Goldman Sachs 27th Annual Global Retailing Conference

Sep 10, 2020

For this next session of the Goldman Sachs Global Retailing Conference. My name is Alexandra Walvis. I cover the discretionary brands and the apparel retailers here at Goldman Sachs. I'm very excited to be announcing this next session where we are hosting Capri Holdings. Capri Holdings is, of course, the company whose key brands comprise Michael Kors, Versace and Jimmy Choo. Joining me today from the company, I have John Idol, Chairman and Chief Executive Officer and Tom Edwards, Chief Operating Officer and Chief Financial Officer. Thank you both for joining us. We're going to start off with some introductory remarks from John, for which there is a slide deck, which you will have on the portal. And after that, we'll go into Q and A. So with that introduction, I will pass over to John. Thank you, Alexandra, for hosting us today. And we're joining you today from our New York offices, again, which have been open since the middle of June, and we're excited to be back and working hard and seeing lots of things progress for us. If you turn to your portal, the first slide you'll see is the new 3 ad campaigns for our fall season for Versace featuring the new Broco V that we'll be discussing in today's presentation, which is a cornerstone to the company's development. 2nd, you'll see our new Jimmy Choo ad campaign. And then 3rd, you'll see the Michael Kors new campaign featuring our MK signature. And on the Jimmy Choo, you'll see our new JC logo as well. Again, very important elements to our growth going forward. If you turn to the next slide, Slide number 2, it just states what our strengths are as a company. First, we have 3 very powerful iconic founder led brands. I want to remind you that Versace has been in business for 42 years. The Jimmy Choo brand will be approaching its very exciting 25th anniversary coming up and Michael Kors is approaching its 40th anniversary. So we believe that this is a very important point for the depth and resilience of our brands, especially during these unique and challenging times. Next is the fact that we are growing our consumer followings across all of our brands. Last quarter, we saw roughly 20% growth in all the databases from our 3 companies. Well, that's really quite an extraordinary accomplishment, especially in a period of time when we gained a significant amount of that database increase from stores. Our stores were of course closed for much of the period of time of our Q1. The next issue is that we have a very strong leading network of retail locations around the world. Our stores are located on the best streets, the best shopping malls. And of course, we have a very powerful e commerce business that was already in place before COVID and continuing to expand as a result of certain consumer changes in behavior. And lastly, we have a very strong balance sheet that includes a very strong cash flow. Even this year, where the first 2 quarters will be negative for us in cash flow, the second 2 quarters will be positive. And we will end the year with positive cash flow for the company. And again, a very strong balance sheet. If you turn to the next slide, Slide number 3, we thought we'd share the information with you. We've seen sequential improvement in our business, including in August. We are ahead of our own internal projections at this point. We're only down approximately 15% comp in our own retail business that you can see from this slide. So again, we're making very, very good progress. And I'm also pleased to report that Versace is actually running comp store positive at this point and our other 2 brands, TB2 and Michael Kors are running in the mid teens negative. But that's really quite extraordinary given the difficulties that we're seeing around the world. So that talks to the strength of our brand and how we're engaging with our customers around the world. The next slide, Slide number 4, I think you'll also find very interesting, this is a new vision of what our total revenue growth will be this year, it's down approximately 35%, as we stated in our previous earnings calls. But we believe this company will grow to a $7, 000, 000, 000 business. And again, we'll talk later, but Versace at $2, 000, 000, 000 remains the same vision, dollars 1, 000, 000, 000 for Jimmy Choo. And Michael Kors, we've resized our vision, which is $4, 000, 000, 000 and that's a result of the reduction in wholesale distribution that we'll again talk about later and also a store closure that we announced previously as well. Still very exciting, we see the growth of this company basically being able to double in the next few years. Next is our retail store base. Again, this just clarifies information that we've given you in previous calls. Versace had grown to 300 stores, Jimmy Choo to 300 stores and Michael Kors will reduce to approximately 700 stores. And that's previously announced we're going to close about 150 stores, primarily North America, but we will be opening stores in China and the Asia region as well. Just very briefly, 5 key pillars of growth for Versace. We're going to build on Donatella Tell's strong 1 way luxury momentum. We are world renowned. And again, you watch our Instagram and our social media feeds just go through the roof every time we build on that storytelling and it's been quite exciting. We're going to continue to help fuel the iconic marketing of this company and brand. That's what having a group gives us the ability to do. We're going to expand our accessories and footwear business to be 60% of the company's overall revenues. Very pleased with the progress we're making here and how that's happening. We're going to really reinforce our e commerce business across this iconic company. And then lastly, we're going to increase stores to 300 over the next few years. Jimmy Choo, we're going to develop 50% of the business will be in accessories over the next few years. And again, we're on a very good trajectory to making that happen. We're going to increase our luxury sneaker penetration as casual has become much more significant part of the business. We're going to accelerate our already fairly robust e commerce and omni channel growth in the company. And then lastly, we're going to increase our footprint of stores to 300. In Michael Kors, we're going to increase the customer engagement that we have today. We've stated previously, we're going to get our database to over 50, 000, 000 people. We're well on the way to doing that over the next 12 months, well over 40, 000, 000 today and we're running a close to 20% growth rate and increase And that again talks to the strength of the business, strength of the brand, engaging with the customer, really pleased with what's happening there. We're going to increase our penetration of our signature offering. It's running between 35% 40% right now, which is really spectacular. Everything that we said we were going to do, it's starting to happen for us. And then we're going to continue to develop our e commerce, already a major strength of the company and the brand. We intend on doubling our revenues in Asia. And then lastly, expanding our very underpenetrated men's business. So in conclusion, I think we have a great opportunity to truly build what is an extraordinary company in Capri Holdings. Alex, I'll turn it over to you. John, thank you so much for sharing those detailed opening remarks. You gave some comments there on the business over the last couple of months. I wonder if you could share some details with us on current trends of the business. Certainly, Alex. The business is improving. I mean, what we're seeing is every month, customers are coming out and they're shopping. They're shopping online. We're seeing customers return to stores. It's not at the level that we would, of course, all like it to be traffic is still quite challenged Outside of China, I would say China is traffic patterns there are very healthy. E commerce, by the way, in China has grown dramatically much faster than we ever thought it would grow at this period of time in the cycle. The place that has the most traffic challenged is clearly our travel retail business where most of the airports and the traveling consumer have not returned to what it was prior to the pandemic. But that all being said, China is running ahead for almost all of our brands at this point, which is excellent. And that's on a like for like basis. The balance of the Asia region is still quite challenged and that's really due to traffic patterns in particular from the traveling tourists. North America is the best next best business for Business is healing here quite quickly and again much faster than we had anticipated. And we like what we're seeing happen. And then the most challenged region for us around the world is Europe. And again, these are tourist capitals where we have not seen the business recover as it's still significantly impacted. So we anticipate that that will be the region that will take the longest for us to see a return to more moderated declines. 1 of the questions that we hear most commonly among investors concerns the accessories and specifically the handbag category. Can you share your thoughts, John? Do you think some of the behavioral shifts that we have seen through COVID, for example, working from home could weigh on demand for handbags longer term? Alex, I shared the same concerns that your investors had when the COVID started because we were very concerned about why would consumers come and buy accessories, quite frankly. Now as you know, prior to COVID, we had been seeing a shift to smaller bags that's really been almost a 3 year change and that was driven by mobile devices and a need to have a lot less things in your handbag, quite frankly. And that really hurt the Michael Kors business in particular because we ended up the last 3 years selling more units every year, but less dollar value. And part of that was driven by smaller bags. What quite frankly interesting has happened during COVID is our AURs have gone up because we're selling larger bags. So that's our tote business is quite strong right now. Our larger handbag business is quite strong right now. Backpacks are very strong right now. Consumers are they're moving about, as you know. While we went through lockdown back in March April early parts of May, people are moving around in society. They may not all be going back to the offices, but they're definitely moving around. And with the need to take more things with you, whether that's hand sanitizer, whether that's rubber gloves, whether that's different things, we see behavior changing about what is in your bag. And in fact, the totes are quite interesting because people have more things at home that they're trying to keep their hands around. And so we've actually been extraordinarily pleased that accessories business is the best performing business across the group inside of basically all the companies. The 2nd best performing business is quite frankly, our sneaker or trainer business, which has been excellent. Again, right across the group, super, super, super performance. The area that's been the most challenged in the group has really been women's wear and apparel. That I just might add 1 little anecdote and I'm sure many of you've seen it. But as there's been outdoor dining resumed pretty much across the world, indoor dining in certain parts of the world, we are seeing people starting to get a little more dressed up again. I think people are getting a little tired of only getting up in the morning and putting on certain active wear and they want to see themselves in a little different light, and that's both men and women. And so we are seeing, even in the last few weeks, we saw our pump business across the group start to improve. So again, we think there's a casualization that's gone on across the globe. We don't think that's necessarily going to dramatically change. But where we might have lost the more dressed up parts of the business, that is seem to be coming back. I think also people want to even if they're on a Zoom call, they want to look a little more dressed up and maybe just a little more professional. And I think that's starting to show up in some of our sales. So we have not to really answer your question, we have not seen a dramatic impact in the consumer behavior on accessories. And the last thing I'll just tell you is our watch business got very strong over the past 5, 6 months. And it's really been part of the Zoom phenomenon where people, we call it tabletop. So it's above the tabletop. How do you want to look? You want to look dressed up nice in a top, you want to have a nice watch on, you want to have the right look for your friends and jewelry also has been strong. So we're seeing behaviors definitely change and some of those are actually quite positive for us. You mentioned in the key strengths slide that 1 of the strengths of the business is the elevated digital presence. I wanted to go to that topic now. And specifically, how do you think about the role of e commerce at Versace and Jimmy Choo versus Michael Kors? Well, Alex, I think, again, we saw a significant trend happening globally before COVID, and that was consumers really wanting to be able to be serviced from an omnichannel standpoint. For the past few years, we estimate that somewhere between 70% 80% of purchases happen as a pre purchase where people are looking online, shopping online, making some of their selections beforehand. And we see them coming into stores saying, I've seen this, this is what I want. I want to try it on. I want to touch it and feel it. And so we think that that whole phenomena obviously started happening long before COVID or the pandemic. This has accelerated the situation. We've put 100 of 1, 000, 000 of dollars behind our omnichannel account capabilities and that's everything from our platforms to our service capabilities, to our warehouse and distribution facilities. And so we've always had a goal as a company. This was again before the pandemic of being capable of having $1, 000, 000, 000 online business. And we're well on the way to probably seeing that happen a bit faster than we had anticipated. We oversized some of our warehouses early on, knowing that this would be coming. So we have the distribution capabilities in place, being able to help the customer service, we can flex up in that. And we're even looking at re platforming some of our e commerce, in particular at Jimmy Choo and Versace to give us capabilities that are more adapt to what the needs are going forward. So we're making those investments. The other place I'd say we're making some very big investments with Jimmy Choo and Versace as well is really in our CRM capability because the databases at Jimmy Choo and Versace are not where they need to be, but we're working super hard to build those quickly. We think we know obviously doing it from Michael Kors, we think we understand how to do that and how to build those databases quickly. And we certainly have the social media following to both of these brands to be able to convert many of those customers to active and engaged customer from us. So we feel good about the investments we've made, the investments we're making, and we think we can be able to accelerate the Jimmy Choo and Versace growth on e commerce to a much greater percentage than it is today. And I think also the luxury And so we, as a group, we see that e commerce should be, I would say, almost a minimum of 30% of our revenues over the next few years. And that'll happen quite quickly. John, you made a comment earlier, which I want to make sure that we address about tourism. Can you talk a little bit about the impact of tourists? And do you think that they will return? Or will you adjust your business to focus on more domestic consumers? Well, Alex, I would say to you that I want to state our biggest concern is the health and safety of our employees. It's something that we get up every day and think about is and I want to to applaud the 17, 000 plus employees across the Capri Group and in particular, those people who are in our retail operations and in our distribution centers, they're on the front lines. They're getting up every day of the week. They are engaging with customers or engaging with other associates in the company. And they're really doing an incredible job and they've kept our business open. And so I want to publicly thank them once again for all that they've done and say they're really quite extraordinary. The issue that concerns me, 1st is our safety of our employees. 2nd is the tourist business, because even with the vaccine coming hopefully soon, even with people getting inoculated, we believe that there's again probably a minimum 18 month to 24 month recovery for people to feel comfortable getting on airplanes, doing extensive traveling around the world. And that will impact our business, especially in major cities. Again, I've commented that in Europe in particular and in some of the balance outside of China, Japan, Korea, Malaysia, Singapore, these are cities and countries that rely heavily on the traveling tourists. And we think it's going to be a considerable amount of time until that heals. So in the meantime, we'll obviously focus on local markets. We're all seeing increases in China. We know that's because many of these traveling tourists are shopping domestically. As I said to you, we're seeing very good business in North America. And while we're not getting tourists into North America, a lot of people who are traveling outside of North America aren't doing that. So they're spending their money here. So we're definitely focused more on the local consumer in the individual markets and we've had relationships with them. I think we're trying to deepen those relationships. And I've talked on previous presentations that we really think that engaging with the customer, whether it through Zoom calls like this or whether sending clothes to the house, creating more bespoke shopping experiences is going to be equally as important as we're all talking about online and digital and e commerce, but there's still very much a 1 to 1 relationship that exists between a sales associate and a consumer. And we're going to really put a lot of time and effort and energy behind that as a way of mitigating some of what we don't see with the consumer drop off. That's very clear. I want to ask 1 more high level question and then I have some on each of the brands. I want to talk about margins. Where do you see the biggest opportunity for margin expansion at each brand, perhaps passing between gross margin and SG and A? I think I'm going to pass that 1 over to Tom Edwards. Thanks, John. So Alex, as we look at the margin opportunities and take a big step back at the total company, we have significant growth opportunity in Asia across all our brands. And structurally, Asia has the highest margins, both growth and operating margins across the company. So we do expect to see this benefit brands. The other piece, as John mentioned, based on the new goals, retail become a larger piece of the business and the penetration and mix will be greater. And with the growth in retail, that itself brings higher gross margins, which will help the overall business as well. When we break it down by brand, we look at Versace and Jimmy Choo, and we're targeting mid teens operating margins, which we think are very realistic for luxury brands and look to get to that level by growing our accessories business across both. We've already started in both businesses and added logo product and introduced new collections across the accessories categories. They're doing quite well. We also look to improve our store productivity across both of those businesses. And as they grow, they'll leverage their SG and A, which will help the bottom line in the operating margin piece as we've made significant investments in those businesses. From a Michael Kors point of view, we're looking at operating margins greater than 20%, above our historical levels. And we look to achieve this through gross margin expansion as we benefit from manufacturing sourcing, which our teams have already achieved and look forward to driving more positive efficiency there, as well as increased pricing. We've talked about that on a improve and increase improve and increase pricing. Finally, looking at the SG and A portion, we announced the new fleet optimization program, the majority of which would be driven by Michael Kors closures. And that will help the SG and A line as well as other cost efficiencies and cost control measures as we look to continue to grow margins with that brand. Thank you, Tom. I'd like to move on to talking about some of the specifics across the brands. Let's start with Versace. How has the pandemic changed how you expect to achieve the growth opportunity for this brand? Alex, I would start out by telling or reminding everybody on this call, when we bought Versace, we actually closed down approximately $150, 000, 000 worth of business. Versace had 2 other labels, a collection and Versace, which we made the decision. We're not in our view where we wanted to focus our time, energy and effort. So we closed those businesses down. I also want to remind that the Versace business had a high single digit operating margin, which we decided to basically take to 0, slightly negative, because we know that this company will double its revenues. And as I said just earlier in the presentation, Versace is comping off right now, which is extraordinary given what's happening around the world. And so we believe we have a company and a brand and a luxury house led by 1 of its original founders, Donatella, that has such an important message and voice in the fashion business that we'll be able to accelerate that really with a laser focus. And we're on a mission that really the pandemic is not going to change what we're doing. We're going to renovate every 1 of our stores around the globe. We are going to focus on the accessories business where this company is very underpenetrated versus its other luxury peers. And we are going to really make sure that we are 1 of the competitors in the luxury space. And I want to remind everybody on this call again that the 2 acquisitions that Capri has made are luxury acquisitions. So while sometimes we're referred to as being in the apparel space, that's actually not what we're in. We're in the luxury space and we know who our competitors are and we think we've got assets that are extraordinary. Clearly, COVID will set us back 12 to 18 months and it's going to set everybody back that amount of time in our journey. But we remain again very, very focused. And also I would add that along with the codes of the house that have already existed, we now have the new borough Govinee, which is starting to gain traction. We're in very, very, very early days for the development of that all important icon along with our Medusa and the Borocco prints that we're known for. And with Donatella's voice and the power of our distribution, again, we sit in the best locations, the best streets and with an enhanced global e commerce business. I think we have something that is quite extraordinary. And again, 2 of our European very large competitors have shown that you can take extraordinary brands like this and with really some fine tuning and some focus, you can take it anywhere from doubling it to many of these companies have gone up 4 times in revenue. So we are so incredibly pleased with what's happening at Versace and we're so pleased as a company to be able to have Versace as part of our family. And I would tell you, it's the lead growth engine for Capri Holdings, and we think that we'll be able to execute on that. That's very clear. You mentioned in that commentary the move that Versace is making into accessories. Can you talk about where you are in that category mix shift? How confident you are in that piece of the strategy? Well, I think that was 1 of the things when I met with Donatella and Jonathan Aykroyd, our very talented and bright CEO, that they were excited about our partnership. We clearly know a little bit about accessories business. We're 1 of the largest accessories companies in the world, in particular with Michael Kors and again Michael's vision and how we built that business together. So we know a lot about the consumer, how they shop, where they shop, what she likes to wear. And we've been able to impart a lot of that information with our partnership with Versace. So I'd say we're again, we're in early days. We needed to establish this Perroco V. We needed to establish identifiable silhouettes. And remember, we only started introducing all of this last fall season. Sadly, we've had a little situation with the pandemic, a little situation, a major situation. But so that's going to as I said, we're assuming that's a 12 to 18 month impact from where we sit today until we get back to a bit more normal level than a lot more normal level than where we are today, I'm sorry, to undermine how serious the situation is. But I think we're we've got all the right design teams in place, got the right vision. We're supporting that with really quite robust marketing efforts. If you watch our Instagram, if you watch our emails, we've been very much leading with accessories and we're excited about how the consumer can find. Moving over to Jimmy Choo, you've laid out the path to $1, 000, 000, 000 in revenue and mid teens operating margin. Can you talk about that path for us today? Sure. So Jimmy Choo, which is going to be 25 years old next year, has grown in revenues every single year it was existence except for this past year, unfortunately, with what happened with pandemic. So the company has always had been on a growth trajectory and very excited and proud to the since the very beginning and no 1 knows this company as well as Sam Bartoy, our Creative Director and Hannah. So we've got a great team running that business now. And we are going to resume our growth bought it. Once again, we took the operating margins down. We knew what we were doing. We bought it. Once again, we took the operating margins down. We knew what we were doing. We're trying to reset some things, refocus the company, because again, luxury. I want to impart to everyone on this call again, we are not just about running brands. Many of our competitors run brand. We don't run brands. We run luxury houses. And with luxury, this takes time. And you have to respect the quality and the heritage that are in these companies. And I think we have demonstrated that. I think that many people have commented to us. They thought we were going to take these companies and Americanize them or do whatever. That's not what we've done. We respected that. We've bought a brand new shoe factory with Jimmy Choo so we can control our own manufacturing. We're building a great research and development center in Florence for all of our design teams to work in across the group, which is going to be quite extraordinary. So we're deeply investing in luxury. And with Jimmy Choo, we were resetting the base so that we could grow the business and we think we're headed directly towards that. 1 of the big cornerstones of that will be accessories. The company actually had a quite successful accessories business some 10 years ago, and just shifted more towards footwear, which was a good thing to do and help propel its growth. We know that there's been a shift away from dress footwear and that absolutely was already starting to have an effect on the company. We've been a little late on our entree into the active footwear active footwear business. Although, I think we've gotten a bit of that behind us, we're not 100% where we want to be, but we reported that last quarter, we doubled the penetration of our active footwear business, which has been quite extraordinary to come so far so fast and we've only just started. And we've introduced our new JC logo, our new accessories collection. So we think if we can get those 2 pieces of the business developed, which we feel very strong about, that we'll be able to get this business to the $1, 000, 000, 000 that we had anticipated. And again, a lot of that's going to be driven by our digital platforms. And the company is actually Jimmy Choo has got a pretty good digital business with a pretty high penetration level already to date. And then we will do store expansion on top of that. Again, 300 stores compared to our competitive set in the luxury arena, we are right on where we should be. And those are representing really the major wealthy cities around the world. So I think we still feel every bit is good about Jimmy Choo, but with the same caveat that we have for Versace and to a degree of Michael Kors and that is we're going to it's going to take us 12 to 18 months to get through what everyone is facing today with the pandemic. But we think we've built a very, very loyal and strong base. And again, we saw approximately 20% growth in our database last quarter with Jimmy Choo, which is again extraordinary being that this company is predominantly a shoe company. It's not exactly like shoes were the hot dress shoes were the hot commodity during COVID. So I think that shows you the loyalty of our customer and how they've been responding to us. And again, with Jimmy Choo, we're seeing very strong sequential improvement quarter to quarter between our Q1 and where we are today in our Q2. Let's go to Michael Kors, John. And let's start with distribution strategy. How do you expect the long term distribution mix at Michael Kors to shake out between e commerce, full price retail outlet and wholesale? And how does that support higher margins? So a couple of things. I want to start out by saying that last year, wholesale was approximately a third of our overall corporate business. And we anticipate that declining over the next few years to probably around 20%. Wholesale has lower gross margins for the company, but it has very nice operating margin. So I we're very proud of our partners in the wholesale channels and I've called them all out around the world. They've been great partners to us and we're very proud to be partners with them. So I want to tell you that we're completely supportive of that channel distribution and it's been a wonderful opportunity for our company today and we view it as a wonderful opportunity going forward. But if I really start from the beginning, our own e commerce channel is going to grow the fastest for us on a global basis. We're seeing that happen now. We are bump up for the quarter almost double in terms of percentage growth where we were last quarter. So we're actually seeing an acceleration in our e commerce business across every 1 of the brands in the group, which is really quite extraordinary. And with our omni channel capabilities, we're able to fill from stores and roll their own distribution centers. So we're feeling very good about how we deal with the customer through e commerce and be able to service them where they are and when they want their product. Our full price business, our retail business has actually been quite healthy, especially the customers responding to newness, again, across all 3 of our brands. And while we are going to reduce our footprint in North America, in Michael Kors, we're seeing a lot of that business shift into our e commerce and that's just the way the consumer wants to shop with us. And so when we look across the board, e commerce will grow very rapidly. Our retail company owned business will be flattish to decline in terms of total revenue, mainly because of stores being closed. And then our wholesale business will shrink. And that's been for a number of reasons. As we said, I ask you all not to think of us only as a North American department store business, because I don't think that's the proper representation as a piece of our business. And that will decline because of our partners closing doors and in certain bankruptcies. Secondly, we have a very large European wholesale business. That is also under pressure due to the large doors in major markets, which are suffering. We also see specialty storage where we have a very considerable specialty store business is suffering as well, and we think that will contract. And then lastly, as I've indicated, minimum 12 to 18 months for the travel retail business to recover. And that of all of our businesses across the group, that is the 1 that is absolutely the most impacted. And we do not see any kind of significant recovery happening today or anytime in the near future. So that will be our biggest hurdle to get over the next 12 to 18 months. Tom, we are right at the end of our time here. So I'm afraid we're going to have to wrap the session. Thank you so much both for sharing all of your insights on the business today. And thank you to everyone in the audience for joining us for this session. Please do stick around for the remaining sessions this afternoon. We do have still a packed schedule ahead of us. And with that, I will thank John, Tom, the team at Capri Holdings 1 more time for being a part of the conference this year. And Alex, we'd like to thank you and we'd also like to ask everyone and hope for everyone to stay safe and continue to be diligent about wearing your masks and social distancing.