Okay, well, good morning, everyone. Thank you for joining on day two. We are happy to have with us today at Capri Holdings, a $3 billion market cap luxury fashion accessory brand. Today I'm joined by John Idol, Capri's Chief Executive Officer, and Rajeev Mehta , Capri's Interim Chief Financial Officer. So thank you both so much for joining us today. This will be a fireside chat format. I'll kick it off with questions. And just a one housekeeping item in terms of disclosures for reference, you can visit morganstanley.com/researchdisclosures for anything you need disclosure related. So let's kick it off. Before we dive into Q&A, I do have several for you today. I want to give you the floor and kind of give you a moment to just any messages or opening remarks that you'd like to share with the audience.
Great. Well, thank you for having us here today.
Of course.
It's wonderful to be here in New York on this very cold day. We're excited for the holiday season in front of us, and it seems to be kicking off very nicely. I think most of you have probably read that we completed the sale transaction of Versace yesterday, which gave us about approximately $1.4 billion for the brand. That's a very important event for us because that will give us tremendous financial flexibility to continue to execute on our strategic initiatives around Michael Kors in particular. We'll talk more about that, I'm sure, during the Q&A. And it also gives us a situation where we will have a very small amount of debt on the company, which gives us, again, the opportunity to look to the future and really invest in our brands. It also gives us the ability to be more focused.
So we'll be much more focused on Michael Kors in particular and the growth opportunity that that represents. And so we think that this is kind of a seminal moment for us to really reset and to take these two wonderful brands, Michael Kors with about 44 years of history and Jimmy Choo with about 29 years of history, and to refocus our initiatives on growing those two wonderful brands.
Wonderful. So you maybe already answered my next question, but given the sale of Versace, how should we think about portfolio optimization and your other brands going forward, particularly Jimmy Choo? Is it core? Should we think about it kind of going forward, or would that also be something else that you might consider optimizing or selling at some point?
Yeah, so Jimmy Choo is. We've publicly said it's not for sale. We think it's a great opportunity for us today. It's about a $600 million business. We feel very confident that we'll be able to grow that to approximately $800 million over the next few years. And in addition to that, the business has historically had low to mid double-digit operating earnings. So we think that that is a very strong positive for us in terms of the overall operating profit for the company. And it is core to us in the sense that it is footwear, which we have a very big footwear business in the company. We own 50% of our own footwear production. Over the years that we've owned the company, we actually bought two factories to make sure that we had the capacity to fill our own needs.
Secondly, we have a growing handbag business, our accessories business, and we've seen some very, very strong momentum in that business. We think that will be one of the cornerstones to growth, but also to operating margin expansion for Jimmy Choo. It's a great brand. We think we can do lots with it, and hopefully you have a lot of it in your closet.
I have a lot of everything. So two iconic brands, Michael Kors, Jimmy Choo. Maybe you walk us through what some of the key strategic initiatives are right now to really drive growth going forward at each of them?
Sure. So Michael Kors, we've obviously had some difficult years the last few years, some of that more recently where the company looked at a complete transformation of the Michael Kors brand, and that was a mistake that really went off the core values or the core identity DNA that Michael Kors has. Most people recognize the brand for our jet set image, and that is something that we are really reengaging deeply with the consumer around, but in a modern way. The brand used to be very focused on airplanes and cars and boats and people moving around the world that way, and we've really recentered that around something that we call hotel stories, which is, I think, more modern in the sense of what people have an aspirational dream for is to travel and go away and enjoy time for yourself, for your family, or just relaxation.
We know that that doesn't mean that you are flying off to Capri or Saint-Tropez or to Aspen. That might mean going from uptown to downtown for dinner. We want to be the brand that you think of when you're trying to really think about your style, and we call that standout style. Michael Kors has always had that. When you put on Michael Kors, you feel really good about yourself, and you feel that you're expressing yourself in a way, and hopefully you're the fashion person in the room, but in a very kind of sophisticated positioning. We've modernized our marketing strategy, which is still based around jet set, but traveling the world in style, and it's about standout style. The second thing that we've done is we've really looked at our marketing differently.
We had not engaged in the same way that we are today with influencers, and that's become a very, very big part of our marketing initiative and very successful. We have hundreds of influencers now engaging with the brand, and it's doing two things. Number one is bringing new customers into the brand, but it's also reengaging with existing customers who might have bought from us three and four and five years ago who are now seeing the brand through a different lens and are excited about that. So the marketing is working for us in terms of how we're marketing. Obviously, we're using a lot more social media than we had been in the past. And so that was kind of the second leg of our strategic initiatives to reignite the Michael Kors brand.
The third piece was an interesting piece in that over the two years or so that we were working on this other transformation, we saw our discounting rise, and while you might have thought we were doing that just because we wanted to get more business, that's actually not what happened. What happened was the product wasn't selling, and it wasn't selling because there were a lot of initiatives around taking our signature products out of the line and going again in a direction that wasn't necessarily part of our DNA, and so at that same point in time, we had raised prices over a three-year period of time, and we saw where we were discounting was to get back to the pricing where we were originally some three years beforehand, so as a part of that analysis, we decided to reset our strategic pricing architecture.
We did that in accessories and footwear and very significantly in ready-to-wear. That has had a profound improvement in our business. Our full price sell-throughs are up dramatically. I think you also may recall that in our last earnings release and call, we said that our full price business turned positive. We haven't come positive in years in our full price business. We see that from the consumer engaging with our new marketing, the consumer engaging with our new strategic price initiatives, seeing that product through a different lens. Lastly, us getting back to more of what Michael Kors stood for in the product, which is much more of a modern glamour. The last piece of our strategic initiative in the Michael Kors business is store renovations.
And as I started out by saying, the Versace transaction really cleans the balance sheet for the company. We have very good free cash flow to begin with, but we'll be able to very comfortably renovate over 50% of our store fleet worldwide over the next three years. And we're going to go faster if we can. And hopefully, if any of you have the time, please stop in and see our store at Rockefeller Center that's been recently renovated and doing phenomenal. And we have only a handful of these renovations that are open currently, but they're seeing very, very strong traffic increase and even stronger revenue increases inside of the new renovated stores. So we think those components will be very strong for resetting the brand, reengaging with customers, and taking the brand back to a growth trajectory, which we plan on seeing next year.
Do you want me to jump on to Jimmy Choo or you?
Oh, I was going to ask more about the store renovations because it sounds like there's a lot going on there. And especially at Michael Kors, it's always been a great way to kind of highlight that jet setting and fashion-forward image. And so I guess with some of the renovations that you're doing, maybe just tell us a little bit more about that. What can we expect to see in the store visually and from a merchandising perspective? And then similarly on Jimmy Choo, if there's anything from a fleet perspective to really watch out for.
Sure, so in Michael Kors, we closed around 125 stores over the past three years. We have a few more to go this year, and so the majority of our fleet optimization program will be completed, and we'll be down to approximately 700 stores worldwide, and what is actually going to happen is we're going to start to open stores again, and as we see the renovations work, the new product work, the pricing architecture work, there's a big gap between where we were and where we are today and where we could be, so just look out for that. We will be opening stores very selectively, but over the next few years, and the store environment is much warmer. The original store designs were very white and shiny and very, very of the period, and the new stores are much more residential, have a much warmer feel.
And interestingly enough, we've added a new component. Again, I hope you get up to see our store in Rockefeller Center. We opened our first Jet Set lounge. And so we're offering coffee and matcha and non-alcoholic champagne and other wonderful little small bites. And it's really increasing dwell time. And so we've opened another one in London recently. And we have about 10 of them rolling out throughout stores. You'll also see some pop-ups going around with our Jet Set lounges. So that's one of the first interesting changes that we've made inside the store. The second is we've really increased some of our ready-to-wear space in the stores, and it's driving enormous engagement with the customer. We have an advantage over certain of our other competitors in that we have a very strong ready-to-wear presence and history.
Michael, as you know, is a true runway designer and started his business doing that. And so we think that that's an advantage for us that we're going to continue to lean into. It's also consumers enter the store more often to buy ready-to-wear than they do handbags and shoes. So we think that's another positive for us. And so we're feeling very good about that. We'll also be renovating our outlet stores as well. Our first one opened at Jersey Gardens recently. And so again, if you get a chance to go out and see that, that's seeing similar type of returns for us. So the goal one day is to renovate the entire fleet, but we'll start with this first 350 stores. Jimmy Choo is in very good shape. We've spent a lot of time and money over the past few years.
And again, if you get a chance while you're here in New York, please visit our store on Madison Avenue. It's newly renovated and relocated about two years ago and doing phenomenal for us. But I'd say 85% of the fleet has been either touched or renovated. And so there's not much need to spend a lot of capital on the Jimmy Choo fleet today.
Okay. Understood. So you talked a lot about the strategic initiatives that you have underway at both brands. Maybe you tell us a little bit about some of the KPIs that you're looking to kind of measure the success and follow and track your progress along the way?
Sure. So obviously, number one is traffic in stores. And I think we reported, again, in our last call that we've seen sequential improvement in traffic in our stores, which is number one key indicator for us. Number two is always going to be AUR and looking at how the value transaction. Actually, our AURs rose in our outlet channel, went down in our full price channel, but that was planned because we lowered our prices in our full price channel. Full price sell-throughs went up. So we're looking at that database, which even through our ups and downs, we've been growing the database about high single digits per year. Last quarter was 9%. We've got over 90 million people in our database. It's a huge pool to our pond to fish in, as well as garner additional people to the brand.
So we think that's a very good indicator that we continue to have people come to the brand and shop with the brand. And we have, over the last couple of years, we've replatformed our e-commerce and all of our data analytics inside the company. And we're much closer to the customer and what the customer is saying to us about the brand. So through our consumer research, we're seeing that our marketing, in particular with Suki Waterhouse, who's the face of Michael Kors, is really creating a lot of engagement with new consumers, younger consumers to the brand. And we see the campaigns building in terms of their engagement. So we're tracking everything very carefully. And as I said, we have a lot more capabilities of being able to understand what the customer is saying to us than we did just a few years ago.
Thanks. As we think about the sales outlook, a lot going on, strategic initiatives, but then there's also just the macro and the category itself. I guess taking all that together, when do you think, or from a timeline perspective, sales could start to inflect to a more positive trajectory?
Yeah. We think that we will turn positive our next fiscal year, which begins April 1. We will really start to lap some of the things that we've been doing around August of next year. So I think that would be a much better inflection point for the company. We'll probably be flattish or so in the first two quarters of the year for us. And then by Q3 of our fiscal, we should be in a really good position to see a very nice inflection in the Michael Kors business, as well as Jimmy Choo. Jimmy Choo is, as I said, we're very pleased with what's happening with our accessories.
We're seeing some strong, strong performance on some of the price point work that we've done there, strategic architecture on pricing in the $1,000 to $1,500 accessories business, as well as we're really leaning in from a marketing standpoint into more of the casual footwear. So that should also help us turn positive with Jimmy Choo in our next fiscal year.
Great. So we talked a lot about the demand side, maybe a little bit more on profitability. You've outlined some margin targets or long-term goals for both of the brands. Maybe talk us through just the key levers, inputs, and takes as we think about margin outlook for both brands.
Let me turn that over to Raj.
Yeah. We still feel very confident about the previously stated margin targets that we set longer term at Investor Day. For Michael Kors, the low 20% operating margin target is achievable in the future, and we're going to do that through a couple of ways, through both gross margin expansion and operating expense leverage. In terms of gross margin expansion, we will continue to deliver on our strategic initiatives, and that's really around driving higher full price sell-throughs related to better product and really our marketing initiatives to help drive that. In addition to the quality of our sales, we are reducing the sales into our Suki Waterhouse business as well as the off-price channel, and they both have lower margin businesses, and as we reduce that, that'll help our overall gross profit margins. The second piece of this will be our tariff mitigation efforts.
We are continuing to work with our sourcing partners on costing efficiencies. We've already started to do that earlier this year, and we've made progress. We're going to continue to do that as we go next year and into the future because we have to mitigate the tariff impacts here, and then the other piece of this is taking targeted price increases. We have to take targeted price increases across our product categories to help offset some of the tariff impact that we're seeing, and then as we look out a bit longer term, we have to look at our regional mix. We have to get Asia back to growth, and we will do that in the future. As we improve Asia and get it back to growth, our Asia business has higher gross margins, and that'll naturally improve our overall gross margins as we go into the future.
The second component will be operating expenses. We will leverage our operating expenses as revenues return to growth. We continue to diligently manage our SG&A. I'm always looking for cost reductions whenever we can, so as we look to next year, just the slightest bit in revenue increases, we're looking to hold SG&A approximately flattish as we look to next year, so if we do that and grow revenues, we will leverage our SG&A, and then as we look into the future, revenues will grow at a higher rate than SG&A, so that'll continue to leverage as a percentage of sales, so all those factors combined, we're very confident that we can get Michael Kors back to a low 20% operating margin, and then turning to Jimmy Choo, we believe we can achieve the low double-digit operating margins in the future here.
Here, it's really about being confident that as the business grows, operating margins will expand. For Jimmy Choo, it's a little bit of a different story. It's more about the expense leverage here. We have to get revenues. Once revenues grow, expenses will leverage. The primary driver of this will be the revenues growing, and we have to improve the store productivity in these stores. Once we do that, the operating margins will naturally just improve. We're going to look at costs where we can to reduce where we can here, but it's really going to come down to productivity levels in these stores to improve. And the last component related to the gross margins is getting our accessories business to approximately 30% of the overall penetration of the business. Our accessories business is a no-size business, so it has higher margins overall.
So as we get this business at a minimum to 30% of the overall, it will drive the gross margins higher, as well as the operating margins impacting the bottom line. So I think all these factors across both brands, we are extremely confident that Michael Kors will get back to a low 20% operating margin, and Jimmy Choo will be at a low double-digit margin in the future.
Great. That's super helpful. I want to get a chance to, and then I'll return to some more questions, but at least ask the three that we've been asking all companies to attend the conference. So I'm going to get to those now, if that's all right. The first one is really on demand and recent trends. As you look over the next 12 months, do you expect consumer demand to accelerate, remain stable, or decelerate?
I think you have to kind of look across the globe to answer that question. Starting with North America, the consumer is relatively healthy, and I know that at the lower income levels, there's a lot of stress going on, and I think that it's not that we certainly have customers at all different income levels, but I'd say we're operating more at the middle and higher income levels, so I think there's less stress on that consumer today. That being said, they're choiceful. Everyone, I don't care whether you're the richest person, everyone's thinking just a little bit more about how they're making their purchases, and so I think one of the things we're excited about with our strategic pricing initiatives at both Michael Kors and Jimmy Choo is we're leaning into some white space that some of our competitors are creating for us.
And we're seeing consumers respond to that. And we're seeing, in particular, younger consumers respond to that. The younger the consumer is, the more price conscious they are, even at various income levels. So I think North America, we're feeling things are okay, and it's going to be okay next year. And so we're not looking for any big change in the consumer going forward here. Europe, interestingly enough for us, the market has been very strong over the past year, year and a half. And where there aren't the same kind of stimulus going on with things that the government is doing to make the situation better, in many cases, the governments are making the situation worse. But the consumer seems to be leaning into our brand. I'd say we're a tiny bit more cautious in Europe. Hopefully, some energy prices come down there and people get some relief.
In China, we think things are improving, and we think the consumer will start to rebound. We can see things are not necessarily positive yet, but they're leveling off. Certain brands obviously have turned positive there, but it's starting to get better, and Japan's still a big market, and that market's still quite strong, so I think overall for us next year, we're not seeing that there's going to be some big macroeconomic weight. Now, what happens geopolitically, that is something we can't obviously predict.
Okay. Okay. No, that's helpful. And I guess a similar question on margins, and you were talking more detail on margins earlier. But again, we're asking all companies at the conference the same kind of polling question of when you look over the next 12 months, are you expecting more tailwinds, a balance of tailwinds and headwinds, or more headwinds to margins as we go forward?
I'd say it's a balance. I mean, it changes every time. We thought we were in a good spot before the tariffs came about in the beginning of this year. So we have to take it, I think, a quarter at a time as to see what the macroeconomic environment looks like as we take it in stages. But we're feeling good about the strategies, the executions that we have in place, and that we're setting ourselves up for next year to really return to growth. So we're feeling good about that, and we're going to continue to deliver and execute on the strategies we have in place.
Yeah. I think I'd add to that that we do think we will have margin expansion next year. I think most companies are doing the same thing. You can't offset all the tariffs that are happening in the United States. It's not going to be possible. So as we take strategic price increases, those will be global. So we'll offset some of what's happening in North America with a more global approach to that. We're going to be very careful because we're in the early stages of a turnaround. So we don't want to all of a sudden now tell the customer something else is happening. And I think our view is that we don't need tremendous sales growth, low single digits, mid-single digits. And then if we can hold our SG&A roughly flattish, that's just going to lever for us.
And so that could be some very nice earnings per share growth for the company. So while all this other stuff is happening with the tariffs and price increases, we're going to look at it just slightly differently because we're more focused on how do we grow EPS in the company, how do we return the company to top-line revenue growth. And we're getting close to feeling that there's enough things happening that we think that those components are going to come to work for us.
That's great. And so as you were looking into next year, sales start to inflect positive, potentially see some operating margin expansion. How should we think about capital allocation and maybe reinvesting back in the business or to shareholders and also specifically spend on technology, which is a big topic for everyone right now? How are you thinking about shifting your CapEx spending across tech investments, AI stores, etc.?
I'll take the tech. You take the rest of it. Go ahead and start with the general.
Sure. I mean, in terms of our general, we are going to continue to invest in our stores, our digital, and IT back office functions. We mentioned the $350 renovation program. So that is one of the priorities that we have. The second is paying down debt, which I'm waiting for a text, hopefully shortly, that we have paid down a large amount of debt thanks to the $1.4 billion that we've received. So that'll put us in a very strong position in terms of our balance sheet. We would have done the investments within the company regardless, but it just makes us a little bit able to do a lot of different things as we look forward. And the third piece is returning shareholder value. We just got approved a billion-dollar share repurchase program, which is great from the board.
There's a lot of confidence behind the company and the future, and we will begin to do that in FY 2027.
Okay. Great. You guys, oh, go ahead.
Well, no, just on the tech front, I just wanted to say that I think we're all going through a learning curve. I'm sure you're doing it at your company as well. And I'd say that we have a lot of partners, whether it's Microsoft or Salesforce or Workday. And so they're bringing a lot of technology to us, and we're parsing through that as to where the best places for us to invest are and how we're going to get the best return for the company. So we're definitely partaking in different new platforms and new technology as fast as we can. But we also want to be a little careful because things are starting to move around a little bit. And once you go down a path, it's a pretty big commitment.
And so I think we're comfortable that we're making the right investments, but we're not going to go out and overstep that right at this moment. We'll probably have a better picture on that towards the tail end of next year.
Makes sense. You've talked a bit about the health of the consumer and what you're seeing in different pockets in different regions. I guess maybe zooming out on the category specifically, there's been a lot of kind of fits and starts or fits and starts on what we're seeing in luxury overall over the last couple of years. So what's your perception or take on just the health of kind of the luxury market and the handbag market specifically right now, the State of the Union?
The luxury market has historically grown some 5% a year. I think last year was a step back for the market, and I think there was a couple of resets going on. Number one, there was an aspirational consumer who was stepping up to get into the luxury market. Some of that was being funneled by the stimulus checks in the United States, etc. What happened simultaneously to that was prices started going up, so all the luxury players, including ourselves, started raising prices. Then some 24 months ago, the consumer started to, number one, particularly the aspirational consumer started to say, "I can't do it anymore. I need to kind of back off a little bit." You saw that in the real top tier or the bigger luxury companies. You also saw something interesting happen.
Some of the more accessible or opening price point luxury companies actually started to jump in and take market share because that accessible consumer said, "I can't afford this, but I'm comfortable with some of these other brands being there." And I think that you're seeing a slow recovery of the luxury market, in particular in North America, because people in North America have gotten quite wealthy, in particular with the stock market over the last couple of years. And I think they see that interest rates might be coming down. So I think that you're going to see a slow recovery for the luxury market. And the accessories market in particular has already seen there's starting to be a little bit of a turn again. The other thing that happens in our business is you need a trend to happen.
And with soft bags happening now, that's a trend every company is now getting a part of. And so you need that in your closet. The same way sneakers were the trend. And a lot of luxury companies made very big inroads with the accessible customer with sneakers. And that trend slowed down a little bit. So we need those kind of big moments to happen in the business. And you can start to see some of them are coming.
Okay. Great. Very exciting. We can all support that by getting out and shopping after the conference today. Before we wrap, I just want to end with, is there anything that we didn't cover today or any key messages that you'd like to leave the audience with?
Sure. I think that Michael Kors is a 44-year brand. It obviously had a peak sales volume of about $4.6 billion, and we're down to approximately $3 billion today. We feel very strongly that we will be able to return the company to $4 billion over a period of time. We're not looking to do that overnight. We're looking to do that in a very sustainable way. But clearly, the consumer is engaging with us. And clearly, we have the authority to be a part of this luxury consumer's closet. Jimmy Choo, again, we think we've got a brand that's got 29 years of history, and people love Jimmy Choo. And we have some opportunities, which is, as I said, in accessories and in more casual footwear.
And we have some work to do there to get more into the customer's zeitgeist around, "I can come to Jimmy Choo for something more than just a pump or a party shoe or a wedding shoe." And we're working hard at that. And I think that will be one of the unlocks for Jimmy Choo. And a business, again, that can get to $800 million and have low double-digit operating margins, if you look at what Michael Kors could be with low 20s, Jimmy Choo with low double digits, this will be a very profitable company again. And I think that it'll happen in a relatively short period of time. What does that mean? That means somewhere in the next three to five years.
I think you will see a company that's going to be very strong with the consumer and hopefully very strong with the financial community.
Wonderful. Super exciting. Thank you so much. I appreciate your time.
Thank you. Thank you for hosting us.
Thank you.
Thank you very much.