Capri Holdings Limited (CPRI) Earnings Call Transcript & Summary

Good morning. My name is Kimberly Greenberger, and I'm the specialty softline, department store and branded apparel for analysts here at Morgan Stanley. We're very pleased that you were able to join us for the third day of the Morgan Stanley Global Retail and Consumer Conference. And we're equally delighted to welcome the management of Capri this morning. Capri is a global luxury powerhouse. Managing 3 global brands, Versace, Michael Kors and Jimmy Choo. Today, we're joined by Capri's Chief Executive Officer, John Idol; and Chief Financial Officer, Tom Edwards. We're going to spend the session today in a fireside chat question-and-answer style format, where we'll explore some of the investor questions that we've heard most recently. We've also reserved time to answer your questions. For those of you joining us via the webcast, please click the Ask a Question button on the webcast to submit your questions. Lastly, before we begin, I need to remind you that for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. With that, welcome to you, John and Tom, and thank you so much for joining us today.

Thank you for hosting us Kimberly. We're thrilled to be here, and we look forward to sharing a lot of the opportunities that Capri has in front of it with you and all the investors on the call.

Fantastic. So with that, let's kick off the fireside chat session. John, I'm wondering if we can just start with what's happening in luxury accessories. How would you characterize performance in the category since the onset of COVID last year?

Kimberly, as you know, the luxury category has really had consistent compounded annual growth kind of in that mid-single digit range for year after year after year. And I think that's kind of commensurate with the growth in the higher wealth in the economy as well as the middle class. And so we see that across the globe, and we see that continuing. Clearly, last year, the luxury category, along with many different categories, contracted to store closures and lockdowns, et cetera. But we believe that the category is back to pre-pandemic levels this year. And we see future growth happening. As you know, also certain parts and regions of the world actually grew during the pandemic, in particular China as travel restrictions meant that more money was happening or more spending was happening in the local areas. Which is what we see is happening in the United Stated and the strength of luxury in the United States, where -- a few years ago, people were only pointing at China and Asia as the growth trajectory. Now people are looking at the U.S. and seeing about the wealth that's been created seeing the middle class consumer really aspirationally move into this category. And it's been thrilling actually to watch. So we believe that luxury and in particularly in accessories and luxury footwear has been growing faster than the total category. We see that continuing, and we see the consumer remaining pretty engaged with that category for the foreseeable future. And we think that having Versace, for sure, with our accessories expansion is perfectly timed. And then if you look at where we're going with Jimmy Choo, where we -- over time, we want to take that to about 50% accessories. Then of course, my core is, that is our lead. So we think as a company, we're really focused in the right areas.

So it sounds like as we look out here over the next few years, you're really bullish on the outlook for luxury handbags, footwear and accessories. You talked about certainly into next year. Would that outlook, John, continue, you think, for multiple years as we exit this pandemic, do you think the category has sort of a new level of life to it?

Yes. I think what you have in the category is the power of brands. And if you look at some of our very big competitors, who are European based, their growth has been extraordinary. Some of them growing at 40% and 50% rate during this period of time. So I think that this area of luxury is something that will continue well beyond next year. And -- but that being said, the competition is getting better, and you have to be prepared. In particular, with always design-first, leading the segment. And with Versace, there's nothing more exciting. With Jimmy Choo, I think we've really put a lot of glamor back into that company, in particular with Haley Beaver now being in our lead campaign. And Michael, if you look at what he did with his 40th anniversary, I mean, so we've got a lot of energy around all 3 of these brands, and we think we can compete. So -- and along with that, I want to say that you've heard not only us, but many other companies say marketing is critical. And so we don't continue to invest deeply in how -- and communicate with our consumers, how and what our brands mean, we won't be successful. So I think that's going to be one of the cornerstones to our growth in a category that will continue to grow because it's competitive.

Yes. Obviously, strong cash flow strength at Capri Holdings really allows for some of that investment in those acquired brands. Maybe we could just reflect on your acquisition of Versace and Jimmy Choo for a minute. How have you taken the brands, which were already very strong when you acquired them and really helped to strengthen the brands and the voice in the marketplace in the global luxury marketplace?

Kimberly, great question. I want to take not a victory lap, but I want to smile for a moment because I know when we bought Jimmy Choo, and then we bought Versace, I think the investment community as well as the fashion community didn't understand how an American company could acquire 2 European luxury companies and be successful. And I think there's a lot of people who doubted our commitment and doubted our ability to be able to do that. And as you saw from the last 2 quarters with Versace, we're well ahead of what we had anticipated in terms of our revenue and our operating margin performance. Jimmy Choo is really starting to get some traction faster in terms of a rebound than we thought. And we think we've now got the right positioning in place. So what we did, again, just to remind everyone, when we bought Versace, we -- it was an approximately $800 million business. We closed $150 million for the business instantly. We took the company from making money to losing money. I know everyone thought that was not a very bright idea. For luxury, you have to invest for the long term. It just doesn't happen in a year or 2 years. It takes 5 and it takes 10 years. So we're a few years into that investment, and it's going extremely well. And we're committed to luxury. That is what that brand will stand for. So when you think of Capri, think of us as leading with luxury first. And I know everyone always wants to talk about North American wholesale, that's becoming less and less and less of an engine for the entire group. Jimmy Choo, again, we bumped in the road for the first couple of years. I don't think I'm as proud of what we did there as how quickly we move to Versace. But I am proud of what's happened in particular since Hannah Colman has taken over as our CEO. She's done a brilliant job, really has focused the company in terms of its marketing message and its product message. And this company has got some significant traction there. And I think the great -- one of the -- if there was a silver lining in COVID it made us at Michael Kors, as you know, kind of reset where we thought we were going to go with the brand have less aspiration for revenue, more aspiration for operating margin and profitability and raise the quality of the consumer transaction and our prices also, quite frankly, and all of that has been resonating. So I'm proud of the fact that Capri has really deeply invested in luxury and we're committed to it, and we're unwavering about that. And that's not an easy thing to do, especially in a competitive environment. But we know it's the right thing to do, and we have 3 amazing brands. So that's not going to be an issue for us. Whether we'll execute on all of them at the perfect timing, I can't commit to that here, but I can commit to the fact that we understand what we have to do, and we'll stay true to that vision.

That is super clear, John. I wanted to just take a look here at what we've seen so far this year in progress since your Analyst Day in June, which doesn't seem that long ago, you're now about halfway through the current fiscal year and you're sort of blowing through your revenue targets this year. I'm wondering how we should think about the revenue growth opportunity from here once we get past fiscal '22? So into '23 and beyond, how do you sort of view the total revenue growth opportunity by brand and understanding that it may differ in many cases, by brand?

So starting with Versace. Again, this year, we'll do over $1 billion for the brand. I think that's -- and as I said to you, when we started by cutting $150 million, so really a $650 million base and you look at where we've come over 2 years, I'm so impressed by the management team and what they've accomplished and Donatella's vision. And most importantly, we bought a company that was not an accessories company, who was an Italian luxury company that did not have an accessories business and our accessories business has been one of the lead stars in the entire company. So when we focused on it and really are rebuilding our stores to present that as the most important part of the business and through our communications on social media as well as our online store, I think the consumer is really responding to this, and it's natural for an Italian luxury company to be based in leather. We will still always have a ready-to-wear lead because of Runway and Versace probably is the most exciting runway company in the world. And we said that when we bought we'll always lead with our Runway and our fashion. But now we have things that we can embrace a broader group of consumers with. So the $2 billion projection for us, I think, is very clear. I'm not ready to say it yet, but I'm getting close to ready to say we're going to go beyond that number. And we know it. We feel it. And if we can keep doing the things that we're doing, it's not a matter of if we're going to break $2 billion, it's just a matter of when, and I'm really excited about that. And of course, you can see what's happening with the operating margins. And this is going to be a very big contributor to our overall profitability. When I look at Jimmy Choo, we're going to have a very, very strong back half of the year with Jimmy Choo. This company has really got its grove, if I can call it that. And you can feel it in the office, the management team is excited and the product is really resonating. We have a good moment also, people are getting dressed up again. So where people were dressing down during pandemic, we got hurt badly in Jimmy Choo because of that. But now as you, I'm sure been out, and many of you on this call have been out, women and men are getting dressed up again, and that's a great thing. And we are the go-to luxury brand for that level of footwear. And we're starting to get some very nice traction on our accessories in both the Versace case, which we believe will be 50% of the business ultimately. So that's $1 billion of Versace. And we think at Jimmy Choo, we will get to a 50% accessories penetration over time. That will be another $500 million. So that's a $1 billion business. And we're also seeing profitability. The company was profitable last quarter. We think you're going to see more of that going forward. And then lastly, I think we're very surprised at Michael Kors, where we had the [ high ] $3 billion kind of projection rate, and we're going to go past that quickly. And it's in our core category, our accessories are resonating. We're having much higher AURs. And we have other opportunities, in particular, in the men's business, most of our big competitors are doing well over $1 billion in that category. We're only approximately $300 million. So we see a huge opportunity there and some other opportunities in the brand. So again, we're not looking to push Michael Kors because we've got from a store platform standpoint a pretty good footprint, expand a little bit in Asia and contract a little bit in North America. But we're in a very good place now where we can really gradually move that business forward, and in particular, its profitability. So $2 billion for Versace, clearly in sight, $1 billion for Jimmy Choo, I think that's clearly in sight. And I think $4 billion and/or north of that for Michael Kors is also looking to be more clear than it was probably previous.

Super clear, John. And I think if I reflect at our conversations here over the last couple of years, one of the things that certainly has surprised me, maybe it didn't surprise you, is from a regional perspective, it's just the surge here in the Americas when I look at just the strength here that your business is experiencing for the last several quarters, it's been -- and I think not uncommon in the luxury goods industry, North America has been a real good news story this year. Maybe you can just reflect on maybe on how your approach to going to market in different regions may be evolving? Where do you see your big global opportunities by brand?

I apologize, evidently, there's some hammering going on over my head, in our offices, Tom, maybe you can see if they can stop it. So first off, I think we're all pleasantly surprised at North America, and we know that the North American consumer is healthy. That consumer was locked down, and now they're out and they want to spend money, they want to dress up. And that bodes well for all 3 of our companies. I think stimulus certainly helped. We saw people coming into stores, feeling more comfortable about spending money maybe than they might have been previously because of some of the underpinnings of their financial well-being. So I think that was really positive. And I have to tell you that in North America, those trends are continuing. We're seeing a very strong consumer this quarter. And so we're pleasantly surprised. We have said in the past that we had the inventory to do what we projected. We'd like to have more to go past what we projected, but that's a little tougher to do. But the consumer is exactly where we thought they'd be, and maybe in some cases, even stronger. I have to say that the 2 standard -- well, actually 3 things. Versace is shocking us in North America, how strong this business is and how the customer is. Once we changed the product, and I was with our President of North America yesterday, and the accessories and how the customers resonated with accessories in this country is really way beyond what we had ever anticipated. So really good news there. And I think the other is solid Michael Kors rebound here in the marketplace, we have not -- because it's always the big question for us, how strong is promotional activity. We've really just backed out of that in such a significant way. Again I apologize for the hammering. And the customer hasn't said no. So that means it's product that they're -- and buying into this imagery of what Michael Kors stands for. So very, very positive around that. On Europe, very solid rebound, reopenings are happening. Obviously, everyone's reading the news, there are lockdowns happening in Austria, certain parts of the Netherlands. We anticipate some things to happen in some other countries after the 1st of the year. I think I've been consistent in saying there's going to be bumps in the road. We think that we're going to have some of this. We've got the Omicron right now, which none of us know what that actually means. But I think we're in such a solid financial position, such a good inventory position that whenever these bumps are going to be, we're going to be fine. And -- but I'm really excited about what's happening in Europe. So even with some of those regional lockdowns, I'd say trends are continuing, getting better and better every day, and we're looking forward to a great holiday. China and North Asia, I should say, reopenings in Japan are getting better there. China is probably getting a little -- still remaining bumpy. There is some more incidents that happened over the last few days in Shanghai, et cetera. We're going to see some bumps there. I think that consumer while it's not quite the pace that it was last year, you're not going to stop the growth of China. It's too big, it's too powerful. And so North America is probably going to make up a little bit for some of the bumps in the road that are in China right now. Europe is on a good track. So I think overall, we look across the globe right now. I call it relatively healthy. Some regions are not back to LLY. But we've kind of planned our business around that, and we know that the trajectory is going to take some time. But the consumer feels healthy and they feel excited about the luxury business. And we're also seeing some very nice rebounds in ready-to-wear, where that had been the laggard where accessories and shoes kind of stayed strong through the pandemic. Now people are getting dressed up again, they want that good feeling that a new dress or a new top or something gives you, and we're definitely seeing that.

Great. So understandably a little bit of unevenness globally, but that's kind of really been moving [indiscernible] now for almost 2 years, right, John?

That's correct.

I mean that's where we are. Okay. That is super clear. When I think about the overarching strategies for Capri, one of the strategic rationale for some of the acquisitions that you've made is to create cross-brand synergies, and in particular, I think in operations, back-office, global distribution and a few of those areas, can you talk about the strategic thinking behind the synergies? And then maybe Tom, if you can talk about some of the cost and operational synergies behind the scenes that Capri is realizing with this multi-brand strategy?

I'll say one quick thing, I'm going to hand that over to Tom. One of the great things about having the luxury group is you have 3 CEOs who talk to each other. And they get to share a lot of information, whether that's about cost of product, whether it's about consumer, consumer behavior, regional successes. And when you're a monobrand company, you don't get that opportunity. You might talk to people in the marketplace. But here, we get to see live living color when something like the ERIC HAZE POGGY collaboration that we did in China with Jimmy Choo was so hugely successful or with our new La Greca pop-ups in China with Versace and what that's done. So having that dialogue internal amongst the CEOs is really, really, I think, gives us not a leg up, but it gives us an ability to have information about the consumer and how we are building success more quickly than when you're just a monobrand company. But I'll let Tom talk about the other sectors.

Thanks, John, and thanks, Kimberly. And to be clear, we think there are significant advantages to having a group and building one. And in the first area, it's digital and e-commerce. So we are replatforming across the brands. In digital analytics, Michael Kors has advanced capabilities and we're bringing those along to Jimmy Choo, Versace, so that we can speak to our consumer and engage with them as we grow our databases and further expand all 3 brands. So digital analytics is critical. And then, of course, e-commerce the platforms to state-of-the-art omnichannel things like clienteling, all of those activities, as John mentioned, we talk across the group and we look at best-in-class, and we then rollout. So we are in the process of doing that, and we'll just see our capabilities and each of the brand's capabilities continue to improve. As you mentioned, other synergies, there are numerous ones in terms of back on house and others. So it starts with procurement. We're putting in common systems across the group. We're also looking to expand our capacity and capabilities in luxury manufacturing. We recently bought a luxury shoe manufacturer in Italy, which services all 3 of our brands and looking to expand those capabilities from a luxury manufacturing point of view. So we believe that there is a number of opportunities here as we work through and continue to build out a luxury global platform for our 3 brands. And then as we look forward, potentially others.

Great. And Tom, I don't know if there's an opportunity to just move slightly closer to the microphone. You're coming apart just very slightly faint. I wanted to, if we could double-click on the conversation on digital. How would you rank order digital performance and capabilities at all 3 of your brands? And how does your operating margin compare between digital and store? And maybe how it's changed over time?

Tom, go ahead and take that one.

Sure. In terms of our capabilities, Kimberly, I would call it Michael Kors is really the highest. Jimmy -- and we have very strong capabilities, as I mentioned, in digital analytics and the e-commerce platform, as you've seen this year, is delivering tremendous results for the brand across the globe. So very strong. Jimmy Choo strong and improving. And Versace, when we purchased the company and it became part of the group, I would say it was the furthest in terms of areas of opportunity that it was not omnichannel and still had the significant opportunities to build out. And Versace has just come ahead in leaps and bounds. Still wonderful opportunities to continue to improve, but what they've done in e-commerce has been tremendous and driving not just double-digit but triple-digit growth. So that's how I would rank them at this point, but a key to that is we're building out the common platforms and capabilities to bring all the 3 brands up to even higher levels. And then in terms of digital margins. Across all 3 brands now, our digital margins are very strong and above store margins. Jimmy Choo and Versace, were always in this position with the luxury price points and positioning. Michael Kors, pre-COVID maybe was not in that position, but as the significant increase, doubling in penetration from an e-commerce perspective has occurred. The e-commerce P&L has really responded and levered and now is very strong and above the store levels. So we really think that, that's a great positive for us as we move forward and expect to see continued growth and increased penetration from our e-commerce channels and omni capabilities.

Okay. Great. And a conversation with a -- with global brands and retailers today is incomplete without a conversation on supply chain and inventory levels and how the slowdowns in global supply chain might be impacting the business? And how are you navigating through what we're seeing out there in this environment?

Happy to take that one. So we have been impacted, as John mentioned, we could be selling more. We have seen increased delays in the quarter. We had the shutdown in Vietnam, which has now moved through, and we expect to see continued delays into next year as well as higher costs. However, we do have the product to sell. And as we mentioned, we increased our guidance for both the year and Q3 coming into our last earnings call. So we believe we have the appropriate levels. As we look forward, we do expect to build inventory through the end of this year and in next year. So as we look at next year, for the first half, we were more conservative in this year as we were coming out of COVID, so we would expect inventory to be building, and we have more visibility now to those delays and believe that will be the case. In second half of next year, we'll be comparing against a year this year where we don't have as much inventory as we want. So again, we would expect inventory to be higher as we look at next year in the second half. But that's all both on a comparison basis as to where we were this year, but also importantly, to support higher sales growth as we look at the business going forward and expect to continue to deliver double-digit revenue growth. We do expect that the transportation delays continue to impact our inventory receipts in the near term. And in the future, we'll look to receive product earlier, the reduced cost of transportation and our production teams are doing a number of activities to mitigate these lead time delays and the ocean delays.

Okay. Great. So it sounds like you're set up well for the holiday season this year, which is super encouraging and obviously navigating those -- that dynamic external environment, sounds like quite well so far. I wanted to, John, think about on the last couple of earnings calls, you talked about future potential acquisitions for this business. Maybe you can just share with the audience how you think about the potential for future acquisitions for Capri Holdings? What are the criteria that you're looking for in a potential target? And any update you could share with us on potential timing?

Sure. I think I should take one second to tell you what our kind of priorities are in terms of our cash deployment. First, it's obvious to invest in the business always; second to repay debt. And I think we did an extraordinary job paying down debt during the pandemic. And our balance sheet is super clean right now. And we're going to be in a very, very good position in particular, by the end of next year, we'll have very, very little debt in the company. So we're positioned for an acquisition. Simultaneously, we've said that we're going to continue with our share repurchase program, and we announced a $1 billion share repurchase program at the last earnings call, and we will be active in the marketplace, in particular, when we see our shares being undervalued, and we continue to believe that our multiple is significantly below what our revenue. And as we've said, we're going to have double-digit revenue growth over the next few years and double-digit earnings per share growth over the next few years. And just to be honest, we don't believe that our multiple currently reflects that strength of these 3 luxury brands and our projections for revenue and earnings. But acquisitions, we're going to be disciplined. We believe that we will continue to focus only on the luxury area, which predominantly means, and I would almost say exclusively means European luxury companies that really have the ability to be at minimum a $1 billion because it's not really worth our time, energy and effort to do something that will only be hundreds of millions of dollars, even though it's a very sizable business. It takes kind of the same energy and effort to put that into a few hundred million as it does $1 billion-plus business. So we're active. We are actively looking now. We're actually even involved in select conversations, nothing is on the horizon, but we are active. And I think the investment community knows that when an asset becomes available, the investment bankers are absolutely reaching out to us to have communications. So we feel good that we will be in the hunt in the conversation, at least, and we will have the balance sheet to support an acquisition when and if it's appropriate.

Okay. Great. That is super interesting. Tom, we've got a question coming in from the audience on operating margins. Obviously, you've got a ton of momentum in margins here this year, year-to-date. How should investors think about the operating margin opportunity beyond the current year for Capri Holdings? And how are you thinking about margins by brand longer term?

Sure. Thanks, Kimberly. So when we look at margins, first, I'll start with gross margin. And we've already stated that we expect gross margin to expand an additional 100 points next year on top of a 250 basis point increase this year. And the 250 basis points is, again, in the face of some headwinds on the margin side from transportation costs than others. So as we look forward, we do anticipate continuing to improve operating margin in the future as we continue to see leverage and grow sales. And we're moving along more quickly than we expected. We're at -- the guidance we provided previously of 18% this year, but well ahead of just our Investor Day projections that you noted was in June of this year. So the progress has been very fast. We still continue to target 20% longer term in line with those earlier discussions and expect to see that come through.

Okay. We have about 1 minute here. John, what's the question you wish I had asked you today that I did not ask.

Well, I think the main question that we would love for you to ask is, do you believe that all 3 of these companies have significant growth opportunity in front of them over the next few years? And I think the answer to that is yes. I think if you asked us that question 2 years ago, we would have probably been a little more tentative. But I just have to take my hat off to the teams, everyone from Donatella to Sandra Choi to Michael himself and how they really continue to deliver exciting products and engaging marketing for our consumers and the way the consumer is responding. So if you see a bit of a smile on my face and Tom's face an encouragement, it's because things are going well here at Capri, and they're going better than we had thought. And to be able to do that in the face of what we're all living with today is exciting, and I have to just thank our entire organization worldwide because they have done an amazing, amazing job of executing against that vision. And I think it's showing up in our earnings, showing up in our revenues and I thank all of our shareholders for supporting us, and I think more good things to come.

Well, that is a great note for us to end on today. And John and Tom, I just want to say thank you both so much for joining us this morning and taking time out of your day.

Thank you very much for hosting us.

Happy holidays to everybody.

All right. Happy holidays. And for those of you tuning in, in the audience, thanks so much for your time today. Please stick around. We've got a great day here at the conference, and we look forward to keeping in touch. Have a great day, everyone.