Earnings Call: Q1 2021

Aug 5, 2020

Welcome to the Capri Holdings Limited First Quarter Fiscal 2021 Earnings Conference Call. As a reminder, all participants are in listen only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Jennifer Davis, Vice President, Investor Relations. Please go ahead. Good morning, everyone, and thank you for joining us on Capri Holdings Limited's Q1 fiscal 2021 conference call. With me this morning are Chairman and Chief Executive Officer, John Idol and Chief Financial and Chief Operating Officer, Tom Edwards. Before we begin, let me remind you that certain statements made on today's call may constitute forward looking statements, which are subject to risks and uncertainties that could cause actual results to differ from those we expect. Those risks and uncertainties are described in today's press release and in the company's SEC filings, which are available on the company's website. Investors should not assume that the statements made during this call will remain operative at a later time, and the company undertakes no obligation to update any information discussed on the call. In addition, certain financial information discussed today will be presented on a non GAAP basis. These non GAAP measures exclude certain costs associated with COVID-nineteen related charges, long lived asset impairment, ERP implementation costs, Capri transformation costs, restructuring and other charges. Unless otherwise noted, all financial information on today's call will be presented on a non GAAP basis. To view corresponding GAAP measures and related reconciliations, please view the earnings release posted on our website earlier today at capriholdings.com. Before we begin, I would like to note that we have posted on our website slides that provide highlights for the quarter. Now, I would like turn the call over to Mr. John Idol, Chairman and Chief Executive Officer. Thank you, Jennifer, and good morning, everyone. Today, once again, we are joining you from our New York offices. I'm sorry, but there may be some light background noise due to construction in the building. Before reviewing our Q1 results, I would like to share some thoughts around the evolving COVID-nineteen pandemic. The situation remains very serious and dynamic as it continues to profoundly impact the entire world. My thoughts and prayers go out to all those who have been affected by the virus and everyone on the front lines who are tirelessly helping combat this pandemic. As we continue to reopen our stores around the globe, the health and safety of our employees, customers and communities remains a top priority. I want to thank our teams around the world for the hard work and dedication they continue to demonstrate every day to support each other and their communities during this unprecedented time. Now turning to our Q1 results. While our performance was significantly impacted by the COVID-nineteen pandemic, Revenue and earnings exceeded our initial expectations. We were particularly pleased with our robust e commerce growth as revenue increased approximately 30% compared to the prior year. And as our stores reopened, revenue exceeded our original expectations. Similarly, our wholesale partners' e commerce sites and reopen stores are performing above our expectations. However, our wholesale partners placed limited orders during the quarter due to the store closures. Overall, 1st quarter revenue in our retail channel declined approximately 60%, while wholesale sales decreased approximately 85%. Total revenue declined 66% with trends improving progressively each month. Looking at gross profit, we were pleased with our performance as margin expanded 4.80 basis points. This improvement in our corporate initiatives to increase full price sell throughs and selectively raise prices generating higher AURs. Additionally, gross margins benefited from a higher mix of retail sales versus wholesale sales. Moving to operating expenses, we have taken decisive actions to reduce our expense base in fiscal 2021. However, due to the deleverage on lower revenue, we generated a net loss of 156,000,000 dollars a loss per share of $1.04 in the Q1. Now turning to a review of our sales trends by region. 1st quarter revenue in Asia declined 41%. We have made the most progress in this region driven by the strength in Mainland China, where stores have been open the longest and sales are benefiting from domestic consumption. 1st quarter revenue at Versace and Jimmy Choo was approximately flat to last year in Mainland China, where Michael Kors was below prior year. Revenue in Hong Kong and Macau remained significantly below last year. In the remainder of Asia outside of Greater China, the recovery is progressing at a slower pace as the virus impacted these areas later. Wholesale shipments in the region declined 80%. In EMEA, 1st quarter revenue declined 66%. Our stores in the region were closed on approximately 60% of the quarter. We began reopening the fleet in May and 98% of stores were opened by the end of the quarter. Wholesale shipments in the region declined 70%. In the Americas, 1st quarter revenue declined 70 6%. Our stores in the region were closed on average approximately 80% of the quarter. We began reopening our fleet in May and ended the Q1 with approximately 70% of stores open. Wholesale shipments declined approximately 90%. Additionally, all of our regions have been impacted as international travel has virtually come to a standstill since the outbreak of COVID-nineteen. Tourism and travel related sales comprise a meaningful part of our business. Tourist activity impacts our travel retail channel as well as many important flagship locations in major tourist destinations. Now turning to 1st quarter performance by brand. Starting with Versace, sales of our new Virtuous Accessories collection with the Barocco V logo are encouraging. The Virtus group remains a top performing collection and accessories and we have expanded the Barocco V across additional categories including belts, backpacks, footwear as well as fashion jewelry. Within ready to wear, we saw a strong customer response to springsummer collection, which celebrated the 20th anniversary of the jungle dress worn by Jennifer Lopez. The collection featured statement jungle prints, complemented by innovative tie dye designs. Within footwear, we saw outperformance in our new Virtuous styles, including sandals and fashion active. Overall, we are pleased with the pace of the recovery at Versace. In terms of brand awareness, the customer engagement we launched the Very Versace Challenge in May, promoting our new iconic Barocco V logo. The brand invited followers to share pictures of V shaped objects, landscapes, spaces or scenes from their everyday lives with the potential to have their submissions featured across our social platforms and websites. The challenge encouraged the social community to have fun and inspired creativity. In mid July, we launched part 2 of the Very Versace Challenge across our digital channels to drive further awareness of our Barocco V logo. The second installment featured imagery of the Paris Cheer Royal Squad dressed in a uniform of Barocco print pieces from the pre fall collection of 2020. Squad showcased our new Virtuus accessories line symbolizing the Virtuus values of strength, courage and virtue. Additionally, in June, we launched DVTV, a series that follows Donatella as she handpicks outfits for a few of her famous friends. These initiatives resulted in a significant increase in engagement and helped contribute to a 13% increase in Versace's total social media following during the quarter, which grew to 39,000,000. Moving to Jimmy Choo, we are pleased by the performance of our expanded assortment of accessories with our JC Signature Varen remaining our best selling collection. In footwear, as fashion preferences are shifting towards more relaxed styles, we saw strong performance in sandals, flat and active. In fashion active, customer response to our expanded assortment resulted in penetration nearly doubling for the quarter. In terms of brand awareness and customer engagement, we launched our new pre fall 2020 ad campaign featuring fashion icon Kate Moss. In June, Kate was featured in the latest installment of In My Choose interview series, which highlights strong prominent women who not only dare to stand out, but also empower others by sharing their insights, learnings and experiences. Kate Moss epitomizes this season's bohemian glamour inspired collection, as well as the modern and stylish Jimmy Choo customer. Additionally, Sandra Choi held virtual shopping events with some of our top clients. These activities helped contribute to a 6% increase in Jimmy Choo's global social media followers, which grew to over 17,000,000. Turning to Michael Kors, we are pleased with the performance of our accessories classification. This quarter, Signature penetration increased to over 35% compared to approximately 25% last year and generated higher AURs as well as gross margins. In addition, we saw strong performance in large bags such as totes and backpacks, which are also contributing to AUR increases. Within footwear, we are seeing better performance in versatile styles such as chic sandals and fashion active. In watches and jewelry, we saw an inflection over the past several months. Watch sales are being driven by traditional styles that are true to our DNA with bold, sophisticated and distinctive designs. Finally, the men's business continues to grow as we focus on timeless essentials with a modern edge. Within men's accessories continues to outperform our expectations. Turning to brand engagement, Michael reinforced the theme of the modern traveler as he continued to connect with fans on social media, taking them on a virtual journey to some of his favorite travel destinations. He shared photos and memories from his trips around the world. Before the coronavirus pandemic, Michael inspired Bella Hadid to visit the city of New Orleans. And last month, Bella took our Instagram followers on a virtual tour of her first trip to the city where Michael sent her to his favorite spots. Michael's and Bella's videos drove a significant increase in engagement. Our marketing initiatives continue to underpin our brand pillars of speed, energy and optimism. This helped contribute to a 6% increase in the brand's global social media presence, which grew to nearly 49,000,000 followers. Our global database also continues to expand, reaching nearly 45,000,000 customers, an increase of 17% compared to last year, demonstrating the continued strength and desirability of the Michael Kors brand. Despite the impact of the global pandemic, we are encouraged by the ongoing progress of Capri Holdings as we execute against the strategic initiatives for each of our founder led fashion luxury houses. Looking ahead, we remain focused on the initiatives that position our global luxury group to achieve meaningful long term revenue and earnings growth. Starting with Versace, we remain confident in our ability to increase revenue to $2,000,000,000 at a mid teens operating margin over time by building on the luxury momentum driven by Donatella's fashion vision, enhancing our powerful and iconic marketing, expanding accessories and footwear penetration to 60% of revenue, accelerating our e commerce and omni channel development and increasing our global retail footprint to approximately 300 stores. Similarly, at Jimmy Choo, our confidence in the luxury houses long term growth potential has not changed. We believe there is significant opportunity to grow revenue to $1,000,000,000 and achieve a mid teens operating margin over time. By increasing penetration of our accessories collection to 50% of revenue, expanding our luxury footwear collection, leveraging our e commerce and omni channel capabilities and increasing our global retail footprint to approximately 300 stores. Turning to Michael Kors. Our goal is to return to revenue growth, while also improving profitability. To increase revenue, we plan to increase customer engagement building on Michaels global brand awareness, expand our signature offerings across all classifications, continue our strong e commerce growth, double our revenue in Asia and expand our growing men's business. Turning to profitability. We are beginning to realize the benefits of certain initiatives designed to improve our operating margin over the next several years. We expect to drive gross margin expansion through higher full price sell throughs, strategic price increases and lower manufacturing costs. We also will continue to reduce our cost structure as we streamline our organization to better align our expense base with anticipated revenue. Additionally, we expect our fleet optimization program to improve overall profitability by closing underperforming stores. In conclusion, during these unprecedented times, we plan to continue to execute on our strategic growth initiatives and remain confident in the long term opportunities for each of our unique global luxury houses. Capri Holdings has a portfolio of 3 iconic founder led fashion luxury brands that have enduring value and a long history of successfully navigating challenging periods. We will continue to carefully guide our business through the current retail environment, while positioning the company to resume growth in fiscal 2020. Now I'd like to turn the call over to Tom. Thank you, John, and good morning, everyone. Starting with Q1 results, revenue of $451,000,000 decreased 66% compared to last year. The revenue decline was driven by our retail fleet being closed for approximately 55% of the quarter and limited wholesale orders. Across all brands, revenue trends improved progressively each month throughout the Q1. Primarily due to deleverage on lower revenue, we generated a net loss of $156,000,000 resulting in a loss per share of $1.04 Looking at revenue performance by brand, Versace revenue was $93,000,000 a 55% decrease compared to prior year. Versace ended June with a global luxury fleet of 2 0 4 retail stores, a net increase of 8 from prior year. For Jimmy Choo, revenue during the quarter was 51,000,000 dollars a 68% decrease compared to prior year. Jimmy Choo ended the quarter with a global fleet of 2 28 retail stores, a net increase of 13 from prior year. Turning to Michael Kors, total revenue of $307,000,000 declined 69% compared to last year. Michael Kors ended the quarter with a global fleet of 8 22 retail stores, a net decrease of 31 from prior year. Now looking at total company margin performance. Gross margin expanded 480 basis points to 67.2%. This predominantly reflects an increase in Michael Kors driven by higher AURs and favorable channel mix. Operating expense as a percent of revenue was 100% compared to 48.3% last year due to deleverage from lower revenue. Total company operating expense decreased 200,000,000 dollars primarily due to benefits from our cost reduction initiatives as well as lower variable store costs. Total company operating margin of negative 32.6% compares to 14.1% last year, reflecting the significant deleverage on lower revenue. Turning to our balance sheet, we ended the quarter with cash of 207,000,000 dollars and debt of $1,800,000 resulting in net debt of $1,600,000,000 Total liquidity at the end of the quarter was $1,100,000,000 dollars Looking at inventory, we ended the quarter with $948,000,000 down 7% compared to last year. We expect inventory to sequentially decline throughout fiscal 2021 and end the year approximately in line with our full year revenue decline. Now turning to guidance. We are not providing annual earnings guidance at this time due to the lack of visibility surrounding the pandemic, macroeconomic fundamentals and tourism. However, I would like to share some thoughts around our expectations for the fiscal Q2 and the progression of the expected recovery throughout the year, as well as provide some color around certain non operating items. While encouraged by the progression of the recovery so far, we are planning our business assuming that revenue will rebuild gradually. In China, we are experiencing more rapid recovery as luxury sales are benefiting from domestic demand. In the balance of Asia, as well as the Americas and EMEA, we expect the recovery to take longer. Across all geographies, we anticipate a slower recovery in tourist activity, which impacts our travel retail channel as well as many important flagship locations in major tourist destinations. Now looking at the 2nd quarter, the vast majority of our stores have reopened. Building on the positive momentum seen through the Q1, sales trends continue to improve in July. In the wholesale channel, we also see performance at the point of sale continuing to improve, which is resulting in increased shipments. We anticipate total company 2nd quarter revenue will decline approximately 40% compared to prior year, with retail sales performance significantly better than wholesale. In the 3rd and 4th quarters, we anticipate all regions will continue to gradually improve as consumer confidence and the economy begins to recover. We expect performance in the 4th quarter to be better than the 3rd quarter, but for both periods to remain below prior year levels. Summing up our revenue outlook for fiscal 2021, we expect a gradual improvement in consumer shopping trends and anticipate a decline of approximately 35% for the year. We expect company owned retail sales trends to be better with a slower recovery in wholesale shipments. This outlook does not incorporate any significant store re closures or additional government lockdowns. Turning to gross profit, we anticipate gross profit margin expansion approximately 150 basis points for the year, with improvements across all quarters. This performance primarily reflects the benefit of greater full price sell throughs, selective price increases and manufacturing cost efficiencies. Now turning to our expectations around certain non operating items. For the full year, we anticipate interest expense of approximately $60,000,000 Our effective tax rate is expected to be approximately 15% and we forecast weighted average shares outstanding of approximately 154,000,000. We anticipate an earnings per share loss in the first half of fiscal 2021 given the reduction in revenue and resulting deleverage. While we have made significant cost reductions, it will not be enough to offset the considerable decline in revenue during the first half of the year. In the second half of fiscal twenty twenty one, we expect the company will return to generating positive earnings per share as revenue trends gradually improve. In conclusion, we are pleased with the progress of the recovery thus far, which is ahead of our internal projections. We remain focused on managing our business through these uncertain times, while also executing against our long term strategic initiatives for each of our brands. As we emerge from the pandemic, Capri Holdings is well positioned to drive strong revenue and earnings growth in fiscal 2022. Now, I will open up the line for questions. Thank you. We will now begin the question and answer session. Our first question comes from Omar Saad of Evercore ISI. Please go ahead. Thanks for taking my question. Good morning. Thanks for the update. I'd really like to dive in a little bit further on the Michael Kors positive AUR and underlying gross margin trends. John, maybe you could talk about some of the brand dynamics driving that. And do you see an opportunity here in this pandemic think about pricing and the promotional levels in your own channels and with your wholesale partners taking this opportunity to kind of reduce that on a go forward basis? And do you think the demand environment could support that kind of an ongoing positive AUR trend? Thanks. Good morning, Omar, and I hope you and your family are all safe during this unprecedented time. Let me first start out by telling you that, as we've said in our prepared remarks, the majority of our initiatives that we started out with in our fiscal '20 are really still in place today. So we haven't changed a lot of our strategies given the pandemic. And when I say that, when we look across each of the groups, we see enormous growth opportunity. And first starting with Versace, where we clearly believe we have one of the most underdeveloped luxury houses in the world. And when you look at our current revenue trend pre COVID, we feel that we were underdeveloped significantly and we've said numerous times that we think that's ultimately a $2,000,000,000 opportunity, which means a little over $1,000,000,000 growth for the company. So I think we remain very confident with that. We see our ability we've taken really the 1st year, year and a half of owning that company. We've been cleaning it up. We've been closing unproductive stores. We closed out 2 lines where we dropped over $100,000,000 in revenues. And we've finally gotten the company into position now where we can also start to expand margins. And we're doing that through the larger penetration of accessories and also really kind of refocusing some of our initiatives around life size in the company. So we were doing that, all those things heading into COVID and we launched our new Borocco V logo, which along with our Medusa, we think gives us tremendous opportunity to create engagement and brand loyalty. As consumers pre COVID again, we're still very engaged with products that represented a brand's heritage or the symbol of that brand. And we think we have that. And then lastly, you can see by the, again, prepared remarks, our social media base continues to grow very, very rapidly. And what we didn't say in our prepared remarks is our database grew 20% during the quarter. So again, we're engaging with the customer, we're growing, we're getting that company really positioned to have this mid teens operating margin and we feel quite good about the trajectory that we're on for that. And we can absolutely take market share as the top of the pyramid is still growing very, very quickly, although obviously being contracted for the short term with COVID, but we think that's still a very fast growth area for the industry long term. Secondly, with Jimmy Choo, again, we think that as we rebalance that company from being predominantly just a footwear company to an accessories and footwear house, we have opportunity to improve the operating margin there, again, as we said in our prepared remarks, by 20%. Again, our database grew 20% during the quarter, which is really phenomenal. And I want to talk more about that later. And then we are taking price increases in that line. And you're going to see that happen this fall season. We actually think Jimmy Choo historically has underpriced its product. We are a luxury brand and we've had a history of always being a little bit of the underdog and we've taken a new position on that. And we think that's going to also be the prepared remarks, we pivoted very quickly to what the new casual is. Luxury always had a very big sneaker business. We did traditionally did not. We've talked about that before in Jimmy Choo. You can see we've made really incredible strides in that. And if you looked at one of our slides today, in the attachment to our press release, you got Kate Moss wearing our new Hawaii trainer and that trainer is just on fire for the company. So again, lots of strength there and we're making some manufacturing efficiencies that we're putting in place with our new factory that we purchased about 9 months ago. So that's going to start really showing up in our gross and operating margin. And then Michael Kors, we've started down a path some time ago, really led first by, as you recall, I personally said that it was a mistake that I made of not really pushing our signature products. And in fact, we had pulled back on them. That was a very strategic incorrect decision on my part. We have subsequently corrected that. We told you on previous calls that we would get the Signature business up significantly. We've done that 35% of the business during the quarter in our particular accessories area was driven by the signature and we could have done more. We just were actually in certain cases running out of inventory. The customer is absolutely responding to that. It's far out pacing the inventory levels that we own in that product category. That says a lot about what she or he, because we're selling men's product that wants from the company and from the brand. And Michael and our marketing teams have been fantastic and really coming up with great stories around that, obviously led with Bella Hadid and that's been resonating with signature areas because we take less markdowns in that area. Secondly, we are absolutely strategically raising prices in Michael Kors. We've been doing that for probably 3 quarters now. You'll see it again happening. We're going to be moving prices up in Michael Kors. Once again, we've taken a little bit of the position in the marketplace that we were always a little bit of the underdog. We've been doing that for I think about 16 or 17 years. We're taking a different position. We are one of the most, if not the most important American fashion luxury brand in the world, and we're going to price our products accordingly. And we've seen no resistance when we've been taking prices up so far. And again, that also always depends on whether you have the right product or not. We've also been getting some manufacturing efficiencies. Our partners have been terrific. We haven't changed our quality at all. They've been really great about working with us on different things that are going on in the marketplaces and we've been reaping the benefits of that. I also want to thank on this call our partner manufacturers who during the pandemic, we actually didn't cancel most of our fall orders, canceled very limited amounts. We really put more of the cancellations in holiday. We're flowing that product through holiday, the fall product, and then we're actually repurposing some of our spring product into the upcoming spring. So our inventories are in excellent position, which will also mean there'll be less markdowns for us. And as Tom talked about gross margin expansion, a lot of that's going to come from the fact that we don't have to close out as much merchandise as we move through the next few quarters. So all in all, I think those trends that we were leaning into and of course with Michael Poor's better full price selling by really being a little bit more restrictive in the amount of new fashion that we introduce has helped us as well. So we haven't really changed any of our strategies going into the pandemic with the exclusion of our e commerce, which as you can see, I think we had a really strong performance, up 30% during the quarter, actually slightly over that. And by the way, for the month of July, we're significantly higher than that. So the trend is not decelerating, the trend is accelerating. And I think one of the other interesting points in this is that we generated more new customers during the last 4, 5 months than we have historically. So we saw more new customers coming to basically all of our luxury houses during this period of time. And that was with less marketing. So they were searching us out. They wanted our products and our brands and Michael Kors saw the highest percentage of that. So I think these are all really good indicators. So if you hear me sounding positive during probably one of the most bleak periods of time in our industry, it's because a lot of the strategies that we put in place, they're working and we decided as a management team not to change those strategies during this very difficult time. And I think that's been a strategic win for us. And again, one last thing I just want to say before we take the next question is that we've got an excellent management team in this company. They're very seasoned, both here at Michael Kors, at Versace and at Jimmy Choo, some of the best in the industry. And these teams have been able to nimbly work through the issues, while not taking their eye off of the strategy of where these companies and these houses are going to go. We will get through this. There's not even a question. We've got Versace has got a 42 year history. Jimmy Choo has got a 24 year history. Michael Kors has got a 39 year history. These are not brands that are going to fade away. These are brands that are going to grow. They're going to get stronger. And we will as long as we stay focused on our strategies, we will get through this and we'll come out the other end and we'll be one of the winners, in my opinion. So thank you, Omar. Our next question comes from Erinn Murphy of Piper Sandler. Please go ahead. Great. Thanks. Good morning. I guess my question is around the recovery that you're seeing here in the Americas. It looks if I'm looking at your slides, John, it looks like the Americas is a lot steeper of a recovery versus some of the other regions. If you could just speak a bit more about what you're seeing? And then in certain states as we've seen case counts rising, have you seen any major regional differences in the month of July? Thank you. Thank you. Good morning, Aaron, and I hope wherever you are, you're safe and your family. So Aaron, I think when you look at that chart that we sent out, which we hope is enlightening and helps give you all some view on what's happening. And I feel for many of the analysts who are on this call because we're living this day to day, you're getting the information a little bit later than what's happening live. So we appreciate you need as much information for our investors as possible. So we're trying to be as transparent and share with you what we see. So I would go around the globe and I would start with Asia. Again, we've said that China has seen the fastest recovery where Versace and Jimmy Choo are doing quite well there. Michael Kors a little less so and I just want to address that and that's really because when the pandemic broke in January, we very, very rapidly moved that inventory that was in route to China, to EMEA and to the Americas. Hindsight is 2020 that was probably not the best decision given the recovery bounce back pretty quickly in China. So we're lean on inventory in that region and that inventory is arriving basically as we speak. So we needed more fresh new merchandise and that's an interesting trend that we're seeing both in China, EMEA and the United States. Customers really responding more than ever to newness. It's quite interesting. It's a little less about what's on sale and a whole lot more about what's new and fresh and what's going to excite me. So it's a really fun time from that standpoint to be out marketing and storytelling. And again, we are companies that really project an image and a story around we're trying to talk about, whether that's in product or around the various lifestyles of each of our 3 brands. So we're seeing the positives in China, obviously very difficult in Hong Kong, Macau and those are significant businesses for us and most luxury companies. So it's very painful what's happening there. And in Japan, as many of you have read and heard, there is a kind of a resurgence happening. And so there are our offices have reclosed in China. Certain stores are starting to close again. So we're seeing some difficulty there. So I think we're starting to see some bouncing around in that region. And as you probably have read in Australia, Melbourne has a lockdown going on. So I'd say while China is encouraging, the balance of the region is slowly recovering. And here in this region, we're seeing a very big impact on the Asian tourists traveling, where many places are very important to us with the traveling tourists. And that basically, as I said in my prepared remarks, has come to a standstill. I'll move to EMEA next. I'd say that's where we're seeing the slowest recovery. And really the reason for that is because of the tourist travel. And again, we're at the peak season of where tourists would be coming to London and Paris and Milan and Florence and Barcelona and all these very important cities where we do huge volume. And obviously, that's not going to happen this year. So we continue to be cautious about what's happening in Europe. And but on the other hand, our sales associates who once again I want to give an enormous shout out to, they're the people who get up every day of the week. They're heroes opening these stores, working with clients and in some cases are very, very nervous about what's happening. But they're putting their company and the brands first and they're really making their customers happy and while being safe at the same point in time. There's a lot of work being done with clientele and virtually with our customers and also really creating bespoke experiences where we can send whole wardrobes to people's homes and let them pick and choose and live with the clothes for a day or 2 and then we'll have them brought back to us. So we see probably a little bit more of that happening in Europe and there's been some very, very good response to that. In North America, the rebound is happening, as you pointed out, quicker. I'll actually start with our department store partners. Our department store partners are at least with our products are doing quite well. And we've had a few weeks at some of our partners where we're actually beating last year, which is quite interesting. And that's being driven by the depth and reach of their digital operations. So we've always and I mentioned it in the last call, we've always had a very high penetration online with our department store partners And we're seeing incredible results with that. Also, I might add that that's been similar in Europe, where we've seen some real extraordinary sales results on that end. So the limited the closures that we've had in North America, which have been predominantly in California, really haven't had a tremendous impact on the recovery numbers for us. We are seeing sporadic closures due to COVID cases that have happened inside of our stores. And again, we're putting our employees' safety first. We will close, we will clean the stores, we will make sure that whatever employees have contracted COVID are quarantined. And so I'd say that that is happening, but not skewing the business tremendously. The biggest issue for us in North America, in Europe and even in Asia is foot traffic into the stores. Foot traffic is generally down in the 50% range. And so it's difficult. The transaction levels are much higher. The conversion levels are significantly higher for those people who are coming in. But clearly, there's less traffic. We're seeing the traffic build week by week, but it's slow. And what I would lastly say is that in all three regions, the e commerce results for us are really quite extraordinary. And as I said earlier, actually even building. So I'm so proud of our teams. We've made investments in this company. As I mentioned previously, we started this journey of being digitally led, omnichannel focused and really engaging with our customer that way. We've been doing this for 5 or 6 years. So it's not like all of a sudden today everything has changed for us. We've got a lot more spotlight on it, a lot more emphasis on it. We've got a huge database that I've talked about in Michael Kors, 45,000,000 people. So our ecosystem is quite large and we can really build upon that. We have some quite lofty goals for Versace and Jimmy Choo to increase the size of that ecosystem. And as we do that, we can do a lot more targeted marketing and the results and the ROAS off of that are really extraordinary. So this is going to take time for us to work our way out of it. But we feel like we're positioned the right way given our asset allocation towards e commerce and omni. And clearly, North America has the largest percentage of that for us, both in our own channels as well as our department store partners. Thank you, Aaron. Our next question comes from Matthew Boss of JPMorgan. Please go ahead. Great, thanks. So maybe on the wholesale front, relative to the 85% global decline in the Q1, how best to think about the progression of wholesale shipments in the second quarter versus the back half of the year? And larger picture, John, maybe how do you think about the opportunity to emerge from the pandemic with a stronger wholesale distribution footprint overall? I'm going to take the second part and then I'll turn it over to Tom for the first part progression. As I've said to you on many calls, we are very proud and we believe deeply in our partnerships with our department and which last year ran about a third of our business, about 30%. So when you look at our wholesale penetration, which last year ran about a third of our business, about 30% necessarily by some unique design. But as you know, you see bankruptcies that are happening, you see door closures that are happening. And so that's going to limit that. We also believe that the travel retail business will probably take at least 2 years to recover. And again, I'm not telling you anything that I'm sure you haven't heard or been listening to. So we think that that number will become a less relevant number to the company, although extremely profitable. And we value those partnerships and we think that our customer absolutely shops at whether it's Neiman Sacks, Bloomingdale's, Macy's, Dillard's or Galleries Lafayette, Harrah's or Harvey Nichols or the Mein Kampf, whatever the places are, these are beautiful stores with amazing sales associates in them and they have great relationships with their loyal customers. So we continue to remain engaged with that channel and want to see that channel ultimately recover, although we know it's going to be smaller for us for just a host of reasons. And the last thing I'll say and then I'll turn it over to Tom is that while you've seen this decline, which was quite precipitous given the outbreak of the pandemic, we actually went to our department store partners and we laid out we told them here's what we think is going to happen for the next 4 quarters. We want to actually not ship you merchandise because we think it would be bad for the brand. Obviously, everyone was worried about cash at the time. And we took the position that we think we've got a better way of working our way out of it. I don't think we were the only one doing that, but I think what we did turned out to be quite smart. And we're seeing that pay off for us as the department stores, as I said to you before, are actually recovering very nicely, at least the ones that we do business with today. And remember, they're down to only a handful of people that we do business with today. And the recovery seems to be quite good. So we'll start to see that recover over the next few quarters, but I'll let Tom talk about that. Sure. Thanks, Matt. And just to build on what John was stating, we have seen good POS trends and positive on the e com side for our wholesale partners. So that has been very encouraging. That said, the replenishments and new orders have been on a lag from our own retail business. And what we expect coming out of Q1 is that it will recover. It will recover through the year. However, it will be slightly paced behind our own retail shipments and recovery throughout the year. And then as John mentioned, look at it maybe a little smaller longer term. We have had a few door closures with bankruptcies, but in large part those are small and not really a major impact to our business. Thank you, Matt. Our next question comes from Alex Walvis of Goldman Sachs. Please go ahead. Good morning and thanks so much for taking the question here. My question is on the fleet and how you're thinking about that longer term. John, you mentioned in your comments that the plan is still the same for the store rollout and the opportunity that you see for and for Jimmy Choo. How has the pandemic and the associated acceleration in e commerce growth changed how you're thinking about the fleet or anything on the structure of your direct to consumer business going forward across the 3 brands? First off, good morning and I hope you and your family are safe. Secondly, I think we couldn't hear the first part of the question, if you could just repeat that. My apologies. I wanted to ask about how the acceleration in e commerce growth during this pandemic has changed how you're thinking about the presence of physical retail in the business. I believe the thoughts on the new store opportunity for Jimmy Choo and Versace are still similar. So I guess I'm wondering why that is and how you're thinking definitely about maybe the types of stores that you're looking at, how those interact with e commerce in the future? Sure. Okay. So, Alex, as I said before, absolutely the pandemic has accelerated our e commerce revenues. It's increased the penetration of that to our total business. The great news is some time ago, we built our at minimum in Michael Kors, a strategy to have $1,000,000,000 e commerce business that we didn't think that would happen overnight and it's still not going to happen overnight. But we've built warehouses, we've built platforms, etcetera, to be able to handle that type of a business. So we feel very comfortable that we are in a position to be able to grow that as fast as we possibly can. And what's happened is some of our integration and transformation is starting to take place. Jimmy Choo, for example, they're moving into our Holland warehouse in Europe and we're looking at other initiatives where we have the ability to help the other divisions be able to take advantage of this rapid growth in e commerce. Secondly, we've really for the past 2 years been on a very strong initiative. You hear us talk about it regularly. We're going to grow that database in our ecosystem and we're pushing as hard as we possibly can on that because we know that's got tremendous value to us. What we are able to do with current customers, new customers, lap customers, when it's when you're dealing with in particular the fact that traffic is down and don't know when that's going to recover or what rate it's going to recover at. The one thing we can do is we can talk to our customers that we have their names they're engaging with us. And then of course you see the social media following growing. That's not growing because they don't like us. That's growing because they want to be a part of the experience of each and every one of our brands. So we're excited about that. I think that when you look at Versace and Jimmy Choo, we know both of those brands are underdeveloped. And having 300 stores globally, in our opinion, is not over stored. And even in light of the pandemic, we don't think that that's a stretch for either one of the brands. Many of our competitors have significantly more between 400 and as many as 500 stores in the luxury customer, clienteling with our customer, we have a lot of ways of creating additional experiences and we can hit our growth targets without going beyond what where we are today. So we'll be very careful as and monitor that. On the Michael Kors side, we've already started a program where we have been really optimizing our fleet. And I have to say, I'm quite proud of that. I think when you look at us versus our competitors, we've clearly said that we're going to close approximately 100 and 50 Michael Kors stores over the next 2 years in addition from our current 8 80 stores. So that's going to start to put us in a really good position in terms of having stores that are predominantly profitable and stores that can grow. And we're going to focus on making those stores more productive and we're doing that at Versace, at Jimmy Choo and Michael Kors. And so I think that, again, this is a journey that we had been on before the pandemic. Could that accelerate a little bit after whatever we see happens over the next 12 months? Maybe, I don't know. But I think we feel really good about where the Michael Kors stores are. They're on the best luxury streets in the world. They're on the best shopping centers in the world sitting next to many of our very powerful luxury partners. So I think our distribution is lined up with where we want it to be. The other thing I just might add, we are we have been for quite some time, we're omni capable, we can ship from store. And so we've been doing a lot of that, boy, that helped us significantly during the pandemic as stores came online, the utilization of inventory. So we still view our ability to do that as a competitive advantage, speed and service for our consumer. So again, I think that when we get closer to that 650 to 700 level in stores, I think that will be a good place for us and feel good about our e commerce capability sitting on top of that. Thank you, Alex. Our next question comes from Kimberly Greenberger of Morgan Stanley. Please go ahead. Great. Thank you so much. And I just want to say a special thank you for the very helpful slides. I thought they really added to the presentation today. And I just wanted to start with the slides, if I could. It looks like North America is really nicely accelerating. And June, if I'm eyeballing it correctly, looked to be down about 50% or so with July really materially better at sort of a down 20%. Am I sort of reading those slides correctly? And then it looks like here in July, global sales trends are sort of running down around 25%. So I'm just trying to contrast what looks like we're seeing in the slides with the 2nd quarter outlook for revenue to decline about 40%. Is that differential, just simply what's happening in the wholesale channel? That would be super helpful. And then, the fleet rationalization that you talked about is really encouraging. And I'm wondering if because of COVID and all of the sort of unique external circumstances out there, is it easier to close stores prior to lease expiration because of these circumstances? And have you are you still targeting the same 150 stores for closures today that you were thinking about pre COVID? Or has COVID actually changed perhaps the 150 stores that are on that list? Thank you so much. Hi, Kimberly. And so starting with the first question on the Q2, it is really our wholesale mix. As we mentioned in Q1, retail was significantly better than the wholesale trend. So while POS at the wholesale channel is performing, we think that the reorders and new orders will continue to lag that and that ultimately it will normalize, but that it will still have an impact certainly in Q2. And I'd say that that also will have an impact in this case in a positive sense on our margins. As you saw in Q1, we had a gross margin increase and expansion and about half of that was channel mix, about half of that was the initiatives around AUR that we discussed. So as wholesale continues to normalize, we'll see that benefit reduced. However, our initiatives are going strong and they'll continue to drive that 150 basis point margin expansion through the remainder of the year. And Kimberly, let me add one last thing to that as well. And I don't mean this disrespectfully, but I think a lot of times people think of us and our wholesale distribution as just North America. So there seems to be a lot of focus, rightfully so on our North American wholesale distribution. But remember, we have a fairly large wholesale distribution in Europe, which is department store and specialty store. And then we have a very big travel retail business in this company. So if you go backwards and start with travel retail, we don't know when that's going to recover. So that for all intents and purposes is 0 today and will probably remain at 0 for quite some time. So that's going to hurt our wholesale shipments. Secondly, the specialty store business in Europe is very slow to recover. They will not be taking any new orders in, I would assume until really September. Again, these are small family owned businesses that are really struggling through this pandemic. And that's also a sizable business for us. It's actually the greater part of the business in Europe specialty store versus department stores. And the department stores in Europe are really struggling on the recovery because remember the key ones that I mentioned earlier, their flagships account for significant amounts of their revenue. So until again travel retail comes back, they're going to be impacted. Oddly enough, oddly enough, but the North American department stores are the best equipped right now because they have very robust e commerce businesses. And so where we have seen difficult situations in major flagships at our department store business in North America, we're actually getting offsetting lift. As I told you, it was a few weeks where we've actually comped over last year because the e commerce business is so strong and so well developed for that channel. So again, when you think about wholesale for us, please think about those three areas, North America wholesale, Europe wholesale, which is broken into 2, specialty and department store, and then lastly, travel retail. You need to keep that in full context. So even if North America wholesale recovers, we're going to be much slower with the other two pieces. And that's why the progression of company owned retail is going to outpace wholesale, I think for the majority of the year. And that will have impact on margin, that will have impact on some of our sales recovery as well. In terms of the store count, I think we gave you on the last call was between 150 170 stores we're going to close, because there'll be a handful of Versace, Give Me 2 stores that we're going to close and reopen in different locations, etcetera. But of the approximately 150 of my core stores, we're good partners with our landlords. And I want to thank them all on this call, because I would say almost without exception, every single one has helped us partner through this difficult period of time. And that says a lot about them and it says a lot about us and our relationships together. And again, I want to say thank you to them for their help during this. We're going to honor our leases until they're terminated. And we really are looking very carefully at store closures based upon profitability. Unfortunately, when e commerce took off 6, 7 years ago, it impacted our stores. And as consumers' behaviors changed, they just came into the stores less often. And therefore, we had at one point in time where almost our entire fleet was profitable worldwide in Michael Kors. That's not the case today. And so, many of our leases are coming to termination. And you're going to see that the impact of losing those lower stores, which are quite a drag on the profitability, start to go away and we think that's a very positive thing. I might remind everybody on this call that Michael Kors did have a very significant operating margin last year, slightly north of 20%. So Michael Kors is still a very profitable business and we actually think we can not get back to our peak periods, but we think we can make that a significantly better number than what it was last year. Obviously, that won't happen in the current fiscal year. But we are planning for 2022 clearly to be a smaller business for many reasons, whether that's wholesale closures, whether that's store traffic being down. But we think we can hit some very significant profitability levels, given our ability to reduce costs, to be in line with what our revenues are, plus the strategic initiatives that we're putting in place that will increase gross margin and productivity in existing stores will be in place. And additionally, you're going to see the Jimmy Choo's and the Versace's and all resume growth and Michael Kors is going to have a different mix and we think ultimately resume growth as well. So we feel quite good about that. But we don't think COVID is going to change our mind on where the stores are given what we think will happen next year. We think that's we think we'll end up with the right mix. Thank you, Kimberly. Thank you. I think we'll take the next question. Our next question comes from Michael Binetti of Credit Suisse. Please go ahead. Hey, guys. Thanks for all the detail today. I guess I'll just follow-up on a couple of the earlier questions. When you've obviously given us some good color for Q3 and Q4 as we look out a little bit here, but maybe some thoughts on how the initial conversations are going for orders in the wholesale channel, particularly in the U. S. As you look to spring 'twenty one, which is just from talking to the retailers when they feel like they can lift their eyes a little bit and maybe go back on offense. But I'd love to hear what your initial conversations are for them as they look to how they're going to set their floors. And then I guess if I put the pieces together here, Tom, it sounds like you think wholesale revenues are going to lag POS through at least through this fiscal year. Maybe you could speak to when you think those will actually come back into alignment? I know there's a lot of moving parts, but is it far into 'twenty two? Or how would you describe that? Thanks. Good morning, Michael. And I hope you and your family are safe. And I forgot to say that to Matt and Kimberly, so I hope both of your families are safe as well. So department stores, look, the initial conversations we're having are actually once again encouraging. We have been one of the best performing brands during COVID. We were told that by our key North American department store partners. It's a little less so in Europe because they have much smaller e commerce businesses. So it's been a little harder to understand what that what the customer reaction has been to our brand until the stores reopened, although we're seeing some relatively reasonable results since stores reopened. So I think our numbers that we're getting from the stores have been quite in line and actually slightly better than what we had internally budgeted for. And I might add that's particularly in accessories and in footwear, a little less so for ready to wear. Ready to wear has been the I think I mentioned that previously, has been the softest category for us. And we're doing some things to mitigate that. Obviously, we've been a company for both Versace and for Michael Kors where we've been a very company focused on more of a polished image. And there's clearly a big market that can be tapped in a more casual, but also something that excites people for what their new lifestyle is. And so we're making some adjustments to our assortments on that and we think that you'll see that more in the first half of next year. So again, we haven't seen anything that's told us anything that's concerning given what our projections are. And again, our POS sell throughs are we're being again told we're one of the best. And as I said to you, they're running at our performance rates and in some cases better. So we're feeling pretty good about what again, I want to caveat all of this. If obviously there's a resurgence, if there's a heavy second or third wave of this, obviously that's going to impact everything that we possibly could be discussing today. But if we continue at this slow pace of recovery, I think we're feeling confident about working with our partners. And in terms of the revenue normalizing and how it really relates to retail, I think it's dependent upon the overall economy and the COVID situation itself normalizing. I think at that point, you'd see more similar trends. But for wholesale, as John mentioned, we would expect on a percent of business basis, it will be smaller going forward. And what we're going to continue to evaluate is the health of the EU specialty retailers and the overall footprint of travel retail in a post COVID or normalized environment. We believe in the U. S, we're with the very strong wholesalers and department stores. So we feel very good about that situation. Thank you. And we'll take one last question. Our final question comes from Jay Sole of UBS. Please go ahead. Great. Thanks so much for taking the question. John, I wanted to just follow-up on the margin, the opportunity you see to get back to 15% margins. How correlated is the margin trajectory to the sales trajectory? So if we look out and say fiscal 'twenty three and the business is $4,500,000,000 versus maybe $5,500,000,000 is a better scenario, how much would that change the opportunity for the company to get back to a mid teens margin? Jay, first off, good morning and I hope you and your family are safe through this very difficult time. Jay, look, there's no question that volume or higher revenues will definitely create leverage, operating leverage for us to get back to the mid teens operating margin for the company. We have very distinct goals. We see something north of 20% and less of 25% for operating margins for Michael Kors. We've stated that we see mid teens operating margins for Versace and Jimmy Choo. I think you've heard my positive commentary around that. We think we've got some really good initiatives. And we were heading in that direction anyway. So I think we're comfortable that we will get there. Again, there are certain components that are have to come together. As you well know, we've got to get a vaccine. We've got to see foot traffic return to brick and mortar because as important as e commerce is and omni sales and we're certainly very well positioned with that as a company and an organization and where we do have a slight weakness in Versace, we're fixing that. We need brick and mortar to work. I mean, as an industry, we all need it to work and we believe it will come back. It will be probably a little different than what it was before, more e commerce revenues versus as much store revenues. But there's even today, it's a bigger percentage of our business. So as that happens and as travel retail recovers, I think we'll be able to reach those objectives. And I'm not going to comment on the kind of numbers that you mentioned. The only thing I can tell you is that we believe we'll be somewhat smaller next year from our pre COVID levels. But that being the case, remember Versace is very underpenetrated in the luxury market. Jimmy Choo, which had grown every year of its 24 years in existence except for last year, given what happened, we believe that company also is underdeveloped. And we believe that Michael Kors, while we'll be setting off of a lower base, we'll begin a recovery of growth as well. So again, when you look at 3 companies, Versace with a 42 year history, Jimmy Choo with a 24 year history, Michael Kors with a 39 year history. And these are all highly recognized names around the globe, as well as beloved with growing social media, growing databases, and I think excellent management teams. I think we're feeling quite positive about how our company is going to get through this very difficult time. And I might just conclude with one last thing. We ended the quarter with $1,100,000,000 in liquidity. Our debt is coming down and we think will come down over the next couple of years. So we're not a very leveraged company and we're going to have the resources and the cash flow to be able to continue to build on what we need to do. So I think that gives us great confidence and we'll continue to navigate through this difficult period, making sure that our employee safety comes first and our customer safety. And I would like to conclude by thanking our entire worldwide employee population. They get up every day. They are working very hard, whether it be remotely, whether it be in our stores or whether it be in our warehouses to really service the end consumer to build value for our shareholder. And without them, we wouldn't have the great company that we have today. So I want to end by thanking them. And then lastly, I want to thank everyone for joining us today. And we look forward to updating you on our 2nd quarter results later this year. Thank you all. Have a good day and stay safe.