Capri Holdings Limited (CPRI) Earnings Call Transcript & Summary

Okay. Hi, everybody. I'm -- for those of you who don't know me, I'm Alex Straton, I co-lead the branded apparel, footwear and softlines retail team alongside Kimberly Greenberger here at Morgan Stanley. We're super pleased that you all joined us today for the first day of our conference, and we're equally delighted to welcome members of the Capri management team today. So thanks for joining us. Kicking off with a brief overview. Capri is the parent company of 3 growing luxury lifestyle brands. That, of course, includes Michael Kors, Versace and Jimmy Choo. Joining me today are John Idol, Chairman and CEO; and then Tom Edwards, CFO and COO. So starting with John, I'll give you guys a brief intro. John has been the Chairman of Capri since September of 2011 and the Chief Executive Officer since December of 2003. Previously, John served as Chairman and CEO of Casper ASL from 2001 to 2003 and as CEO and Director of Donna Karan International from 1997 to 2001. Keep going here. John also served as Ralph Lauren Group President and COO of Product Licensing, Home Collection and Men's collection from 1994 until 1997. Now that is quite the resonating here. So great. Moving to Tom. Tom is the Executive Vice President, CFO and COO of Capri and has been with the company since 2017. Previously, Tom served as Executive Vice President and CFO of Brinker International. And prior to that, he held numerous positions within finance at Wyndham Worldwide from 2007 to 2015, including having served as Executive Vice President and CFO of the Wyndham Hotel Group from 2013 to 2015. Tom has also held a number of financial and operational leadership positions in the consumer goods industry. So that intro them entirely. Thank you so much for joining us, and welcome.

I'd like to point out we're both only 26 years old. [indiscernible] a very short period of time.

It's quite the resonate for 26, I will say. So today, everyone, we're going to spend the session in a fireside chat question-and-answer style format. We're going to explore some of the most recent investor questions we've been hearing. But before we dive into that, I do need to remind everyone that for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. Now that's a mouthful. We're done with it. Let's move to the questions.

There's been a great deal of volatility in consumer trends this year, but Capri has managed to grow revenue mid- to high teens on a constant-currency basis, which is quite impressive for the first half of the year. How would you explain this resilience? What are the drivers there?

Well, first off, thank you very much for hosting us today. And maybe just before we start, I would like to also thank Kimberly Greenberger for covering us since we went public as well. And we wish you all the best in your future. So what's exciting about Capri is we made a decision probably about 6 years ago now that we wanted to transform the company into a luxury group and we had the good fortune of being able to acquire Jimmy Choo and then not too long after that, the good fortune of being able to acquire Versace. And what I feel is really strong about our company is we have these 3 powerful brands and 3 luxury brands, 3 brands that really are positioned in the consumer's mind from a lifestyle standpoint and from an ability to excite consumers and that's what we get the opportunity to do every day, is to get people excited and feel great about themselves. And Capri, I think, has shown number one, that we were able to integrate 2 additional companies into our portfolio. I think we've done a reasonably good job in particular with Versace in terms of taking that brand, growing it and growing it profitably. We've done, I think, a reasonably good job of growing Jimmy Choo. We need to do a better job of growing it more profitably. And I think we've also done a very good job of turning around Michael Kors and really beginning to position that brand on a much more luxury and elevated level. And I think that the results are showing through. I think we're also doing a very good job as an organization with our digital and our communication in general around the 3 different brands, in the lifestyles and the codes that these brands have with inside of them. And you can really see that with our database growth. Our database growth, which is not just for e-commerce, it's really for the entire group, for stores, et cetera. And we're really excited about the strong double-digit growth that we've shown quarter after quarter. Obviously, during the pandemic, many companies showed that. But even post-pandemic, we've really been showing that we were able to acquire additional consumers. But I think it's about our brands, I think it's about our management team, and I really want to call out the 17,000 people around the world who got us through COVID and who are taking us and propelling us post-COVID and the great job that they're doing. And then, of course, our 3 founders, which Donatella, Sandra Choi and Michael and for their great vision and leadership. So we feel good about what we have today and how the consumers are responding to that.

That's super helpful overview of kind of what's driven the trend so far this year. I want to ask you a question we're asking most people here at this conference, a very topical item, which is how are you assessing the health of the consumer as you look at your business? And have you seen any signs of strain or any pressure there?

So I think we've all had a very interesting last 3 years, again, going through the pandemic, coming out of the pandemic and now we have a whole another set of headwinds in front of us. And as Tom and I look at them, first is, obviously, interest rates are rising, and that's not just a North American situation, that's a global situation. And what effect is that going to have on the consumer. It has to have an effect. We don't exactly know how big of an effect that will be because simultaneously to that, you have wages that are rising very quickly. Secondly, we see some FX headwinds that are definitely impacting us as well. And that's less per se about the consumer, but it obviously impacts our business on a global basis. And -- but inside an additional issue is the energy costs, which, again, that's going to impact the consumer. We know that is already impacting the consumer. And then, of course, the geopolitical situation and in particular, the war in Ukraine. So we have all these various things. And I think maybe the best way for me to describe it is by region. So North America, we still see the consumer relatively healthy at this point, which He&She seemed to be holding up well. What does that mean? We definitely are concerned about next year. And we don't think we're going to see it probably in this quarter or maybe a little bit into next quarter. But we think kind of the back half of next year, we've got to be cautious about what happens to the North American consumer, which has been very resilient. Second, in Europe, I think we -- and we said it during our earnings call, we were quite surprised at how strong the business was in Europe. And again, we just have this anticipation that, that consumer is going to be even more impacted than the North American consumer, in particular, because of energy prices are much higher in Europe. And they didn't have the stimulus that came into the economy. But that consumer obviously showed tremendous resilience during the summer season and even post the summer season. And then in Asia, we are very pessimistic on China. I'll start with that. While we do see certain measures being pulled back on the COVID -- zero-COVID policy, we think that's going to take a lot of time. And I think we've been one of the companies all along saying it's going to take longer and we don't think there will be a recovery in China until '24. But at this point, we're still anticipating negative impact throughout next year. We hope that that's not the case. But I think from a prudent planning standpoint, because none of us can really assess what's happening there clearly. The balance of Asia is growing very nicely. So Japan is rebounding very nicely. Southeast Asia is quite strong. But for many of the people in the luxury business, we need China to get back on its feet and start to have a robust recovery.

So you spend a lot of time talking about China, your more pessimistic view, certainly feels prudent given what's going on there and the uncertainty. Have you all changed your strategy at all in the region? Or how have you kind of shifted, how you think about it as you navigate this?

That's a very good question. Because of the inconsistency of what's happening in China, it makes it very difficult for us to plan our business around that. I mean, last week alone, we had more stores closed in China than at any point during the pandemic period. This is just because cities keep closing and reopening. And again, we think some of the measures they're taking will alleviate that. But it's very hard to plan your business, plan events, plan how you're going to communicate with the consumer when they're having difficulties traveling getting out to shopping malls. And I think many of you have seen the travel figures on airfare being down -- I'm sorry, air travel being down around 40%. So I would say we're just going to take a very wait-and-see approach and not try and push too hard. We need China and Asia in general to work. It's a big part of our growth strategy across Capri and even more so in Michael Kors. And so we're going to be patient just like we've -- if we learned anything through the pandemic, it was to be patient, stay focused, just keep building and doubling down on the core values of the great 3 brands that we have. And this too shall pass. But it's probably, as we said, going to be move '24.

Okay. So it feels like we've covered kind of revenue trends for the most part. Maybe we move down to total company margins. So how are you thinking about gross margin and operating expenses and what are the puts and takes around your longer-term goal to hit that 20% level or so?

Sure. I'd be happy to speak about that. First, we're really pleased with the progress of both the company and the brands on margin coming out of COVID. And it's all due to strategies that were put in place actually prior to the COVID situation. So we've been executing and they have been executing against them. And our guidance as of last quarter was 18.3% operating margin for this year with a long-term goal of 20%. So when we look at the pieces in terms of getting there, the things that are going to support gross margin are what's been driving it in the past, first and foremost, the strategic initiatives. It's driving accessories at Jimmy Choo and Versace, building out additional beyond signature into hardware for Michael Kors and managing tightly inventory to drive full price sell-throughs. We see brand mix helping the overall margin as well as the ultimate return of China, which, as we know, Asia and China, in particular, are structurally higher. And at some point, transportation may become a tailwind as well for those costs. So on the gross margin side, those are some of the drivers. On the SG&A and operating expense, it's really leverage as we grow the business. And that's twofold. Leverage of our fixed cost, but very importantly, our store sale densities have a significant upside for all 3 of our brands and we see that driving margin long term. Now we've talked about a lot of things that support it. The one thing we're going to continue to do is invest in the business. We want to grow in different categories. We want to grow in different regions. We want to talk to the consumers in our large and growing database. So investing in marketing and communications is going to be critical. And that's how we look to balance out the margin growth from where we're at today to the 20%.

Okay. Those are great building blocks for kind of how to think about this. Maybe you mentioned some of the brands and your excitement over them. So perhaps we drill down into them, starting maybe with Versace. So it's continuing to outperform the group, great performance there. Maybe can you talk us through what's driving that? And what are the key learnings so far as you've been building it? And then the path to I think that $2 billion target or so?

So when we bought Versace a few years ago, as many of you probably are aware, was a privately owned business, and it had a lot of operational issues and I think one of the great things that Capri has done is we've brought tremendous structure to the organization and really cleaned up a lot of the businesses inside the company. And very importantly, we've renovated 60% of the store fleet worldwide now. And across the group, we're in a very good position with our store network in terms of the locations and our leases, et cetera. So one of the first priorities for us is to increase the store productivity. And what we're seeing, as we had kind of set out on our mission of trying to take -- make accessories 50% of the business is we've gotten just tremendous traction, and we've been showing strong double-digit growth in that category every single quarter, almost since we own the company. And it's something, obviously, we have a little knowledge of. And that is really changing the profile of the way the consumer thinks about us. If you had a chance to get to any of our newly renovated stores, you'll see that usually the first 30% of the store is now all accessories, where in the previous formats, it might have been in the middle and it might have been 10% of the store and it was really a ready-to-wear run company. Surprisingly for us, our footwear business has gone much faster than we had anticipated. And as you, again, are aware in the luxury industry, footwear is a very key component and can run up to 20% of your business inside these stores. So we're starting to get our productivity levels. As a matter of fact, our -- many of our stores that when we bought the company originally were unprofitable and now we're starting to get the opposite, which is quite good. We have a lot of stores that are now profitable and can really, to Tom's point, create enormous leverage for us as we take these stores and drive up the velocity. And many of these stores, we can do 4x as much business as we're doing today. And then we'll be somewhat close, not even exactly close to our luxury competitors in the marketplace. So accessories, footwear, renovation of the stores and then, of course, clarifying what our marketing communication is with the consumer. We're probably on that piece of the journey right now where we're trying to get a bit more consistency about what does Versace mean to a consumer. And as we've been doing that, the other thing that's happened is we've started to really bring in a much younger customer into the business where when we took the business over originally, it was a much older customer. And again, the company really didn't have a way to draw that younger customer. And of course, accessories is one of the great ways to do that. So we've got fabulous brand codes between the Medusa, which is quite famous. We have the Greca now, which you see coming out. And then we have our Barocco V which we actually created right after we bought the company. So now very identifiable icons, driving the accessories business, footwear, renovation of the store fleet. So all these things are coming together that really are starting to propel the company in a very nice way.

Yes, that's certainly a very clear foundation and kind of how you're going to push to that longer-term revenue target. So let's turn to margins now for that business. I think it's about 16%-ish now, and the path is kind of a low 20s number longer term. I get the revenue piece now, how do we get to that margin target?

Sure, I'd be happy to comment. And first, before we purchase Versace as a private company, they were making about mid-single digits operating margin. So as John mentioned, refocusing the company on the luxury element that has helped propel it to this year, guiding to 16%. And we're really pleased with how the company has progressed and the opportunity in the future. As we look at that and I break it down into gross margin and SG&A and leverage, I think we have opportunities as gross margin and we drive the accessories business. So that helps support strong margin performance. And the brand has done a great job, and we'll continue to focus on broadening or democratizing its offering and tightening inventory, so we drive full price sell-throughs as well on the gross margin side. On SG&A, it's really about leverage of the store fleet. So when we talk about increasing store sales densities, across all of our brands, Versace has the greatest opportunity. They're running at about $1,000 a square foot per store, and we gave a goal at Investor Day of doubling that to $2,000. And I'll also note that compared to luxury peers, that $2,000 may be on the lower end of the scale. So we think there's a huge opportunity here as we move forward to really drive profitability through that means. At the same time, as I mentioned, for the overall company, and I'll mention it again, investing in marketing, communications is critical. Versace has a great opportunity in Asia where they're underdeveloped but that will take time to invest and talk to consumers as well as build out some of the product offerings that we're focused on like accessories. So we feel really good about the opportunity here.

That's great. I feel like it covers Versace in total. And now we can perhaps move to Jimmy Choo, same line of questioning, maybe talk me through the initiatives to grow that business to about $1 billion or so, I believe, in revenue.

So Jimmy Choo, I think growing the revenues has been fairly consistent since we've owned the company. I think the company has only had 1 year, and it was during COVID, where it actually was doing less than the prior year. So the brand has always grown very nicely even before we bought the company. Unlike Versace, the store fleet was in pretty good condition when we bought. The only real major issue was that the -- it didn't have space for accessories. And we reduced the assortments by about 1/3 in the stores to put accessories in which has been a very, very strong success for us. Again, strong double-digit growth almost every quarter since we've gone after trying to make accessories somewhere between 30% and 50% of the business. We actually didn't have to do any renovations in the stores to accomplish that because of the way the stores are fixture. But what we learned was we started to get more profitable in the footwear business because we didn't need as many SKUs in footwear. And then during COVID, we reduce SKUs even further. And again, I think the stores look terrific right now. And we have probably 50% to 60% less SKUs in the stores today than we bought the company, and we're doing more business, and we're more productive on those SKUs. So we've learned a lot from that. With Jimmy Choo, the #1 priority for us is to build the accessories business. And there, as I said, somewhere between 30-plus percent of the business, and it could get up as high as 50%. And that will change the margin complexion of the company because when you have a purely footwear company, it always will operate at a lower margin because of the sizing inside that range. So we're well on our way. Again, we have our new JC signature that we brought to the company some 2.5, 3 years ago, which is performing very, very well for the company. And then, of course, some of the traditional Bon Bon items that you've seen inside the company and then the Crystal Madeline. So we now have 3 strong platforms, again, just like Versace, and we've done that very quickly. And as again, you probably -- many of you in this room know, in luxury, it takes time. You don't just introduce a bag and all of a sudden, it flies off the shelf. It takes time for the customer to understand it, desire it, purchase it, then to have their girlfriends sees on their other girlfriends and then they all want the same bag, hopefully. In footwear, which is obviously the core competency of the company, we've been very underdeveloped in casual and a lot of people might say, what does that mean. It's really sneakers. And when you look at what sneakers mean today in luxury, I know it doesn't sound luxury but it actually is a very strong component of most of the best luxury companies in the world, their business. In Jimmy Choo, we have not gotten that piece of the business going to the degree that we ultimately needed to go. We're working on it. We're working at it hard, but we're not where we need to be. And so if we can get the accessories going, which we feel good about, it's happening. And then if we can fix this last piece, I think we can increase the productivity of the stores dramatically and that will be the single key when Tom talks about what -- from a margin standpoint, that's the unlock in Jimmy Choo. If we can get the store productivity up, it's not about their size, it's not about their location, it's not about their leases. We'd need to do more business in the stores. And another reminder, in all 3 of our companies, we're very good at e-commerce and digital. That's not an issue for us. What we need to be better at, in particular, and we'll talk about when we get to Michael Kors is clienteling and how important that is. Our luxury competitors are much better at that than we are. That is going to be a very, very high priority for us over the next year or two, is to really build out -- again, we have strong sales associates inside the company, but we need to give them better tools, and we need to create more of a clienteling atmosphere, which will, I believe, increase the store productivity.

That's great. So you mentioned kind of unlocking this margin opportunity here at Jimmy Choo. Tom, could you expand on that? What is that?

Sure. I'll expand and emphasize. Jimmy Choo, we've got it to about a mid-single digit operating margin this year and a goal of mid-teens. So in order to get there, there were 2 things that John mentioned that are really going to drive it. First is accessories. Because we're selling more accessories, which are not size, that's going to support gross margins for the brand and we're already seeing Jimmy Choo drive double-digit revenue increases on accessories. So we're pleased with the start and think that there's more upside there clearly with the revenue goals. So that will support the gross margin expansion for the brand. And I'd also mention, with the continued increase in accessories as well as the refocusing on smaller SKUs, they've done a great job over the past 2 years, already expanding gross margin. On the SG&A side, it really is about store leverage. So Jimmy Choo with accessories moving through the stores and continuing to do exactly what they're doing in footwear and building out casual, I think has a very big upside to leverage their store SG&A, increased store sale densities, as again, we noted previously on Investor Day. So I think that, that's the opportunity for Jimmy Choo over the next few years to get to that mid-teens level.

And I forgot to mention one thing, too, and Jimmy Choo, which I'm very proud of the teams about is -- I hope you've all seen our Time to Dare campaign, originally led by Hailey Bieber and then now led by Kendall Jenner. And again, you've seen the results of our database growth in Jimmy Choo against strong double-digit growth in the company and we're getting a much younger customer to come into Jimmy Choo. Many people who didn't even know the brand existed. And I think some of our marketing initiatives have really helped at the company was quite quiet over those past few years and not really spending the money that it needed to. And Tom has talked about this. We've taken our marketing budgets up for every single brand in the company and we're going to continue to do that. You need to in this environment because our competition is very good at what they do and they've got a lot of money. And so we need to make sure that we're out communicating with the consumer and really making sure that we're a part of their luxury assortment.

Okay. So we've covered Versace, we've covered Jimmy Choo. Now let's move to the big behemoth brands, Michael Kors. Now that one, same line of questioning, has a $5 billion revenue target out there. Maybe talk to me about the levers to get there, how much is going to be driven by accessories versus other categories? Same line of questioning. Third one.

So Michael Kors is obviously the one we're most familiar with. We made a decision about a year before the pandemic that we were going to change the profile of the Michael Kors brand. And in fact, we had come out and said we were going to reduce the actual revenue targets for the brand. And that was going to be based upon profitability. We really wanted to get our operating margins back to 25%. We also wanted to reduce promotional activity, which by the way, it's primarily a North American more phenomena. And we wanted to elevate the product experience for the consumer. And we felt that Michael Kors, being that there is a real Michael Kors, he comes to work every day. He's very, very engaged. And we have our Michael Kors Collection line. So we're typically the #1 viewed designer brand in the fashion shows here in New York. We're in all the finest stores in the world. And we wanted to leverage off where we originally came from, which was more of a luxury position. So we started raising prices and that was before the pandemic. And it wasn't just the fact to raise prices. We changed the quality of the product. Again, we edited the assortments. And we saw the consumer respond. We saw the consumers say, we want to be a part of this Michael Kors experience. The second thing we did is we went back to Jet Set. And as many of you know, that's where we started. That was our original place of positioning in the consumers' awareness of us. We had walked away from that for various reasons. And we went and doubled down on that. And it was interesting during COVID, we saw what did consumers line up for, brands that had very clear messaging to the consumer and they saw that as creating value inside of their own luxury assortments. And as you know, part of resale is people saying, "Well, I own something that means a lot not just to me personally, but has value to it in the future. " And so that was the position that we wanted for Michael Kors and the customer absolutely responded to that. So much so that we originally had reduced our targets to $3.5 billion, and we said we'll get to $4 billion over time. And long behold, we got to $4 billion and we were doing that on less SKUs, prices and accessories that were over 25% higher and really positioning the brand in a more luxury way and the consumer 100% responded to that. So at our last Investor Day, as you recall, we changed that target to $5 billion. And really, the purpose of changing that was to let our investor community know that we had 3 opportunities. Number one, we are significantly underdeveloped across the group in China, in particular, but in Asia, and we believe we can double that business for us. And again, that's not stressing or putting any pressure on the brand. That's just catching up to where our competitors are. Second, we have an underdeveloped men's business inside the company and it's something that we're going to put a lot of time and energy and effort into. We had started it before COVID then had to turn it off. And lastly, we're going to start to renovate our stores. And the store profile will have accessories reduced slightly, but footwear reduced significantly. So now about 25% of the floor space will be done with footwear salons inside the stores. And we really learned that through our ownership of Jimmy Choo and how the consumer wanted more dwell time, they wanted to be a part of a shopping experience. And we think that's very important to how we position the Michael Kors experience with the consumer. You're going to see our first one will open in Aventura Mall here in April. And then we're going to renovate about 100 stores predominantly in North America first, to create this experience. And we believe that, that will actually give us another opportunity for clienteling with the consumer and create higher dwell times inside the stores, create higher repeats for the consumer inside the stores. So we're quite excited. We already have a very high penetration of footwear with Michael Kors today. But we think this could be another calling card for the company. So all in all, the 3 areas of bigger growth are going to be Asia, men's and footwear inside the company. And I want you to hear that clearly because we're not trying to put too much pressure on our accessories business. And that's where, if you go back 3 or 4 or 5 years ago and you say, well, what did you learn from what you did wrong, when you're just pushing and pushing and pushing to drive a single category, when you already own -- I think we peaked at almost 30% of market share in North America. The trees don't grow to the sky. We are a lifestyle brand. We have a lot of different categories and a lot of different ways we can communicate with the customer. So we feel great about the way the consumer is responding to us. And lastly, once again, the growth rates that we've had in our database. And I think you also saw last quarter on e-commerce, I believe we grew where many companies actually didn't grow last quarter, this is because the consumer is engaging with us and also our teams and the strength around their data analytics is all pointing to what we're doing is heading in the right direction. We need to keep ourselves focused and disciplined. I think we told you that we were not going to get into some pricing battle during the holiday season and we are very happy that we've made it through probably the most challenging period of time, which is a Black Friday, a time period, we're very pleased with how our company did during that period of time, and we did it with integrity. And so we feel good about how our strategies are playing out.

That's a great overview of kind of the revenue opportunity there. One thing I wanted to kind of click down on is it sounds like you're really repositioning the stores to increase sales density. I know you're opening a couple of new flagships for Michael Kors. Maybe walk us through how your -- what the plans are there to increase those density levels in those stores?

So we -- as I think most of you in this room know, we took the Michael Kors fleet, which is about 870 stores today. That was down from 900 change. We reduced that by almost 150 stores. We opened some in China but reduced most of those in North America and a few in Europe because many of those stores have become unprofitable. And in doing that, one of the things we found was we lost some of the kind of the real strength in brand imaging in some of the key markets in New York, in London, et cetera. And so in New York, we're opening a new flagship store about 11,000 square feet on Madison Avenue. We're opening a new one on Bond Street, where we had closed many of those stores as part of our store rationalization program. We actually think these major cities can produce very significant volume for us. And it's also a way for us to showcase all levels of the business and men's in particular, where, again, we don't have it in a lot of stores today and what better place than to start in the best cities in the world. So there's more flagships that are planned. These are not being done just for -- to be wonderful places to look at. Ultimately, we believe these will be profitable for us. We're going to go slowly around this process. And the second thing that these stores will do for us is, again, really serve as a training ground for our clienteling initiatives where, again, especially in the major cities, luxury consumers want to be treated in a very special way. They want product not only have the ability to shop but they want you to bring it to their homes, and they want you to bring it to maybe their home in a different state as well. And so we need to be set up to service the customer that way. And we think that these larger platform stores will give us the ability to do that. And again, show inside the buildings our Michael Kors Collection, our Michael Kors lines, men's and women's fully visualized for the consumer.

Great. So we are running down on time. Maybe is there anything we didn't talk about today or a key message you guys wanted to leave the audience with before we let you go?

No. I think we just want to, again, do you see a smile on our face? It's because we really believe, first and foremost, on the power of the 3 great brands we have. There are going to be bumps in the road next year. We all know that they're coming. But I think the way that we handled this company through COVID, we paid down debt, we came out more profitable. We are -- from an earnings per share standpoint, I think we came off -- 2 of our best quarters in the company's history. And again, we are going to continue to do the right things for the brands first. And ultimately, we think the consumer will respond to that.

That's great. Thank you so much for joining us today.

Thank you.