reopened our London and New York flagship locations. Michael Kors signature jet set lifestyle is evident throughout these stores, transporting consumers to the featured destination of the season and further enhancing the immersive shopping experience. At the heart of our New York flagship store is our new Jet Set Lounge, the brand's first in-store cafe. The lounge embodies a new dimension of the brand's lifestyle experience and is the first of a planned rollout to flagship stores around the world, including Paris, Beijing, Tokyo and Las Vegas. We believe that our store renovation plan will further strengthen the brand's desirability and drive higher sales productivity. Early results are encouraging with locations showing significant increases in traffic and sales versus last year. We look forward to sharing our progress and results with you in the future. Looking ahead, Michael Kors is a powerful fashion luxury brand with a 44-year heritage that continues to resonate with consumers. We are building on this foundation by delivering exciting on-trend fashion with standout style. Combined with advanced data analytics and consumer insights, we believe we have the right strategies underway to return the brand to growth. Now moving to Jimmy Choo. Second quarter revenue decreased 6% on a reported basis compared to prior year. Retail sales improved sequentially, declining low single digits. Wholesale revenue declined mid-teens due to shipment timing that negatively impacted the second quarter. Looking at trends in our own retail channel. While still negative, second quarter improved sequentially, driven by comp growth in our full price channel. We saw a sequential improvement in Jimmy Choo revenue year-over-year across all regions. In the wholesale channel, revenue at point of sale once again improved sequentially, increasing low single digits in North American department stores. Turning to brand awareness and consumer engagement. Our storytelling continued to highlight the playful daring spirit of the house, combined with a relaxed modern sense of glamor. For autumn, we welcome back Sydney Sweeney, who embodies the modern glamor that defines Jimmy Choo. She perfectly encapsulated the brand's playful daring spirit while showcasing new fall fashion styles, including our newest Bar Hobo handbag and Tylor loafer. In Asia Pacific, brand ambassador, Bai Lu unveiled the Bar Hobo handbag, further amplifying its launch across the region. We also continued to extend our reach and deepen consumer engagement through localized immersive brand experiences. These were amplified with high-impact influencer partnerships that authentically express our modern glamor and daring spirit. These initiatives helped expand our reach. Enhanced by our data analytics capabilities, these efforts contributed to a 9% year-over-year increase in Jimmy Choo's global consumer database. Turning to product. Jimmy Choo's product strategy remains focused on further developing accessories and expanding our casual footwear offering. In accessories, revenue increased in our full price channel, driven by the continued strength of the Bon Bon and Cinch groups. Our recently introduced Curve group launched last quarter also continued to perform well with prices designed to appeal to a broader segment of luxury consumers. Additionally, during the second quarter, we introduced the Bar Hobo Group, which also features price points under $1,500. While still early, we are encouraged by the strong initial consumer response to the modern yet timeless styles and the new strategic pricing architecture. Over time, we expect this initiative to drive significant growth in our accessories business. Turning to footwear. Our autumn collection has performed well with versatile styling fusing timeless silhouettes with cultural forms and opulent textures. Key styles, including our iconic Drop Heel families, Scarlett and Ixia performed exceptionally well, underscoring our ability to deliver both innovation and timeless design. Jimmy Choo's strategy to expand day and casual footwear continued to gain traction in the second quarter with an increase in full price sales. Flats and low heels grew in our full price channel, driven by the strong response to new styles, including our Scarlett kitten heels and Jelly ballerina flats. The Diamond Flex sneaker also continued to perform well. We see significant opportunity to further scale casual footwear, not only to deepen engagement with existing consumers, but also to attract new clients. Looking forward, we believe we are on the right path to unlock Jimmy Choo's unique potential to expand its position within the world of fashion luxury. In conclusion, we are pleased to see early indications that our strategic initiatives are beginning to work. Looking ahead, we continue to expect retail trends to improve in the back half of fiscal '26, positioning us to return to growth in fiscal '27. Long term, we remain optimistic about the sustainable growth potential of both Michael Kors and Jimmy Choo. Now Raj will review our second quarter results and guidance in more detail.

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 prior year on a reported basis and 9.3% in constant currency. Global retail sales trends improved sequentially, declining low single digits. Wholesale revenue decreased mid-teens, negatively impacted by the timing of shipments out of the second quarter and into the third quarter. By geography, total Jimmy Choo revenue in the Americas decreased 3%. Revenue in EMEA declined 6% and revenue in Asia decreased 12%. Now looking at total company margin performance. Gross margin of 61% declined 130 basis points. Higher tariff rates negatively impacted gross margin by approximately 120 basis points. By brand, Michael Kors gross margin of 59.3% compared to 61.1% last year. The decline versus prior year was predominantly driven by the impact of tariffs. Jimmy Choo gross margin of 70.2% compared to 68.6% last year. The increase versus prior year was primarily driven by channel mix and higher full price sell-throughs. Operating expense decreased $8 million. The decline versus prior year was primarily attributable to our cost reduction program. As a percentage of revenue, operating expense was 58.6% compared to 58.1% last year, primarily reflecting expense deleverage on lower revenue. Total company operating margin was 2.3% compared to 4.2% last year. By brand, Michael Kors operating margin of 10.1% compared to 11.8% last year and Jimmy Choo operating margin of negative 6.9% compared to negative 3.6% last year. Our tax rate for the quarter was 112%. As a result of being in a valuation allowance position, we are revising our global tax structure. The implementation of this change took longer than anticipated, resulting in a higher-than-expected tax rate during the second quarter. Importantly, we continue to forecast a full year tax rate in the mid-teens range. Now turning to our balance sheet. Looking at inventory. At quarter end, inventory totaled $766 million, a 2.8% decline versus prior year. Looking ahead, we continue to expect year-end inventory levels to be up slightly, primarily due to higher tariff rates and foreign currency exchange rates. We ended the quarter with cash of $120 million and debt of $1.8 billion, resulting in net debt of approximately $1.6 billion. Now turning to guidance. We are reiterating our prior full year guidance of revenue between $3.375 billion and $3.45 billion, with Michael Kors revenue between $2.8 billion and $2.875 billion and Jimmy Choo revenue between $565 million and $575 million. We continue to anticipate full year gross margin of approximately 60.5% to 61%. Excluding the impact of tariffs, full year gross margins would have expanded, driven by the benefits of our strategic initiatives. We expect year-over-year gross margin declines to moderate through the remainder of the year, reflecting continued traction from our strategic initiatives, ongoing sourcing cost efficiencies and targeted price increases. We continue to expect full year operating expense of approximately $2 billion and operating income of approximately $100 million, with Michael Kors operating margin in the high single-digit range and Jimmy Choo operating margin in the negative mid-single-digit range. In terms of nonoperating items, we anticipate full year net interest income between $85 million and $95 million, an effective tax rate in the mid-teens range and weighted average shares outstanding of approximately 120 million, resulting in diluted earnings per share between $1.20 and $1.40. Turning to capital allocation. Our priorities remain the same. Our first priority is to invest in our brands through store renovations, technology and digital enhancements as well as other brand-building initiatives. As previously stated, we plan to invest approximately $350 million over the next 3 years to execute our store renovation plan. Our second priority is to strengthen our balance sheet. Upon the anticipated completion of the Versace sale, we plan to use the proceeds to significantly reduce debt. And our third priority is to return cash to shareholders via a share repurchase program in the future. Given the encouraging signs of stabilization across our business and our planned reduction in debt levels, 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 third quarter guidance. We expect total company revenue to be between $975 million and $1 billion, with Michael Kors revenue between $825 million and $845 million, impacted by an approximate $20 million shift in wholesale shipments out of the third quarter and into the second quarter, and Jimmy Choo revenue between $150 million and $155 million. Looking at gross margin, we expect the third quarter gross margin rate to decline approximately 200 to 250 basis points versus 63.2% last year, impacted by greater tariff headwinds. In terms of operating margin, we expect third quarter operating margin to be approximately 7% to 8%. By brand, we anticipate Michael Kors operating margin in the low teens range and Jimmy Choo operating margin in the negative low to mid-single-digit range. Turning to our expectations around certain nonoperating items. We anticipate third quarter net interest income of approximately $20 million. We forecast an effective tax rate in the low to mid-single-digit range in the third quarter due to the expected shifts in the geographic mix of earnings and the related valuation allowance impacts. We anticipate weighted average shares outstanding of approximately 120 million. As a result, we expect to generate diluted earnings per share of approximately $0.70 to $0.80. In closing, we are encouraged by the early signs that our strategic initiatives are working. We anticipate retail trends will improve in the back half of fiscal 2026 as our strategic initiatives gain traction. Looking ahead to fiscal '27, we expect to return to revenue and earnings growth. We anticipate gross margin expansion as we mitigate the majority of the impact from higher tariffs, and we continue to benefit from our strategic initiatives. Additionally, we anticipate operating expense leverage on higher revenue as we diligently manage expenses. Longer term, we remain confident that Capri Holdings is well positioned to deliver sustainable growth while increasing shareholder value. Now we will open up the line for questions.

[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 iconic groups that we have today. First, Leila, which we introduced in the spring of last year -- over this past year, sorry. Then we have Nolita, which was actually introduced the tail end of last year. And we've brought modern interpretations to both of those. They're also arriving in the stores as we speak for the holiday season as well, fall and holiday. And then we're really excited about our new Hamilton Moderne introduction, which is far exceeding our expectations to take on our original 2009 "it bag". And the consumer is giving us very positive reception to all 3 of those very strong full price sell-throughs. Some of those bags are actually not even included in our 4 times a year sale inside the full price stores. We've removed those styles from that. And the sell-throughs are not being impacted. So customers responding to product. They're also responding to our strategic price architecture, which is really helping our full price sell-throughs across the group. And what's also happening is we are seeing stronger engagement with millennials and Zs, both on styling and on the strategic pricing architecture. We're seeing things like watches also start to really see sequential improvement inside the stores. Our ready-to-wear business is also very strong inside the stores. So when I look across the landscape and how the consumer is responding to the marketing initiatives, the storytelling, the product and then lastly, we talked about how -- while it's only a handful of stores we've renovated so far, and I hope many of you on this call will get a chance to see our New York flagship, which is located at Rockefeller Center or our London store on Regent Street. We've got some other stores around the world that are opening. I think the new store design really speaks to where the brand is going forward and how we're really communicating with the consumer. And inside of that, we're really excited about our new Jet Set Lounge. Again, it's very early days. where you'll be able to have coffee and tea and select small bites of food. But it's really increasing dwell time inside the stores. So we feel like we've got a very solid strategy in place in full price. And of course, we have a lot of work to do on the outlet side, but we wanted to really put all of our efforts behind the full price. The outlet side of things really in Q3, we'll start to see some new product roll into the stores. We'll actually start to see some -- some of our -- at least one of our new store renovations take place during the quarter, and that's going to happen at Jersey Gardens. And we've got more coming behind that, a similar concept to our full price store and really more in our fourth quarter where the product will be more significantly impacted by some of the initiatives that we're putting in place. So from a trend standpoint, we feel good about where we're going to be for the holiday season and Q3. Product is flowing. Consumers are responding. The only, I would say, if those are all the puts, the take would be that we are reducing our promotional activity, in particular, in the outlet stores. We've had significant pullbacks as we talked about last quarter, we're doing more of that this quarter. That will have an impact, but we are focused on the quality of sale. We're focused on increasing AURs. We saw sequential improvement in AURs in the outlet stores. And so again, we have to go through this work to be able to put ourselves in a position to return to revenue and what we think will be some pretty positive operating income growth for next year as well. So again, we don't want to be overly confident, but we're feeling very positive about these last 2 quarters and most importantly, how the consumer is responding to us. So thank you very much for that question, Matt.

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. And so it's -- we have seen a rise in AUR. I think we're going to have some bumps as we go along with that because the consumer has got to become reeducated that Michael Kors is a brand that will sell at a slightly higher price than what they've seen today. And we're doing that for AUR purposes. We're also doing that to offset some of the tariff implications. The second thing, as I've said, is we are going to be introducing a significant amount of new product into the outlet stores that comes a little bit in Q3, a lot more in Q4 and then throughout fiscal '27. We had been too focused on core product inside of our outlet stores and consumers want fashion. It doesn't matter what channel they're shopping in, whether it's our e-commerce, our full price or our outlet channel, they want fashion. And we were not in a strong enough position in that in our outlet. So as I said, we really feel like that's going to be coming more in the back half of the year through next year. And then lastly, we had a daigou business, which was a product that was being purchased in our outlet stores, shipped to multiple places around the world, sold predominantly on online channels, and we're really shrinking that business significantly. So over 60% of the decline that we're having in our outlet business is coming from that real shutdown of a business for us that we think will provide a much healthier company for the long term and actually improve AURs as well. So that's a long-winded way for me to say that really we won't see North America return to positive growth in our retail channel in Michael Kors until next year and probably more in the second quarter of next year. And then we should be in a pretty good trajectory after that point in time. Thank you for that question, Brooke.

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 in this same category of more opening price point luxury. So I think for next year, I wouldn't say there's going to be an improvement in the wholesale revenues because, again, we're going to do some cleanup work around off-price where we are not only cleaning up our daigou business in the outlet channel, but we're also doing some pretty significant cleanup work around some other areas of off-price inside the company. And again, this all translates back to quality of sale. We're focused on that. We want to raise AURs. We want to raise full price sell-throughs. And as Raj said, we're excited about the gross margin expansion we will finally get to next year after we kind of lapse where we are in the tariffs. Again, we're working with inventory that does not have tariffs on it, and we're working with inventories that has tariffs on it. We'll probably feel the hardest effect of those in fourth quarter and probably first quarter of next year, and then we'll start to lap that and our strategic initiatives will take hold. And I think you'll see some very positive results in that. One other thing just to note, when you look at our gross margins today, and as Raj pointed out, the majority of the impact came from tariffs, we also are without those tariffs, more or less holding our gross margins with, if you recall, lowering our prices in our full price channel and clearing some other product, as we talked about in our prepared remarks, in the outlet channel. So I'm really happy about that because it shows you what our sell-throughs are starting to look like. They're looking good. Our inventories are really tight inside the company. So we're in a good position now to move forward on both our retail channel and our wholesale channel.

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.