Capri Holdings Limited (CPRI) Earnings Call Transcript & Summary

Good morning, and welcome to another session of the Goldman Sachs Global Retail and Consumer Conference. My name is Bikash and I cover the apparel brands and software sector at GS and I'm thrilled to introduce our next session with Capri Holdings Limited. Here with me today is John Idol, Chairman, CEO and Director; and Tyler Radian, COO and CFO. Welcome John and Tyler.

Thank you, Brook. Nice to be here. .

John, let's kick it off by framing the Capri story. What are the key strengths of the company and what makes you confident in the path ahead?

So Capri, as you know, is the home to I believe, incredible luxury brands. First, Michael Kors; and second, Jimmy Choo. And these brands have very strong resonance globally with consumers around the world. And we have the ability to speak to consumers and to create trends and create fashion excitement with these consumers. And so that's the starting place. And these brands have the ability to grow. We have been on a journey, particularly in the last 18 months in both Michael Kors and Jimmy Choo to reset some of the product strategies, some of the marketing initiatives and in the case of Micrel Kors, in particular, some of the store presentations and formats. And the early signs, and we call them the green shoots are starting to really take hold and those green shoots are turning into more tangible results for the company. So I think we're in a very good place and in particular, to accelerate our growth in the back half of this year. which will serve as a great platform for us to grow in the future.

Very clear. John, what's your view of the luxury accessories market today? How does that outlook inform your view on the long-term growth opportunity for each of your brands?

So the luxury accessories market globally has seen some small declines over the last couple of years, mainly driven by some of the results out of Asia, although that market is starting to recover. And Europe has softened as we've talked about on our earnings calls. But North America has been incredibly strong and resilient. So we see the overall market as being roughly flat and we do believe the market will return to growth next year. So that really positions our 2 luxury brands well. And secondly, what we're seeing is in the luxury market brands that have more well, first and foremost, have very strong fashion and/or trend products are doing extremely well. And secondly, brands that have value associated with them. So whether that's a price value relationship or whether that's the quality that you're delivering at a price. And I think I'll point out examples of that as we talk with Michael Kors and Jimmy Choo, consumers are responding to that. Consumers are definitely more choiceful today. Choiceful just doesn't mean they want something that's inexpensive or cheap, but it means they want value for how they're spending their money.

Can you give us an update on the current trends that you see by geography?

Certainly. As I think most of you know, North America is a very strong market. The consumer is very healthy in this market. We haven't benefited from that in Michael Kors because of the repositioning work we've been doing. But we can see the underlying health of that consumer is very strong. And on the flip side, we've had tremendous benefit from that in Jimmy Choo from the strength of the luxury consumer and that resonating with our business. In Europe, unfortunately, we've seen the business soften there. And we're not the only company. I think most companies that you hear from are talking about the softness in the EMEA market, and that's #1 led by what is happening in the Middle East and that is impeding business on the ground there in that market. And it's also impeding travel both into that market and into Europe. So we definitely are seeing a softening. And I think I talked about that some months ago. We don't see that really kind of strengthening at any point in the near future. So I think we would look at Europe or EMEA as a market that will continue to remain challenged. And then lastly, in Asia and China, in particular, we're seeing a very steady return to growth in that market and the consumer is out. They're shopping and in particular, again, brands that have a bit more value associated with them, and that's at multiple levels in the luxury spectrum are seeing some quite interesting and strong results in the marketplace. So we're optimistic about what that market holds for us for growth over the next few years.

Great. Now that we've set the stage, let's dig into Michael Kors and the brand transformation that you've been executing there. Where is the brand in its repositioning journey today? And what aspects of the strategy are giving you the greatest confidence that the business can return to sustainable growth?

Yes. So I think we have said that we went from cautiously optimistic, and I think we stated at another conference that we spoke at that we've become optimistic about where we are in the brand transformation. So first, Michael Kors is a brand that's 45 years old. It's a luxury brand. It's got a tremendous history. And you can look across the landscape of luxury brands, and they go through moments and it's moments where brands, either their communication strategy and our marketing strategies are no longer relevant, their product gets off trend. And you lose the kind of the attention or the zigs of the consumer. And I would say very much Michael Kors was in that position some 18-plus months ago. We have been on this journey to really reset the Michael Kors brand. We started that with the brand, our Halo, which is jets and we changed the strategy around that, and we are positioning that we're -- our vision of the consumer is that she or he are traveling the world in style. You don't see them on the airplane and on the -- in the cars and and on the boats anymore, you see them in hotels or they're glamping or they're having a fun experience. And people love to travel. And this is an experienced economy, and we think that our marketing strategies really dovetail perfectly into that it is, and in particular of a younger consumer. So we're pleased with what's happening there with the marketing and the storytelling that's based around that. We need to do more work on the platforms that we're communicating on, and maybe we'll talk about that later. The second thing is, I think we're borderline excited about products. And when you start with some of the introductions that we've had in our full-price business have really resonated with the customer. We can see that. We had issues with our brand being on trend. We have gotten past most of those today. And we're seeing really solid performance out of many categories inside of our full-price business. And in terms of our outlet businesses, which is really where we've had our greatest weakness over the past few years, where we were probably the most off-trend. As we were talking earlier, you've seen some of the new product that's arriving. And we're getting very strong results, and those are selling results from that. And so what's been interesting is, we throughout the quarter, have seen an acceleration of our business. As we had thought, we've had a delay in inventories that we talked about during our last earnings call. Inventories are starting to build. They're not back still to where we need them to be, want them to be or should be. but it's definitely happening. And as that's happening, we're watching the business start to accelerate. And as the new product is arriving, we're seeing the business getting better and healthier. And then lastly is we're really pleased with how the stores and the new -- the renovation program is going and how the consumer is responding to the brand. So between the marketing, between the product and between the experience inside the stores, we can absolutely see the tangible results are there and happening for the business. We're still -- I'm going to call it in early innings of our complete brand repositioning, and I don't want to say that we have completely accomplished everything. But we are doing -- laying the foundation for what is going to be future growth. And the last thing I'd like to point out as we've gone through this, we've made a very strategic decision to reduce promotional activity. We're not quite finished in full price. We -- I think I talked about it in our last call, this will be probably the most painful quarter for us in our full-price business. We ended our inventories down in Michael Kors, almost 27% during last quarter. And we are -- we have 50% less clearance and markdown inventory this year than we did last year. And so that's a big step for us to be able to say to the consumer we're full price. And you're not going to see as much of that other type of product for us. We're doing almost 50% of our full-price business today on our icons and accessories, which do not go on sale. And I'm so proud of where we are today and what we've accomplished. As I said, we've got a little more cleanup work to do through the back half of the year. But we'll be past the majority of it here shortly. And that's another really good sign for the business because AURs are up, full price sell-throughs are up, that means the customer is engaging with us in a different way than they were engaging with us before. So a lot of heavy lifting, a lot of hard work and we're starting to see the beginnings of the dividends to pay off.

It's great to hear Tyler, let's bring you into the conversation. You've continued to point to a return to growth in the back half of the year for the Michael Kors brand what evidence are you seeing today to support that expected inflection?

Yes, sure. And I -- and thank you for the question. I think this is a -- we're at a very interesting point, and we continue to be very optimistic about the second half of the year and this really is the moment of inflection and we expect to return to growth in the second half. And that really is supported by the fact that we're getting new product in our inventory levels are normalizing. And the very early read that we have on that new product is that it is resonating with customers. And ultimately, that we expect that, that new product will be very successful. In addition, we are getting additional new product introductions over the course of the fall season and into holiday, which we believe will continue to support the growth trajectory that we believe that we're on. Also, we are investing incrementally in marketing. So we're increasing our overall marketing spend. We're approaching 10% of revenue in the back half of the year, which really can help us fuel the overall growth trajectory. So we continue to be very optimistic. And like I said, the early indications are that we should be returning to growth in the back.

John, you mentioned a couple of times about the broader assortment of product and outlet in the back half. What gives you confidence that this product pipeline can help accelerate trends as the year progresses?

Sure. So I think maybe what I'll do is I'll start about with full price first, which is we've identified these 3 icons that have been in our assortments and that's our Lela Hamilton and Alita handbags. And Michael Kors has been famous and it's obviously a highly recognized brand name, but you need to have product that famous too. And I think we didn't have that as much over the past few years but we're starting to see that now. And in particular, our Hamilton collection, which is an original legacy, 1 of the founding bags in our company is doing extremely well, and we've just introduced a Hamilton slouch and we are selling thousands of units. And we don't even have it all in the stores. It's whether it's online or it's gotten to Asia first. For the first time in probably 6 or 7 years, we now have a bag that we cannot keep up with with demand. And this is very early days. We saw that with our elite collection when we introduced that in full price as well. So these icons are starting to resonate not only with our broader consumer, but with the younger customers as well, we're attracting a lot more younger Gen Z and younger millennial into the brand. And I think there's a recognition that Michael Kors is maybe not what I thought it was from 3 and 4 and 5 and 6 and 7 years ago. So we're really pleased with that. That is starting to roll into the outlet stores right now. We've got a new bag called Sami, which you can see online. Again, super high sell-throughs on the bag, resonating with the customer. It's also on trend. We have a couple of other bags that are arriving as well. We refer to these as icons. So we have icons in our full-price icons in our outlet. I'd also like to point out that in our outlet business, we are selling full price bags. So we're not up to full fleet exposure yet, but we're getting there. And it's representing between 5% and 7% of the stores business. So again, it talks -- tells you about how the consumer is responding to the new product introductions of the company, in particular, that they're on trend for what the consumer wants. The other thing is in both full price and outlet, I've talked about is our footwear and the fact that we really did suffer quite substantial sales reduction in that category. And again, as the new product is flowing into the stores, which is much more trend right product, we're starting to see a very fast sequential improvement, in particular in our full price business that product will arrive a little bit later on for the outlet stores. And so I think between product, number one. Number two, we're going to be lapping some of the promotional activity that we've walked away from. Third-party sales, I think we talked about and some of the promotional cadence that we've walked away from last year was over $150 million in business that we purposely said, okay, we're going to get rid of that and try and make this business healthier, higher margins, higher AURs and so we think the majority of that -- 75% of that will be in place for the back half of the year for the outlet stores, which really tees us up. We have a high level of confidence in our ability to return the Michael Kors brand too growth in the back half of the year.

Very clear. Tyler had mentioned marketing earlier in the conversation. John, I'd like to ask for your thoughts on this. Can you talk a little bit about your marketing plans for MISO Kors in the back half of this year?

Certainly. Well, first thing I'd like to do is I'd like to say that we've made an incredible hire with Tyler. He's been an outstanding partner for us. And 1 of the first things he said to me when he joined the company is how do we accelerate this business? What do we need to do to grow this business faster. And Tyler new right of way that we needed to have more marketing to really compete but also to tell the story of Michael Kors and to a different generation. And so the first thing that he and the finance teams have been able to figure out how to do is how do we spend more money, still preserve margin. . And we're doing that through some of the activities around expense reduction, which you've seen us do over the last 3 years. We've reduced SG&A by, I think, close to $400 million, which is quite extraordinary given us going through our transition. And we're putting a significant amount of money back into marketing. And the storytelling around jet set traveling the world in style is very strong, and we can see that resonating to the customer, but we've got to get it on to more platforms, whether that's YouTube video or we're very excited about the fact that we just launched on our TikTok shop a few weeks ago. And we are 4x over what we had anticipated on the launch of Tech TOC. It's really extraordinary. So that shows you that there's a younger customer out there that wants Michael Kors maybe didn't know what Michael Kors was and has really engaging with it. And the other thing that's exciting is that part of our marketing initiatives are with influencers. They're not all for free, by the way. I want to be clear about that. And I think I've mentioned before that 5 years ago, we might have had 50 influencers in the world today that are associated with us. Today, we're at about 450. And those are the ones that we're assisting or have on different programs. And then we have hundreds and hundreds more that we're now starting to see build and build and build that want to be a part of the brand. And that's another good indication of you can see this momentum starting to happen. And those influencers, especially the ones that are paid are you can now see them on TikTok, and you can see what's happening with the brand. And so those marketing initiatives, we think, are another reason that we will fuel the revenues in the back half of the year.

Very clear. Let's talk about another channel where you're starting to see some momentum, which is wholesale. Last quarter, trends turned positive in POS. What's driving that improvement? And what's your long-term expectation for this channel for the Michael Kors brand?

So I would say the first thing is the product. And as we have talked about over this and I've said about 18 months journey we've been on since we reset the brand. The department store community was always behind what we were doing in our own full-price stores because that's a full price channel. And what's happened is really excited about this. I was talking to 1 of our key partners at our Fashion Show on Friday. I hope you all saw Michael's fashion show from the Moa Garden. But we -- that same roughly 50% of our business that's at full price on our icons is happening in the department stores as well. And that's a channel that typically leaned into certain other promotional activity. They're excited about the journey that we're on, and they want to have higher AURs to their customers. And so they're seeing the same reaction both to product and a product that has value associated with it. And I think you know that we've looked at our strategic pricing architecture about 18 months ago. And we actually lowered our prices in full price so that we would increase our full price sell-throughs and we're absolutely seeing that. And in particular, we're seeing that in bags that are under $200 leaning into what Gen Z and some of the younger consumers want. So the department store community and specialty store community around the world is starting to see those results come through. The second thing is I mentioned it before. We have a number of partners in Europe, in particular, who had left the brand and who are now want the brand back and we're going back into those stores as we speak. And then the last thing that's happening is we are seeing our shopping shops being rebuilt. So we literally have hundreds of shop-in-shops that are either in construction right now or under construction. And our partners wouldn't want to be building chops with Michael Kors if they didn't see the product resonate. The last point I'd like to make is, and I talked about value before, you know the brands. There's a number of brands that are sitting in this opening price point of luxury. And that category is doing extremely well. And so many department stores around the world are rebuilding those categories of product, and we're the beneficiary of that. But they wouldn't do that with you if your product wasn't selling.

Well, it's round out the discussion of -- by channel, by talking a little bit about the stores and the renovations that you've made. What are you seeing so far? And what are your plans ahead?

So super excited about what's happened with our stores. And if any of you have the time over the next day or 2, please go to our Rockefeller Center store, it's our flagship here in the United States. We renovated that store almost 1 year ago, it will be October. And the traffic in that store is up double digit, and sales are up even higher than very, very high double digits inside the store. Same location and renovated new product. And what's so interesting is when customers come in now, they almost say, "Is this Michael Kors. They look at this and go, this is not the Michael Kors that I knew. Where's the white Chinese store? Where is the people in the very glamorous look. No, what they're seeing is a store that has a much more residential feel to it. They're seeing a product that's much more on trend and they're seeing a vision of Michael Kors that's a little bit less polished and a little bit more relevant to where fashion is today. So all of those key components coming together are really creating strong results in these renovated stores. And we have the same example in Kenwood Mall in Ohio, where super increase in sales and high double-digit growth in traffic. We're in the same location. And it just shows you that the customer has a strong resonance to the brand when we get it all together right. So we're going to renovate half of our store fleet around the world. It will take us 2 to 3 years to do that. We're trying to go as fast as we possibly can. As that starts to come in particular next year, where we'll have 100 stores that will have been completed by then, all of a sudden, that's going to start to build on our sales growth as well as well as hundreds of shop-in-shops in wholesale. So that is really going to be 1 of the foundations for our future growth inside the company. And then lastly, I'm very proud of the fact that I don't know if we have 7 or 8 or 9 or 10 of our jet set lounges open. But please go up to the store, you'll get free tea and free a little bite of something sweet. And those lounges inside the store are creating additional dwell time. We happen to position them typically in our shoe department. So hopefully, you'll sit and buy a pari shoes while you're getting some wonderful tea or coffee or whatnot from us. And so that's another experience for the consumer, whether that be an Instagram moment or whether that be a moment that you're sharing with friends and shopping. So we're really trying to create experience inside the store as well. And so that has got us excited.