Good morning, everyone. Welcome to another session of the 29th Annual Global Retailing Conference. My name is Brooke Roach, and I cover the apparel, accessories and brand sector at Goldman, and I'm incredibly thrilled to kick off our next fireside chat session with Capri Holdings. Here today with me is John Idol, CEO, and Tom Edwards, CFO and COO. Welcome, Tom and John. Thank you, Brooke.
John, I'd love to kick it off with a question about how the category is doing. How is the accessories category performing, and what is the current health of the Capri customer?
I think many of you in this room were at our investor day a little over a month ago, and I think we made a pretty emphatic statement that Capri is now a luxury group. I think we're very proud of the acquisitions that we've made over the last few years with Versace and Jimmy Choo. We're also proud of what we're doing with Michael Kors in terms of elevating the brand and really taking it to a whole new and distinctive level. We believe that we're in the field of the luxury arena, and that field has continued to grow on a kind of a compounded CAGR rate of between 6% and 7%.
Yes, it dipped a bit during the pandemic, but it has been back very, very strong. The global luxury accessories and footwear business is quite strong. We believe that we are a part of that world. We're very fortunate in that we have three strong brands, first being Versace, led with Donatella, second being Jimmy Choo led by Sandra Choi, again, an original founder, and lastly, Michael Kors, who is in our showrooms right now working on his new collection, spring collection that we'll be presenting next week at New York Fashion Week.
We have three amazing leaders who create exciting product every single season, and that's why our company is doing so well, and we're in an arena which continues to grow.
That's great to hear. Can you give us an update on the current trends that Capri is seeing by geography? Any major differences in trend within your brands or by performance level?
It's quite interesting. The North American consumer that we're seeing shopping with our three luxury houses is very stable and strong, I would say. We've seen no change in behavior with that consumer to date. I know we're all waiting for some other change and inflection, but we have yet to see that in North America. We're quite pleased with what we see happening there. In Europe, I think we stated this on our recent earnings call, we're actually doing better than we had anticipated. The consumer has been quite strong. There's been a return to tourism. When I say tourism it's more the European consumer traveling inside of Europe.
There has been a strong emphasis from the North American consumer going to Europe, especially with the parity between the dollar and the euro. That's also helped some of the revenues in that region. Again, we see the European market right now at least holding up quite well. Southeast Asia has seen a strong return, and Japan is coming on very nicely as well. The consumer is rebounding in that market. The market that is very challenged is China. I think we stated again in our last earnings call that we had thought that the revenues for our group would be down some 40% in the first quarter, and we were down approximately that level.
We thought that it would continue to stay below last year, somewhere between 10% and 20% for the balance of the year. I think we continue to believe that to be the case. We don't know whether that will get worse or not with, there's some 30-35 soft city lockdowns that are happening, and it just. It's very difficult to plan the business there, given what's happening. Air travel is down quite substantially inside of China. For the moment, I would say that's the one region in the world that we remain concerned about, and we don't think that's going to rebound anytime in the near future.
We hope that somehow the zero-COVID policy will be maybe revisited after the first of the year. Then I think we would be a bit more optimistic about that region.
Thank you. Outside of some of the consumer macro trends, I think the second most question that we get asked is about inventory. Maybe in context with inventory, we can start with pricing. How do you view the pricing power of your brands today, and how are you thinking about pricing going forward?
It's quite interesting. Before the pandemic, we looked at, I would say 2/3 brands, and I'll come to Versace, who's the third one, during the pandemic. The first one was Michael Kors, where we made a decision prior to the pandemic that we were going to elevate the brand. We felt that it was really more a North America issue than anywhere else, that we had taken the brand and put it in a promotional positioning that was actually doing damage with the consumer. We walked away from a tremendous amount of revenues. I think we had given a forecast of a substantially reduced size business, based upon the actions that we were taking.
We began raising prices. Accessories prices have gone up about 25% over the past 2.5 years. We've seen absolutely no resistance from the consumer on that. In addition to that, our business has actually been growing very quickly, and we gave new projections for the business at our recent investor day, where we now believe Michael Kors will approach $5 billion over the next few years. Around not too long after that, we looked at the Jimmy Choo business. We saw that we were, quite frankly, substantially below the luxury competitors in the marketplace, and we made a decision to start raising those prices. We did that sort of at the end of last year and have been carrying on with that.
There will be more price increases for both Michael Kors and Jimmy Choo next year as well, as we continue to elevate and get the positioning right for both of those brands. In Versace, we had a very clear pricing position versus our other luxury competitors, but there's quite a swath in the luxury range of where you can price that brand. We've made a decision recently to take Versace up a further level from where it is today. We think we have the right product, we think we have the right brand heat, and we know that many of our competitors are at substantially higher prices than us. Our pricing is really about the positioning of our brands.
You know, thank goodness that we did that because there's many factors that have gone against us, in particular with transportation and certain costs of goods. We've been able to more or less hold our gross margins, and again, there will be more elevation of brand positioning, which in fact is price increases. The last thing I would just say, if you look at our last quarter, Versace's database grew 40%, Jimmy Choo's database grew 30%, and Michael Kors' database grew 17% globally. Those are off of, in the particular case of Michael Kors, off of very, very large databases. That means the customer is responding. The customer is definitely inflecting with us on product and on fashion.
That's what we think we have to stay focused on is delivering the most exciting product and storytelling for the consumer. I'll let Tom talk about the inventory.
Sure. If we look at our inventory, just as a little perspective, in the past year, we were missing sales in the range of mid-single digits, primarily for Michael Kors in North America and Europe as a result of delays in the supply chain. We implemented a strategy to make sure we had enough inventory on hand to meet consumer demand across our business. A couple of the big changes are to carry a higher level of core inventory. That's inventory we can use across seasons. It doesn't come with a liability, and really is something that we have implemented at this point.
The second was to pull forward the design calendar so that we're designing, manufacturing, and bringing in products earlier on the fashion side to ensure that we have it here for delivery to our store and to our wholesale partners. We have implemented that. We feel good about where we're at right now. As a matter of fact, we're well positioned for the fall season with inventory, whereas last year we were working with the lowest levels of inventory, really, on a relative basis in the company's history. As a result, as we noted in Q1 in our earnings, inventory on a year-over-year basis, up 66%. However, compared to pre-COVID, up 25%, and again in line with our expectations.
Importantly, we expect it to decline both on an absolute basis and a percent versus prior year sequentially in Q2, Q3, and Q4, ending the year below prior year. Very much in line with our strategy to have the inventory on hand to make sure we are meeting our consumers' demand.
One of the questions that I think dovetails into that, and you may frequently get this question as well, is: How do you maintain Michael Kors pricing and promotional discipline against a backdrop where promotions and markdowns appear to be rising across the industry?
First, we had control 75% of our distribution globally. That's our own retail stores and our e-commerce channels. We have the ability to price our product the way that we want to, and we believe that we don't need to take promotional actions to drive consumers into our stores. What we need to do is to excite them with great product, great storytelling, and you can see that in all of our new Jet Set marketing that's happening, led with Bella Hadid. You can see that in some of the new launches of accessories that we've had with the Empire Hardware that just launched over the last few weeks.
You can also see that in the fact that over the last 3 years, we've taken our signature products and made that over 50% of our revenues. To Tom's point, that's very core. That's product that doesn't get marked down inside of our stores. We feel that we're in a great place to continue along with that strategy. Our competitors may do other things. Remember, our competitors are not only the ones that you think of, but we compete very much with Michael Kors, with European luxury brands as well, and they don't behave in the same way. We think that's more the direction that we want to go with the brand.
For the moment, the consumer is responding and giving us the response that she wants to continue to engage with us that way. I've said it publicly before, we wouldn't sacrifice gross margin for revenues. At this point, we've worked too hard to reestablish what Michael Kors means. You're gonna see multiple flagships open around the world, which are gonna be quite impressive. You're gonna see us renovate over 100 stores over the next 2 years with our new shop concepts, store concepts. We are more excited about engaging with the consumer in a way that she will be excited about the brand than about a price proposition.
Engaging with the consumer is a key core brand strategy for all of your luxury brands. As we pivot to your long-term strategy, let's first start with Versace. Can you reflect on the drivers of the strong recent momentum at the brand? Looking ahead, what are the key drivers of growth for the accessories business in particular?
I have to take a moment again and restate, you know, we are a luxury group. I'm very proud of the fact that an American company bought two European luxury brands. I know many people in the industry and many of our people sitting in this audience didn't think we could do it, and I'm really proud of what our teams have done. We're growing two very successful international luxury brands along with Michael Kors, and I'm proud of our teams for what they've accomplished in doing that. At Versace, we had a very clear mission. We set a goal to do $2 billion. We did about $1.2 billion last year. That goal was to make luxury accessories 50% of our overall revenues.
Last year, we grew accessories by 90%. First quarter, we grew by 80%. I think that's a know-how that we have from our experience with Michael Kors that we were able to bring to the Versace company. That was one of our first cornerstones. Second, we wanted to be able to amplify Donatella's vision of really fashion, runway fashion, and what that meant to the consumer in terms of the excitement and the brand heat. I think we've been able to do that. I believe many of you might have seen the Fendace collaboration we did with Fendi in the second quarter of this year, which was hugely successful for the brand. Again, the awareness of this brand is so much bigger than the brand itself.
It gives us incredible levels of confidence that we will be able to not only achieve our goal of $2 billion, but we actually think there's gonna be something beyond that that you'll see. The last thing I just wanna mention is that we're in the process of renovating all of our stores globally. We're about 60% of the way there. The uplift that we're getting in the stores is tremendous. Tom will talk about that here in a moment. The luxury footwear piece of this was a complete surprise to us. I mean, we didn't plan it.
We knew it was on the horizon, but it's been much more robust than we had anticipated. Again, gives us great encouragement for achieving our goals.
Tom, maybe we can bring you in here. Talk about the path to the long-term operating margin target for Versace.
Sure. Just to reiterate, the long-term operating margin target is in the low 20% range. Significantly higher, maybe triple where it was prior to the acquisition. We've already seen tremendous progress, and we're really pleased with what Versace has done, really over the last couple of years. It's moved from a single-digit operating margin to last year in the high teens, and that performance was driven by two main things. You mentioned both actually. The accessories growth. Accessories brings higher margins along with footwear, which is another one of our pillars to grow for Versace. The other is really store densities and sales leverage. When the brand was acquired, retail profitability was not strong. As a result of this sales growth, we've now moved to profitability at our retail stores.
That has driven a big improvement. As we look going forward, really those two things are gonna continue to drive margin for the brand, along with their continued efforts to drive their full price sell-throughs and reduce their SKUs and manage their product mix, as they've done very well again over the past couple of years. We expect the accessories growth, the footwear growth, as well as the sales leverage both at the store level and at the corporate level, to drive future growth for Versace margin.
Very clear. Thank you. Let's pivot to Jimmy Choo. Talk about your initiatives to grow the brand to $1 billion.
Well, very excited about Jimmy Choo. You know, we have seen just nothing short of breathtaking growth at Jimmy Choo recently, and a great deal of that's been driven first by the product innovation from the design teams, again, led by Sandra Choi. Really there's an excitement level in the company about the product. We've got an incredible campaign that we just launched with Kendall Jenner, our Time to Dare campaign. Before that was Hailey Bieber. This brand has never had faces like that associated with it. You're not only seeing these ambassadors out with our, with talking really great about the brand, but so many different people are wearing it, and you're seeing it show up on just incredible people.
Beyoncé for the launch of her new album had Jimmy Choos on. You can just feel this heat happening around the brand. We started really with the marketing piece. That's given the dress shoe part of this business an incredible lift. The second piece has been our accessories, and we've been kind of at it for a little bit. All of a sudden, in the last kind of 6-8 months, we now have two platforms that are really starting to check in a significant way inside the company. Jimmy Choo accessories grew by over 60% last quarter.
We believe, in this case, that if Jimmy Choo can get to 40%, maybe even 50% of its revenues, again, in accessories, we're gonna have incredible profitability, which I know Tom will talk about. Also a real launching pad for us to potentially even go past $1 billion. I think $1 billion we're very comfortable with, and our ability to get there. Again, we'll open more stores as well. We have 230 stores approximately, and we think we can go to 300. We have that avenue for growth for us. We have the accessories opportunity. The last opportunity we have is in trainers or sneakers. Many of you know that is a very large business in luxury.
Jimmy Choo has not traditionally had a significant penetration in that category. We've just launched a new line called Diamond Maxi, and that is doing extremely well for us. Right now, kind of the company's firing on all cylinders, and we think we have the management team and the elements in place for us to achieve $1 billion.
That's great. John already previewed a little bit of what you were going to say. Potentially, can you talk about the path and rate of improvement at Jimmy Choo for margin?
Sure. I'd be happy to and provide a little background as well. Our Jimmy Choo operating margin goal of mid-teens% is something that we see happening over the next few years. For Jimmy Choo, we're really proud of the progress they've made in moving from a loss 2 years ago to earnings positive over the past year and continuing to grow that. The key driver in that year was really leverage. As our smallest brand, it is most sensitive to sales leverage, and we saw that in a very positive way as Jimmy Choo has come out of the COVID and recovering very, very strongly. The other piece was gross margin.
Gross margin improved at Jimmy Choo, and that's due to all the initiatives that Hannah and team have put in place around product assortment, smaller SKUs, pricing, in particular. As we look forward, Brooke, we really see that continuing to improve. We forecast an increase this year into the mid-single digits%. Then as leverage continues to grow, store densities improve, Jimmy Choo sales improve. Given its great size, we can now see that inflection over the next few years once it has hit the right tipping points in terms of overall sales, absolute numbers. That will be the driver as well as growth margin, of course, supported by the accessories growth, which is the key initiative that will help build up the growth margin side.
I'd like to add also that we're still holding those targets for both Versace and Jimmy Choo, even with the dollar parity and with the pound and the dollar rates which are unfavorable to us. They're quite large headwinds, but we're still being able to deliver many of the objectives that we had for these two brands. When you really look at this on a constant currency basis, the results are even better than what you're seeing on a reported basis.
Thank you. Let's switch to your largest brand, Michael Kors. You've got a target of $5 billion. How do you get there?
Well, first, our accessories business is growing. You know, as I said earlier, we made a decision to pull back on promotions. We made a decision to reduce line size. Most importantly, we made a decision to focus on our signature products. That's been the biggest inflection in the business from a profitability standpoint and from a growth standpoint because the consumer responded. The consumer said, "Yes, we want to wear the Michael Kors signature products." We set a goal about 2.5-3 years ago to get to 50% of our overall revenues, and that includes footwear and women's ready-to-wear, et cetera, in signature products, and we've reached that. Now, I think we talked about it in our Investor Day, we're pivoting to focus on hardware.
Again, we just launched the Empire Hardware, which is gonna be a very big inflection for the company. We think consumers are excited about that. It gives them some of the reason to buy another Michael Kors product from us. We think that that's the first and most important part of our growth. The second, in terms of dollar terms for revenue, will actually be Asia and really China will be the biggest part of that. We are about between 100% and 50% below our competitors in certain markets. So there's big opportunity for us to expand in that region. Although we are still seeing excellent growth in North America and Europe, which is quite interesting for us right now.
The next point or area of growth for us will be women's footwear. Again, I think we showed this during our Investor Day. As our renovations happen, we will upsize our footwear areas in our retail stores to represent approximately 25% of the space, and we'll have beautiful footwear salons in our stores. We've always had a very successful footwear business in the company, and we're gonna make that even a bigger part of our business, in particular, in street locations and shopping malls around the world. Lastly, men's. You know, our luxury competitors around the world typically run 25%-30% of their business in men's, some of them north, well north of that, and we're not even close to that.
That's a big opportunity for us to grow. Again, what we like about that is it's not gonna put any pressure on our existing accessories business. We don't need to do anything for that business to push it too hard because we have these three other growth areas, which is really Asia, footwear and men's to be able to build for the company. We're feeling confident, quite frankly, in our ability to reach those goals. Again, some of that will be a little bit tempered by the currency changes that we're seeing out there. You know, like many things over time, that will change as well.
Tom, pivoting to you. We already talked a little bit about promotionality with Michael Kors, but let's talk about Michael Kors margins in aggregate. What drives your confidence and conviction in keeping that margin elevated. Just maybe talk to the puts and takes that you see there.
Sure. Absolutely. First, last year we were incredibly pleased and proud that Michael Kors achieved its long-term margin well ahead of our anticipated timeline. It was 25%. What was driving that was the strategic initiatives, and John's mentioned a number of them, but it's building out a signature product. Now we're moving that into hardware as well. It's the pricing activities. It's managing to lower SKUs. All of the initiatives that we saw play out drove a gross margin. The fact that the brand was recovering in terms of sales also drove leverage, so we had a benefit there to achieve that level. Now, Brooke, when you talk about puts and takes, this year we do have a few more takes. The underlying puts are very strong.
The strategic initiatives still delivering Q1, and we expect that to continue through this year and, frankly, into the future. What we have as a bit of a headwind is supply chain costs, FX and lower revenue in China, which is a higher margin business. Again, we don't anticipate those to be long term or be here forever. Going forward, we look for the strategic initiatives to shine through. Then as we talked about with the other brands, our store densities and to improve from Michael Kors to help on the SG&A leverage side as well as those gross margin initiatives we talked about. Looking forward to delivering those numbers. As we look forward, our guidance this year was for 24% compared to that 25%.
We think that longer term there is the potential as we focus on price, and maintaining margins, to grow even beyond that.
I also might add that, you know, we went through a fleet optimization program for the last 3 years. We still have a little bit more to go in North America, but it's exciting. We're actually on the other side of that now. We're talking about store renovations. We're talking about opening stores and markets. We're actually talking about going back to markets where we closed stores and to reopen those. It feels really good at Michael Kors right now in terms of, you know, the way that the teams are looking at the opportunities that are in front of us. I don't want anyone in this room to think that, you know, we're looking through rose-colored glasses. We know that there's potentially things on the horizon that might be difficult.
We're staying focused on the mission at all three of our luxury houses, which is to elevate, excite, engage the customer and create a shopping experience that especially inside of brick-and-mortar that will be something that people will wanna continue to come back to. We think if we remain focused on all those things, we'll see our ability to have more consumers come to our brands, even potentially in light of some difficult economic times.
Tom, we've talked about each of the three sub-businesses, but let's zoom out and talk about consolidated Capri. What are the levers to get to 20% operating margin? What are factors in your control and what are in the external environment? And then maybe specifically, can you talk to the industry headwinds with FX that we're seeing right now?
Sure. I'd be happy to. To provide a little perspective on where we're at and the goal of 20%, our guidance this year is for 18%. So it's a couple hundred basis points. What is gonna drive it is what we talked about for each of the brands. In talking about it more specifically, gross margin driven by strategic initiatives including pricing and all the product activities across all three brands. We will look to and enjoy sales leverage and improve store densities, again, across all three brands. Some brands like Versace have huge upside compared to their luxury peers in that area. We feel very good about that.
As we look to what could be headwinds, as John mentioned, if something does occur, we believe we can manage our gross margin very closely. On the other side of costs, we've been very quick to react and decisive in the past, in the very recent past, when needed to. We'll very carefully look at our cost base and manage it going forward, understanding that there is some uncertainty out in the world. In terms of FX, it's been a very large headwind this year. It's been, compared to the prior year, a $350 million headwind, which brings with it some margin and earnings implications as well.
So as we look forward, we've managed to maintain and actually raise our guidance this year despite that at the bottom line to $6.85. Going forward, we will look to have the dollar at some point weaken or stabilize, and at that point it may become a tailwind.
Supply chain is one other aspect of the margin business overall that we've been talking about. How much of the air freight and supply chain cost pressure is recapturable into the second half of this year and into 2023?
Sure. Maybe a little perspective on where we're at in the supply chain. We anticipated and are still seeing delays. The situation on delays has improved somewhat, but they are still there, and that's why we feel very comfortable having moved our inventory core forward and other buys forward so that we have enough on hand. Delays have not gone away, and there's also potential discontinuities with potential lockdowns which we're seeing occur in Asia and China, more specifically. Costs remain elevated and we expect them to remain elevated through this year and into the future. I don't see a scenario where they get back to pre-COVID levels, although at some point they may become a slight benefit.
As we looked at this year, we've noted that in the first half of the year, supply chain costs definitely a headwind on the margin side. In the back half, because we don't plan on airing this year, last year in holiday we did air a substantial amount, that's not currently in, so there's a modest benefit to this year as we look forward to the back half. We're gonna be carefully monitoring this and looking to you know, manage costs and reduce them over time. But we'll watch the external environment very closely here.
In terms of capital allocation.
Yes.
Can you discuss your priorities, and how are you balancing share repurchases and other shareholder returns with M&A?
Sure. You know, I'll kick it off with saying our free cash flow and our balance sheet position are both extremely strong. We are generating very solid free cash flows we expect at a robust level even compared to a pre-COVID level. Our balance sheet and leverage position is well within the parameters that we're very comfortable with. We have the funds, and we are first investing in the business. That's always our first priority. This year we've noted capital expenditures in the area of $300 million. Over half of that will be spent on new stores and renovations.
Renovating the fleet, as we mentioned, at Versace, and looking at other new store concepts in other areas, and completing some activities at Jimmy Choo, as well as opening flagships in certain areas of the world for our various three brands in order to build up brand equity. That's very important. The other big area is IT, but more importantly, e-commerce capabilities. We're investing heavily in replatforming all three of our brands onto state-of-the-art, both front-end e-commerce as well as back-end data analytics capabilities. We already have very robust capabilities. Leading the pack would be Michael Kors, but Jimmy Choo and Versace have done an amazing job over the past couple of years, moving and improving and building their capabilities.
We're gonna raise everybody moving forward, so we can look at the databases that are growing so rapidly and be able to engage with those customers and make sure we're meeting their needs or letting them know of new needs that they may not have thought of yet to meet. The other area is Capri's infrastructure. We've noted we're investing in financial systems and enterprise-wide systems, as well as other things to bring together our three brands and transform the company and create that platform for the future. Investments are key. They're always first priority. Second priority is returning cash to shareholders. You know, I'll reiterate that this is a bit of a change in priority.
Over the COVID recovery timeframe, we were paying down debt very rapidly. We believe that our best investment now is in our own shares. We believe they're a compelling value at the current levels, and we are doing that. In the past quarter, we've repurchased $300 million. We had an authorization of $700 million, and we've now built in share repurchase into our guidance this year, noting that our share count would be on average for the year $140 million, down $12 million from prior year. We've been, I think, very focused on that, and we think it's an important way to use our cash. Given the cash flow and balance sheet, we're comfortable with that.
The next part is we will return to pay down debt. We've always been very, I think, prudent in how we manage our balance sheet. Even though we're very comfortable with the leverage we're at now or even a little higher, we will manage that and balance it going forward. Finally, I'd mention that in the future, although not a focus now, we're focused on our three brands and growing them, and there's a fantastic opportunity across all three to deliver value. It will be open to a luxury acquisition in the future for a heritage luxury brand.
In the final couple minutes, I'd love to hear what excites you the most as you look ahead, and any other closing comments that you'd like to make.
I think we're in a business where we get up every day, and we have an amazing opportunity to excite consumers. That's, you know, what the fashion business is. It starts with our runway shows, and Michael will be, as I said, presenting here in New York next week on Wednesday. Then we move on to Milan, where Donatella and the fashion shows for Versace are usually one of the largest viewed in the world, and really sets the tone for what we're gonna do for the season. Then we have these beautiful presentations in Milan with Jimmy Choo. We're in a business where we can excite people. I think people are looking for excitement today. They have been locked down for many years. There's no question people are out.
They're at social occasions. They're in restaurants. They're on holiday. There's actually even some people going back to work, coming to offices. The Michael Kors offices here in New York are quite busy. Versace was always busy during the pandemic, and now we see people returning in the U.K. We think life, excluding China for the moment, is getting back to normal. When you see that, and I'm not saying that there aren't gonna be headwinds about certain economic clouds that might be out there, it gives us an ability where we can excite and engage with consumers.
If we deliver really good products and great storytelling and really hopefully do that with expertise around data analytics and really clienteling inside the stores, because stores still represent, you know, 75% of our business, we have an opportunity to grow all three of these luxury houses. Again, we put out a new target of $8 billion for the group. I would say we feel very confident in our ability to reach those levels. Will it be 2 years, 3 years, 4? We can't sit here and define that yet because of all the things that are going on. Certainly, the currency headwinds put a little dent in that trajectory. It's not for lack of the heat of the brands.
Sitting here today, we've got three brands that are performing quite well, and it's a nice position to be in. That would be my closing statement.
Great. Thank you so much, John. Thank you so much, Tom. Thank you for all of you in the audience for participating today.
Thank you for hosting us.