Capri Holdings Ltd (CPRI) 2020 Q3 法說會逐字稿

Good day, and welcome to the Capri Holdings Limited Third Quarter 2020 Earnings Conference Call.

Today's conference is being recorded.

At this time, I'd like to turn the conference over to Jennifer Davis, VP of Investment Relations at Capri.

Please go ahead.

Good morning, everyone, and thank you for joining us on Capri Holdings Third Quarter Fiscal 2020 Conference Call.

With me this morning are Chairman and Chief Executive Officer, John Idol; 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 onetime costs associated with the Jimmy Choo and Versace acquisitions, restructuring and noncash impairment charges, transformation costs and ERP implementation costs.

Unless otherwise noted, all financial information on today's call will be presented on a non-GAAP basis and all comparable store sales numbers will be presented on a constant currency basis.

To view the corresponding GAAP measures and related reconciliation, please view the earnings release posted on our website earlier today at capriholdings.com.

Now I would like to turn the call over to Mr. John Idol, Chairman and Chief Executive Officer.

Thank you, Jennifer, and good morning.

We continue to be encouraged by the ongoing progress of Capri Holdings as we execute the strategic initiatives for each of our founder-led fashion luxury houses.

While each brand is distinct with its own heritage, they all have consistent philosophies on fashion leadership and luxury.

Our company is led by design visions of Donatella Versace, Sandra Choi and Michael Kors.

With the resources and investments of our group, we have made tremendous progress in expanding accessories at both Versace and Jimmy Choo.

In fact, in the third quarter, handbags inflected positively at both houses for the first time since the repositioning of the category.

At Michael Kors, our focus remains on rebalancing the brand to position it for growth.

Taken together, we remain confident that our 3 luxury houses position Capri Holdings to deliver multiple years of revenue and earnings growth.

Now looking at our third quarter results.

We were pleased that revenue and earnings per share exceeded our expectations.

Revenue of $1.57 billion increased 9% year-over-year.

This increase reflects the addition of Versace and growth from Jimmy Choo, partially offset by anticipated revenue declines at Michael Kors.

Earnings per share were $1.66.

Before reviewing brand highlights for the third quarter, I would like to share some of our thoughts on the coronavirus global health emergency and its impact on our outlook for the fourth quarter.

This situation is very serious and dynamic.

Our thoughts and prayers go out to the people of China and all those affected by this virus globally.

The health and safety of our employees is a priority.

And we continue to take the necessary precautions to ensure their well-being.

We can only hope for a speedy and positive resolution to this crisis.

Given the extraordinary and appropriate efforts taken to contain the virus, our trading results in Greater China and certain other parts of the Asia region have been materially impacted.

Currently, approximately 150 of our 225 stores in Mainland China are closed.

Additionally, for those stores remaining open, both traffic and sales have been severely reduced.

Based on our current visibility into the situation in China, we are reducing revenue by approximately $100 million and earnings per share by $0.40 to $0.45 for the fourth quarter and full year.

This estimate could materially change if the severity of the virus worsens, including potential broader impact on our business outside of China if outbound travel and tourist traffic is further restricted from China into other countries.

In addition, we will not be providing brand comparable store sales guidance ranges for the fourth quarter due to the lower-than-normal forecast visibility.

Now I would like to summarize our outlook for the year.

Prior to the situation in China, our earnings per share expectations were largely on track with our initial guidance for fiscal 2020.

We now anticipate fiscal 2020 revenue of approximately $5.64 billion and earnings per share of approximately $4.45 to $4.50.

As previously stated, fiscal 2020 is an investment year to fund strategic initiatives in Versace and Jimmy Choo.

We are confident that the investments the company is making this year and synergies that we are now realizing will provide accelerated revenue and operating margin expansion.

Now turning to third quarter performance by brand.

Starting with Versace.

We were pleased with our third quarter results.

Revenue of $195 million was ahead of our expectations, reflecting better than expected comparable store sales, which increased mid-single digits.

Versace delivered double-digit comparable store sales growth in Americas and EMEA, but continue to experience declines in Asia, primarily due to the ongoing challenges related to Hong Kong.

Versace's continued momentum was driven by new collections that were infused with signature brand codes, such as our new Barocco V, Medusa hardware and iconic prints.

Taking from our extensive archives, we recently introduced a new house code, Gianni Versace's original handwritten signature.

This motif was incorporated across several women's and men's ready-to-wear styles.

It is interpreted through embroidery, all over prints and crystal embellishments.

Both women's and men's ready-to-wear were key drivers of growth for the quarter.

Turning to accessories, a key component of our growth strategy.

Sales increased significantly in the third quarter driven by the performance of our new Virtus collection with the Barocco V logo.

The Virtus handbag group remains the top-performing collection in accessories and we have expanded the Barocco V across new categories, including belts, backpacks, footwear and fashion jewelry as well as new handbag styles.

We are particularly encouraged that Virtus is driving increased client acquisition with more than 60% of purchases coming from new customers.

In terms of brand awareness and customer engagement.

Our holiday marketing campaign reflected a rich narrative reminiscent of a Jackie Collins novel.

The brand employed a 360-degree marketing program across social media and e-mail to drive traffic to a dedicated holiday section on versace.com.

This helped contribute to a 30% increase in Versace's Instagram followers during the quarter, which grew to 21 million.

Once again, a number of high-profile celebrities were dressed in Versace throughout the quarter, including Jennifer Lopez, Angelina Jolie, Kim Kardashian, Selena Gomez, Chadwick Boseman and Michael Jordan.

Additionally, numerous celebrities like Miley Cyrus, Gigi Hadid, Priyanka Chopra were spotted out and about carrying the Virtus bag.

Reflecting the power of the Versace brand, Donatella created a worldwide sensation by dressing Jennifer Lopez in Versace Atelier during her first Super Bowl performance Sunday night.

With over 100 million viewers, this event showcased Versace at the forefront of its rock and roll heritage.

Overall, we are excited about our continued progress executing against Versace's growth initiatives and remain confident in our ability to grow Versace to $2 billion in revenue.

Moving to Jimmy Choo.

Revenue increased 2% on both a reported and constant currency basis, in line with our expectations.

Comparable store sales were flat, which was also in line with our expectations.

We were pleased to see positive comparable store sales performance in the Americas, which increased high single digits; and EMEA, which grew low single digits.

Similar to last quarter, trends in Asia were impacted by Hong Kong, while Mainland China continued to grow double digits.

In footwear, Jimmy Choo continued to deliver strong comparable store sales growth in fashion active classification, driven by the introduction of HAWAII, an exciting new sneaker, which builds on the existing strength of Diamond and Raine.

In women's accessories, the continued expansion of our new collections led to positive global comparable store sales growth for the first time since we repositioned the category.

Sales were driven by our JC signature VARENNE group and the continued positive performance of Madeline.

In November, we continued our In My Choos 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.

Rosie Huntington-Whitely was featured in the second installment of the series wearing designs from our Cruise 2020 collection.

In conjunction with the campaign, we launched Instagram shopping tags for the first time and saw above-average sell-throughs on the shoes Rosie wore on her posts.

Jimmy Choo continued to dominate the red carpet with celebrities such as the Duchess of Cambridge, Beyoncé, Rihanna, Constance Wu, Dua Lipa, Hailey Bieber, Gemma Chan and Billy Porter.

During the quarter, Jimmy Choo's Instagram followers grew to 11 million, an increase of nearly 20% over last year.

Finally, I'd like to take a moment to congratulate Sandra Choi for her induction into the illustrious Footwear News Hall of Fame in recognition of her outstanding achievements building Jimmy Choo into one of the most prominent luxury brands in the world.

Overall, we are pleased with the progress transforming Jimmy Choo from a predominantly fashion luxury footwear brand into a more balanced luxury house with accessories becoming a significant part of the company's revenue.

Our goal is to grow accessories from approximately 20% to 50% of Jimmy Choo's revenue over time.

We remain confident in our long-term ability to grow Jimmy Choo's revenues to $1 billion.

Turning to Michael Kors.

Third quarter revenues declined 5% on both a reported and constant currency basis.

Total revenue was in line with our expectations.

Retail revenue was below our expectations with comparable store sales declining in the low single digits.

Our third quarter comparable store sales reflect low single-digit growth in Asia, flat results in Europe, and a low single-digit decline in the Americas where stores were impacted by lower-than-anticipated traffic during the month of December.

Additionally, we saw a greater-than-expected decline in watches, which negatively impacted total comparable store sales by approximately 200 basis points.

Excluding the impact of watch declines, comparable store sales would have been flat.

In the wholesale channel, revenue was ahead of our expectations as we saw better product sell-throughs and are building inventory to prior year levels with our department store partners.

Moving to our product performance.

In accessories, Signature continues to drive sales around the globe as customers responded positively to both our core assortment and new animation.

Penetration of Signature in the retail channel was approximately 30% in the third quarter, similar to the second quarter.

In wholesale, penetration increased to nearly 30% as well.

Long term, we anticipate Signature will reach approximately 40% penetration, which will drive higher revenues and more consistent sell-throughs.

Moving to footwear.

Trends remained strong in the third quarter, with performance-driven by booties and fashion active.

Heritage booties with iconic charm and lock branding were customer favorites.

Active remains one of our fastest-growing categories in footwear.

We continue to be leaders in design and innovation in this classification.

In women's ready-to-wear, positive trends continued with particularly strong customer response to fashion outerwear.

In men's, we also saw -- we also continued to see positive comparable store sales and remain enthusiastic about our opportunity to expand the accessories collection.

Growth in the third quarter was led by backpacks and small leather goods.

Our signature collections are driving performance and now account for 40% of sales.

Additionally, customers responded positively to our new introduction of a sneaker collection.

In our watch category, trends further decelerated in the third quarter.

Despite continued innovation, the decline was greater than anticipated.

This reflects continued decreases in fashion watches and the greater impact of competition from tech-driven companies in the smartwatch market.

This category will likely remain challenged and have a continued impact on North American retail comparable store sales as well as future licensing income.

We remain focused on accelerating the distribution of our fine jewelry line to help mitigate pressure from the continued decline in watches.

During the third quarter, jewelry comparable store sales increased double digits.

Turning to brand engagement.

We continue to be pleased with our Bella Hadid campaigns.

Our holiday marketing reflected the speed, energy and optimism of our brand with Bella in our #MKGO Sea & Ski capsule and traveling in style with our Jet Set Girls signature accessories.

Once again, Michael dressed a wide array of celebrities during the quarter, including Lupita Nyong'o, Olivia Wilde, Daisy Ridley, Reese Witherspoon and Saoirse Ronan, Gao Yuanyuan and Chris Lee, among others.

Moving to customer experience.

Our global database continues to expand, reaching approximately 42 million customers, an increase of over 20% compared to last year, demonstrating the continued strength and desirability of the Michael Kors brand.

We're especially excited about the growth of our VIP database, which now has 2.7 million customers enrolled, well above our expectations.

During the quarter, Michael Kors' Instagram followers grew to 16 million, an increase of nearly 20% versus last year.

We remain focused on deepening our connection with our customers and driving excitement and desire for the Michael Kors brand.

Overall, we are committed to delivering improvement in the Michael Kors business and ultimately returning to longer-term growth with the continued execution against our 3 strategic pillars of product innovation, brand engagement, and customer experience.

In conclusion, our results reflect continued progress at Capri Holdings.

The growth initiatives for our recent acquisitions, Versace and Jimmy Choo, continued to gain traction.

And we remain on the right path to stabilize trends at Michael Kors.

While the situation in China is very concerning, we continue to believe that the long-term opportunity in the Asia region will be a pillar for our future growth.

The power of our 3 fashion luxury houses position us to achieve meaningful long-term revenue and earnings growth.

Now let me turn the call over to Tom.

Thank you, John.

Starting with our third quarter results.

Revenue of $1.57 billion increased 9% compared to last year, ahead of our expectations.

Revenue growth year-over-year was driven by the addition of Versace and growth from Jimmy Choo, partially offset by anticipated lower revenue at Michael Kors.

Net income was $253 million, resulting in diluted earnings per share of $1.66, which was above our expectations.

Third quarter earnings per share included $0.13 of dilution from Versace.

Looking at sales performance by brand.

Versace revenue was $195 million and comparable store sales increased in the mid-single digits.

Total revenue was ahead of our expectations, reflecting better-than-anticipated comparable sales.

We continue to see double-digit comparable sales increases in the Americas and EMEA, while Asia declined as trends in Hong Kong worsened.

Versace ended the quarter with a global luxury fleet of 208 retail stores, a net increase of 10 from prior quarter.

Turning to Jimmy Choo.

Revenue during the quarter was $165 million, a 2% increase compared to prior year on both a reported and constant currency basis and in line with expectations.

Comparable store sales were flat as anticipated with continued growth in the Americas, EMEA and Mainland China.

Jimmy Choo ended the quarter with a global fleet of 223 retail stores, a net increase of 17 from prior year.

Turning to Michael Kors.

Total revenue of $1.2 billion was above our expectations and declined 5% compared to last year on both a reported and constant currency basis.

Revenue performance was driven by better-than-anticipated wholesale results.

As John said, we worked with our wholesale partners to bring inventory in earlier to help drive better sell-throughs.

This was partially offset by lower-than-expected comparable store sales.

In the retail channel, comparable sales declined in the low single digits, reflecting a greater-than-anticipated decline in watches and lower-than-anticipated traffic in North America in December.

The headwind from watches in the quarter was approximately 200 basis points.

Global e-commerce revenues benefited comparable sales by 180 basis points.

Michael Kors ended the quarter with a global fleet of 846 retail stores, a net decrease of 24 compared to prior year.

Now turning to total company margin performance.

Gross margin was 59.5%, down approximately 130 basis points compared to prior year.

This primarily reflects the lower Michael Kors brand gross margin, predominantly due to increased promotional activity in North America, partially offset by a benefit from the inclusion of Versace.

Total company operating expense increased $112 million compared to prior year.

The increase reflected $146 million of expenses related to the addition of Versace.

As a percentage of revenue, operating expense increased 380 basis points to 42.6%, reflecting the addition of Versace, partially offset by lower expenses at Michael Kors.

Total company operating margin of 16.8% compared to 22% last year, primarily driven by the addition of the Versace business and lower operating margin at Michael Kors.

Versace's operating margin of negative 5.1% reflected normal seasonality and increased investments to support growth initiatives.

Jimmy Choo's operating margin of 5.5% compared to 9.9% last year.

Michael Kors operating margin of 23.8% declined 130 basis points versus prior year, reflecting lower gross margin partially offset by lower expenses.

From a channel perspective, once again, retail operating margins expanded in the quarter, while wholesale margins declined.

Our tax rate for the quarter was 4.5% compared to 14.5% in the prior year, primarily reflecting the resolution of uncertain tax positions.

Now turning to our balance sheet.

We ended the quarter with $237 million in cash and cash equivalents and $2.1 billion of debt.

During the quarter, we repaid approximately $300 million of debt and year-to-date have already paid down $500 million, reflecting the strong cash flows of the business.

Additionally, we repurchased 2.7 million shares of stock for $100 million and have $400 million of availability remaining on our share repurchase authorization.

We ended the quarter with inventory of $960 million compared to $765 million last year, with the increase reflecting the addition of Versace inventory of $187 million.

Jimmy Choo inventory increased 13% compared to the prior year to support our growing accessories category and new store expansion.

Michael Kors inventory decreased 2% and is now more in line with sales trends.

Now turning to guidance.

As John stated, primarily as a result of the situation in China, we have revised our full year expectations.

For Capri Holdings, we now expect revenue of approximately $5.65 billion.

By brand, we expect Versace revenue of approximately $840 million, Jimmy Choo revenue of approximately $580 million and Michael Kors revenue of approximately $4.2 billion.

Revenue changes for all brands reflect the situation in China, the developments in Hong Kong and unfavorable foreign exchange translation.

In addition, Michael Kors was impacted by lower sales in North America.

We now anticipate an operating margin of approximately 13.7%.

We expect interest expense of $15 million to $20 million and effective tax rate of approximately 9.5% and weighted average shares outstanding of $152 million.

As a result, we now expect diluted earnings per share of approximately $4.45 to $4.50, including an estimate for the situation in China related to the coronavirus of $0.40 to $0.45.

For some perspective on the impact of the situation, approximately 150 of our 225 stores in Mainland China are currently closed.

The locations that remain open have reduced operating hours and are experiencing significant traffic declines.

As a result, revenues are being significantly impacted.

Prior to consideration of the situation in China, Asia would have represented approximately 25% of total Capri revenue in our fourth quarter, and China makes up more than half of our business in that region.

Our current estimate for the impact of the situation in China could materially change if the severity of the virus worsens, including potential broader impact on our business outside of China if travel and tourist traffic is further restricted.

We currently source less than 10% of our Michael Kors product in China.

Our forecast could also be negatively impacted by disruptions of our supply chain.

As John noted earlier, we hope for a speedy and positive resolution of this challenging situation.

Our thoughts and prayers go out to the people of China and anyone affected by this virus.

For the fourth quarter, we now expect total company revenue of approximately $1.3 billion.

This assumes Versace revenue of approximately $210 million and Jimmy Choo revenue of approximately $130 million.

We expect Michael Kors revenue of approximately $950 million, which includes the impact of the earlier wholesale shipments realized in the third quarter.

Our fourth quarter operating margin is expected to be approximately 9%.

For Versace, we expect an expansion in operating margin reflecting the benefit from an additional month in the quarter, December, which is the brand's single most profitable month of the year.

For Jimmy Choo, we expect operating margin to improve from prior year as we begin to leverage expenses and normalize strategic investments made over the past 2 years.

Michael Kors brand operating margin now is expected to be below prior year due to the coronavirus impact.

We expect net interest expense to be approximately 0 and our effective tax rate to be approximately 7%.

We forecast weighted average shares outstanding of 152 million, resulting in diluted earnings per share in the range of approximately $0.68 to $0.73.

Now I'd like to talk briefly about fiscal 2021.

We have made tremendous progress on our transformation initiatives that deliver synergies across our business.

We are starting to see some savings come to fruition and now anticipate approximately $100 million in synergies and cost savings in fiscal 2021 as we build out corporate shared services, create operational centers of excellence, and leverage common systems to accelerate business initiatives.

We look forward to sharing more details about fiscal 2021 on our year-end earnings call.

Looking ahead, we remain focused on executing against our strategic initiatives for each of our brands and realizing the benefits of our multi-brand portfolio.

We are confident these efforts position us to drive long-term revenue and earnings growth.

Now we'll open up the line for questions.

(Operator Instructions) And we will take our first question from Randy Konik of Jefferies.

I guess a question for Tom.

A couple of just clarifications.

Could you give us some perspective on just how big the watch category is today as a percent of sales, just so we have some frame of reference of where it is now?

I guess, second, can you give us some -- you've done a nice job of stabilizing and improving the retail margins in Michael Kors.

The wholesale margins have come down a little bit.

So kind of give us some perspective on when we should see and how we should see the wholesale kind of margin start to stabilize?

What are the levers there and the timing?

And then I guess, lastly, you gave us some good, really interesting perspective on synergies coming through.

I think you said $100 million in fiscal 2021.

Just give us some perspective of how you think those synergies -- do they more than offset some of the issues going on in China and the Asia region?

Or just how should we be thinking about those synergies offsetting or partially offsetting some issues continuing in Asia?

Sure.

Thank you, Randy, and just taking the watch category.

It is still a significant part of our business in North America and represents a good portion of our retail business.

We don't share the specific number, but from its heights in the teens or high teens of a penetration, it has declined.

But it's still significant enough where, as you can see, it's a 200-basis point impact in a quarter for us and has hit that number in the past as well.

With regard to synergies and the impact, I think we're really pleased with how our company is coming together and our teams are executing against their transformation initiatives to create global services and global capabilities.

We're going to provide a lot more information on that when we provide our full year guidance on fiscal 2021.

But clearly, that's something we're very excited about, and we'll tell a few more.

Randy, it's John.

I'd like to take the margin piece.

We're -- as you recall, Q4 for us was kind of the moment where we were beginning to see operating margin expansion or forecasting that for really all of our brands.

And we -- as Tom said in his earlier prepared remarks, and you're going to continue to see that at Versace and Jimmy Choo even with the situation in China.

Michael Kors is going to be impacted by that.

But what we're seeing is our retail operating margins are expanding, which actually happened in the third quarter.

And that's a result of our fleet optimization program and also some other things that we're doing with getting better sell-throughs in certain categories.

And then secondly, the wholesale margins have been under pressure, and that's really a result of deleverage, given the size of that business is shrinking.

But what we were encouraged about during the quarter, as I said in my prepared remarks, we saw an inflection with our department store partners in North America as we started to really get inventory in.

We worked closely with them to actually move inventories in a bit earlier than we had originally anticipated.

And that worked.

We're not quite up to LY levels with our partners, but we're getting very, very close and we're seeing our Signature initiatives work in that channel, which is what we wanted to see happen.

So I think we felt really good about what happened into our Q3 retailer Q4 in our categories.

So that was really a good sign.

So you've heard us say in our prepared remarks that we feel like we're getting -- doing the right things in terms of rebalancing the Michael Kors brand and heading in the right direction.

I believe you're going to see that show up in margin -- operating margin next year.

And we look for operating margin expansion across all the brands next year with the exclusion of the situation in China, which, obviously, we're going to have to take into our view, especially in Q1 of next year.

But feeling very good about all the initiatives we're making on product development and on cost of goods and how that's going to show up in our gross margins.

And then, as Tom indicated, you're going to hear some of that synergies that we're getting across the group, and you're going to see that showing up in operating margin.

So thank you very much for your questions, Randy.

We will now take our next question from Simeon Siegel of BMO Capital.

John, in light of the additional Macy's store closures, can you contextualize how you're thinking about your business there?

Maybe across their fleet versus e-com?

And then thinking about how you see the revenue opportunity in the Americas, specifically for Versace and Choo?

So we all learned about the Macy's closures here in the last 24 hours.

From what we understand -- let me back up 1 second, Simeon.

We're very pleased with the progress that we're making with Macy's with the Michael Kors brand.

We saw -- we had a very good holiday season with them.

And so I want to thank them for their partnership.

And as I said, most of our department store partners, we saw some good results.

And when we look at Macy's, the majority of our business is done, obviously, e-commerce being our biggest door today.

And then really the top few hundred doors that represents the majority of our business.

Again, we're very proud to be in all the Macy's stores in the fleet because we think they're a great partner and doing a terrific job.

I don't think that these doors that they've announced, from what we understand, are going to be material to our business.

It will have a small impact, but we don't think it's going to be anything significant.

And then, of course, we're looking to see our trend across all of our department store partners continue through our Q4 and then on through the next fiscal year.

So secondly, in terms of the Americas and Versace and Jimmy Choo, we've seen excellent results.

Versace has been strong all the way through since the day we bought the business here, really showing double-digit growth.

And I'm pretty excited that we're doing that without having the percentage of penetration of accessories.

And even though we're very proud of the fact that we inflected and comped double digit, by the way, positive in Versace accessories, as a percentage, it still has so much more opportunity to grow.

So I think we're feeling great about that.

And if you get the chance with Versace, you'll see a number of stores we started the renovation program.

I think we told you when we bought the company, we'll renovate almost every store globally.

And those stores were really outperforming the chain and the fleet.

So excellent results there for us, and we're seeing the same thing, as we said, in Europe.

And then in terms of Jimmy Choo, Jimmy Choo had a very good holiday season in North America.

Jimmy Choo is a more mature business than Versace is in North America.

That's historically been one of our largest businesses in the company.

But we just had a very, very good holiday season.

And super pleased to see the accessories category, which actually had its largest inflection here in North America and driven by the new JC VARENNE collection.

So we've got 2 groups that are working very, very nicely.

And if you go into our stores, I think you'll see the stores probably feel closer to 30-plus percent accessories in the way we've positioned it.

And the same as in Versace, the majority of the customers that we're getting on the accessories are actually new customers.

So we're very, very pleased with the customer acquisition and how that category is developing for us.

So thank you for your questions, Simeon.

We will now take our next question from Erinn Murphy of Piper Sandler.

John, I just had a clarification for you first.

Just on the guidance.

You guys kept the overall sales guidance by $150 million and I know corona was $100 million of that.

Was the primary driver of the other $50 million, was that North America or FX?

Can you just kind of expound on that?

And then on coronavirus, are you assuming that for the quarter, the fourth quarter, that the current business conditions today continue through the end of the quarter?

And then I know it's small, but how are you just assessing the potential supply chain disruptions, if any?

Sure.

The $150 million, approximately $150 million, is a couple of things.

Number one, it's approximately $100 million of what we see in Asia, and I'll come back to that in a second.

Secondly, there is a bit of shift because as we mentioned earlier, that we beat our revenue expectations during the quarter.

And the majority of that's coming from wholesale shipments.

And that turned out to be a very good thing for us because that turned into better performance in our wholesale partners.

So that's really a shift.

And obviously, we'll not get that back in Q4.

So that kind of gives you a feeling of the $150 million.

The coronavirus, the way that we've approached this, the guidance, is that we believe that we've taken the current trends that are happening today, and we've assumed that nothing gets better through the end of March.

And I think that's a very prudent way to view it.

We don't see anything that indicates that, that will change.

And in fact, we've already had 1 change overnight where we'll now close stores in Macau for a few weeks, along with the casinos, et cetera.

So things continue to evolve.

But this is our best understanding, given the visibility that we have today.

And as we said in our prepared remarks, and it's in our press release, if we see additional curtailment of travel, whether that being the tour groups, as you know china had decided not to have the conducted tour groups leaving, which we think was a very smart thing, and we think that the Chinese government is doing a great job to try to protect their own people and other countries.

That has impact outside of China, in particular, in places like Korea and Japan and Malaysia and Singapore, obviously, Hong Kong and Macau.

So we factored some of that into this number.

If it gets materially worse, then that number could get worse.

But we wanted to frame it up to give everyone an idea of what we think it is today on how we see the situation.

Then with regard to -- yes, sorry.

You had mentioned the supply chain.

So as I noted in the prepared remarks, we have less than 10% of products of Michael Kors produced in China.

For the remainder of our activity, we're really actively working to manage inventory flows and make sure our inventory is positioned in the right places and also that manage future production.

So there's a lot of effort around all of the pieces in that area that the teams are focused on.

Yes, and Erinn, let me add one further thing.

I think all of us will know more in the next week or 2. Obviously, there are many, many cities in China that remain closed until next week.

And then we'll start to see resuming a factory opening, resuming of certain places that are not shipping.

So there's a lot of movement that will happen in the country next week.

So currently, we don't think it will have, again, a material impact today.

But if multiple factories don't open up for whatever the reason is, or there's disruption in freight movement, that could again further impact our forecast.

We just don't know sitting here today, what that could mean.

Got it.

Okay.

And then just a follow-up on the logo business for Michael Kors.

I didn't hear you talk about it in the script, and I know that's been a strategic move on your part to kind of increase the penetration.

How did that perform versus nonlogo in the quarter?

Sure.

So Erinn, we actually did comment about it in our prepared remarks.

So the Signature business, as we refer to it, was about 30% of our retail revenues during the quarter and about 30% of our wholesale.

So we saw a significant inflection in the wholesale versus the second quarter, which was a very good thing, which is what we wanted to have happen.

And again, our department store partners are really working closely with us to build out that category.

But the second thing that's great for us is that it is a category that we don't need to be as promotionally active in because it's more consistent, and it has longer life and duration.

So it's the category with the highest sell-throughs in the company today.

And also, the performance is being driven without having to take the level of promotional activities that we normally do when we're moving fashion through the quarters or through the seasonal activity.

So again, we're super pleased.

And we also have a goal to get that from its current 30% level up to 40% level, and we certainly have the inventory flowing in the spring season to do that.

You'll see that probably happen a little later in the quarter/in the first quarter of next year.

But we're well on track to achieve that.

And we think that's also going to have a further impact on our gross margin, which will flow down to the operating margin expansion because of the better sell-throughs, plus promotional activity on that product and the way the customer is responding.

(Operator Instructions) We will now take our next question from Matthew Boss of JPMorgan.

This is Grace Smalley on for Matt Boss.

Looking at the Michael Kors brand, what do you attribute the lower-than-expected traffic in North America to in December?

Thank you, Grace.

Grace, we actually were doing extremely well up until the first week of December.

And then we saw traffic slow and I can't tell you whether it was 1 week less or whatnot.

We obviously then saw a very quick surge right towards the end of the holiday season.

And so what we made the decision during that period of time was to end the quarter with our inventories cleaner.

And so, in Tom's prepared remarks, we took additional markdowns to be in a really good inventory position, which I think you saw from our statement, inventory is down about 2%.

And then really setting us up to be in a clean position for spring season.

And so we can't tell you what that was, but we certainly did not see that in other regions of the world.

It was more of a North American isolated situation for us in Michael Kors.

We will now take our next question from Ike Boruchow of Wells Fargo.

I guess, John, first question for you.

You talked about the watch business being incrementally -- sounds like you're incrementally disappointed by that.

Just curious, outside of China and Asia, kind of that, that's got its own issues, but maybe just focusing on the Americas and Europe.

Because of that incremental pressure from watches, should we not assume that MK comps in those regions can get back to or stay in the positive?

And then just to the inventory question before me.

Given you ended -- I mean, MK inventory looks really, really clean relative to the last 6 months.

What's the visibility on gross margins for MK, just kind of going forward?

Mike, thank you for the question.

So in Europe, we've been comping positively.

We were flat this quarter.

But before that, we were comping positively in Europe.

And again, we see that as being one of the most healthy regions in the world for us.

So I think we view that as being continuing to happen.

Watches are very -- there's a very big surge during the -- our third quarter or retailer fourth quarter.

And so it's disproportionate, the amount of velocity that it represents during the quarter.

So we were very disappointed in the quarter.

We did not think we would drop close to that much in watches.

So -- and I would tell you, I think it was -- you saw it in our prepared remarks, but we have an even greater decline in our tech watches than we have anticipated.

And clearly, the customer voted for those companies that are more in the tech wearable business than we necessarily are.

And it's very difficult for us to compete against them, in particular, where they have an ecosystem that's linked to many other products with the consumer.

So we're trying, we're trying hard, but it's definitely an uphill battle.

So I think that the watch declines will continue to impact North American comps all the way through next year.

It's less of a percentage of the Europe business, and it's a -- not de minimis, but it's a very, very small percentage of the business in Asia in watches compared to what North America and, to a lesser degree, Europe are.

That being said, we are working very, very hard.

You heard us talk about our men's business.

We're really happy with what's happening with men's and men's accessories, in particular.

And when we get to Q4 to give you guidance, I think we're going to start to begin to give you a little more of a picture on what men's represents in terms of revenues because it's becoming much more significant with some very good growth plans for that category next year.

You know women's ready-to-wear.

Women's footwear has already been offsetting some of the declines that we've had in the watch business.

And again, we're seeing that the accessories business start to stabilize.

We're not exactly where we want to be, but we're getting much, much closer.

So I think that, again, not getting too far in front of ourselves, but we definitely look for stable business for Michael Kors for next year.

And even with watches declining, if we get all of our strategies in the right place, we should be able to look at minimum flat comps and hopefully something that's positive for that area.

And in terms of the inventory, as you said, we ended up very, very clean.

And I think that sets us up.

We were already anticipating for, quite frankly, a very nice inflection in Q4 for us in the Michael Kors gross margins, which obviously would have flowed down to operating margin.

I don't think that necessarily changes for us because we're -- all those product positionings are in place.

The bigger issue for us than operating margin where Tom said in his prepared remarks that will be -- operating margin will be declining for Michael Kors in Q4, is the fact that most of the revenues for Michael Kors and the decline that we talked about are coming from Asia.

That is our highest margin business for the company.

So that's just kind of how the direct impact to our overall operating margin.

We will now take our next question from Jay Sole of UBS.

Great.

John, my first question is about Versace.

Could you maybe provide a little bit more context around the performance in Asia?

I think going back a few months ago, there was the issue of a T-shirt that had an impact on the business.

Are you continuing to see an impact from that or has that changed?

And then secondly, if you can just talk about how you're thinking about managing costs in China, given what's happening with the coronavirus.

Is there an ability to sort of manage down the cost?

And then theoretically, if the business were to bounce back next year, if the virus goes away, next year is a normal year, how much of the cost would you be able to relever, if you had a nice bounce back in sales?

Or how much natural inflation would there be in cost in Asia going forward?

Okay.

I'm going to take Versace, and I'll take a little bit of the management costs and then turn it over to Tom.

So as I said earlier, we couldn't be any happier than what's happening at Versace.

Donatella and her design vision and her marketing prowess are working exactly the way that we had envisioned when we acquired the company and really built that out together.

I have to take my hat off to Jonathan Akeroyd and what he's doing with the management team there at implementing our collective strategic initiatives.

And the customers absolutely responding to what we're working on.

So I think we really feel that Versace is on the right track.

We did have a situation in China where there was unfortunately a misunderstanding about the way our product was labeled.

And that absolutely created a difficult result of our performance in Mainland China.

That has been really subsiding.

And again, recently, we had a wonderful Chinese celebrity wore our product in Carina Lau in performance.

And so I think that will, over time -- we are working very, very hard to make sure that the people of China understand that we respect the One China policy and believe in their sovereignty.

So I don't think that's going to be an issue for us.

Obviously, China is a bigger portion of their Versace business than any of our 3 brands.

So that's going to be painful as we go through.

And I'm going to say the next 6 months.

Because we believe the next 2 or 3 months, it's going to take to really get the virus contained.

It will go away and will be dealt with, and there'll be a rebound period.

So our thoughts are Q1 we'll probably see not the level of what we're seeing today in terms of store closures and reduced traffic in shopping malls, but there will definitely be an impact on Q1 for all of our brands.

But Versace feeling it the largest because of its penetration of overall sales.

But it doesn't give us pause for 1 minute about the acquisition itself, and about the potential of what this is going to do for our overall group by being able to add $1 billion with this brand.

I think we're super positive about how that's going to impact us long term.

And as I said earlier, we actually think that operating margins are going to expand in all of our brands for next year, ex this coronavirus situation, which we will get through.

China will return, and it will be a very key pillar of our growth.

And in terms of managing the cost, I will turn that over to Tom.

Sure.

Thanks, Jay.

For costs, we're actively managing costs.

But in the short term, as you can imagine, from the very rapid developments here, the costs are not a lot that are variable that we could adjust in the short term.

However, that said, where there is a possibility and the fact that there is many store closed and less traffic for items like marketing and other short-term events, we're certainly actively managing and reducing those costs.

However, as John mentioned, right now, what we're seeing is the $100 million flow-through more at the gross margin level, which is the highest in the company across all of our regions, thus, the impact to the business.

To the extent and ultimately when this recovers, we would expect that margin to come back as well.

And we'll, again, be managing costs in the meantime.

I don't know that there's any specific inflationary impacts that we would be considering during this time frame, really just the support for the business as we get back in the market after the virus works through.

We will now take our last question from Oliver Chen of Cowen and Co.

This is Jonna on for Oliver today.

Could you just elaborate on the traffic trends for Michael Kors by channel, how the full price performed versus outlet?

And just quick thoughts on the handbags, how did the category perform overall and how are you managing AURs in light of the hands-free trend?

Sure.

Thank you for the question.

In terms of channels, I'll just broadly speak.

Obviously, the full price channel has seen for the last almost 3 years a decline in traffic.

Although that's beginning to mitigate.

Clearly, what you've seen is our online business is growing at every single market.

And by the way, including China.

We had excellent results at 11/11 and over the holidays.

We've gone on to Tmall in a great partnership, and we're one of the best-performing brands in the luxury pavilion, which was very exciting for us.

So again, I think that's part of the natural migration of where consumers are shopping today.

The outlet malls have seen slight traffic declines.

And again, I think we're not the only one who commented or seen that.

And part of that is because of e-commerce.

Again, certain customers who would typically shop in an outlet store might buy something on sale in our full-price channel.

So I think that's just part of the natural migration.

And you see that a bit more in North America, where in Europe and Asia that's not exactly the case.

So I think we're positioned very well.

As we've mentioned many times, we started our digital and e-commerce journey more than 5 years ago.

We've spent a significant amount of money on platforms, distribution centers.

We're also bringing the -- Jimmy Choo is pretty good at it.

We're going to bring Versace up to the group level.

And we're -- as Tom mentioned, we're going to make further investments in synergies, where we're moving certain of the groups together in warehouses.

You'll see that happen very rapidly next year in North America, in Europe and in Asia as well.

So we're really using the synergies not only from a financial standpoint, but also to improve our capabilities.

As an example, Versace would begin to -- be able to have a more omni approach to their capabilities from a store and online channel.

So I think we feel very good about our ability to move that forward.

And in terms of performance of accessories, as I've said to you, we're feeling very good about what's happening.

We're moving the inflection in the right direction.

We have a number of groups that are actually turning into very strong performers, where we did not have that at this time last year.

And Signature is well on its way.

We're going to get to the 40% level, which again is going to give us much better operating margins, much more consistent sell-throughs.

So I think we feel good about that.

And I want to add, not just in Michael Kors, but we feel great about what's happening in Versace with accessories.

I think it's actually quicker than we had anticipated.

And I think that shows the power of the brands and what Donatella has been able to achieve with our new Barocco V logo and then what Pierre Denis and Sandra Choi have done at Jimmy Choo, really getting us into the logo, and Signature business is starting to really take grip and not only in the accessories, but also that JC logo on our footwear and, in particular, our boots this holiday season performed really well.

So I think all of our teams across the world are developing very strong product and put us in an excellent position for next year.

And on that note, I'd just like to conclude by saying thank you for joining us this morning.

We are feeling very good about Capri's opportunity for long-term revenue and operating income and earnings per share growth.

And this was the investment year for the company, as we have said, and I think you're going to see the fruits of our initiatives really come forward next year, and we're excited to tell you more about that in our upcoming earnings call.

Thank you for joining us today.

Ladies and gentlemen, this concludes today's conference call.

Thank you for your participation.

You may now disconnect.