Capri Holdings Ltd (CPRI) 2026 Q3 法說會逐字稿

Greetings, and welcome to the Capri Holdings Limited third-quarter fiscal 2026 financial results call. (Operator Instructions) As a reminder, this conference is being recorded.

I'd now like to turn the conference over to your host, Jennifer Davis, Vice President of Investor Relations. Thank you. You may begin.

Good morning, everyone, and thank you for joining us on Capri Holdings Limited Third Quarter Fiscal 2026 Conference Call. With me this morning are Chairman and Chief Executive Officer, John Idol; and Interim Chief Financial Officer, Raj Mehta.

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 today's call.

Unless otherwise noted, all financial information on today's call will be presented on a non-GAAP basis. These non-GAAP measures exclude certain costs associated with reserves related to a wholesale customer bankruptcy, restructuring and other charges, store renovation program costs, merger and divestiture transaction-related costs, impairment charges, and Capri transformation costs.

To view the corresponding GAAP measures and related reconciliation, please review our latest earnings release posted to our website earlier today at capriholdings.com. Additionally, the company has classified the results of today's operations and cash flows from its Versace business as discontinued operations. Unless otherwise noted, all information on today's call relate only to continuing operations.

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

Thank you, Jennifer, and good morning, everyone. We were pleased with our third-quarter performance which exceeded our expectations. Across both Michael Kors and Jimmy Choo, we continue to execute on our strategic initiatives to position our iconic brands for long-term success. Our strategies remain anchored in strengthening brand desirability through delivering compelling storytelling and creating fashion luxury products that excite and inspire consumers.

Together with our advanced data analytics and deep consumer insights, these initiatives are designed to strengthen consumer engagement and reinforce the long-term equity of our brands. We remain confident that these strategies will support a return to growth in fiscal 2027, as well as establish the groundwork for sustainable performance well into the future.

Recently, we completed the sale of Versace, which was a thoughtful decision to strengthen our financial foundation, ensuring we have the flexibility to support Michael Kors and Jimmy Choo's strategic initiatives, and enhance long-term shareholder value. The proceeds from the sale were used to significantly reduce debt levels. As a result, we ended the quarter with $80 million of net debt.

Now turning to our third-quarter results. Total company revenue exceeded our expectations, decreasing 4% versus last year to $1.025 billion. Underlying gross margins, excluding the impact of tariffs, expanded 70 basis points, reflecting better-than-expected performance driven primarily by improved full price sell-throughs and reduced promotional activity. Earnings per share increased approximately 30% to $0.81.

Looking at results by brand. Starting with Michael Kors. Third-quarter revenue decreased 5.6% compared to prior year. While some of our strategic initiatives are creating near-term pressure on revenue, they are deliberate steps towards building a stronger, more resilient foundation for our business. In our own retail channel, we saw a modest sequential improvement in trends relative to the second quarter, with sales down mid-single digits. Wholesale also declined mid-single digits.

In terms of total Michael Kors retail sales by channel. In our full-price channel, sales declined due to a reduction in promotional activity. However, we saw a sequential improvement in full price sales in the channel, which increased low-double digits. Importantly, this resulted in a healthier sales mix with higher AURs and higher gross margins. In our outlet channel, revenue continued to be impacted by our strategy to improve our quality of sale by reducing promotional activity.

In addition, product assortments throughout most of the third quarter reflected our prior design direction. Late in the quarter, we began to introduce more modern on-trend styles, which are generating higher full price sell-throughs and higher AURs.

Looking at total Michael Kors retail sales by region. Europe continued to outperform with trends increasing mid-single digits, while results declined low-double digits in the Americas, and low-single digits in Asia. Although retail revenue declined in both regions, we are encouraged by sequential improvements in trends.

Now turning to wholesale. Performance at point of sale exceeded our expectations with trends continuing to improve sequentially. Consumer response to our new styles, including our icons, Hamilton, Laila, and Nolita was strong and drove improved full price sell-throughs in the wholesale channel.

Turning to brand awareness and consumer engagement. We continue to reinforce Michael Kors modern jet-set lifestyle positioning with our brand vision of traveling the world in style. Through our hotel stories franchise, we brought the excitement of travel and the discovery of new destinations to our consumers this holiday season. Our holiday campaign extended this narrative, journeying from the streets of New York City to the snow-covered mountains of Banff, Canada, showcasing a standout winter wardrobe along the way.

Throughout the third quarter, we further amplified Hotel Stories with immersive experiences and local activations globally that reflected the brand's jet set spirit. We also celebrated the reopening of two of our flagship locations. Rockefeller Center in New York City and Regent Street in London, with high-profile events. Each event brought together a dynamic mix of celebrities and influencers for memorable experiences.

Our new jet set lounge served as a focal point at both locations, reinforcing our modern, elevated in-store experience. These events generated significant social media engagement and press coverage, further extending our reach and deepening our connection with consumers. To broaden the impact of our Hotel Stories narrative and brand moments, we expanded our social media reach and extensive influencer partnerships.

Influencer-driven content grew significantly during the third quarter, with post up 100% year over year, contributing to a nearly 300% increase in both impressions and engagement. Collectively, these activities helped drive an 8% year-over-year increase in the Michael Kors global consumer database. With our advanced data analytics capabilities, we are leveraging the strength of our extensive database to create deeper, more personal connections with consumers.

Now turning to product. Guided by Michael's creative vision, we are delivering exciting on-trend fashion with standout style. Additionally, we refined our pricing architecture to better align with historical levels. These actions are driving stronger full price sell-throughs. As a result, we drove higher AURs and gross margin expansion across our full-price accessories, footwear, and ready-to-wear businesses in the third quarter. In accessories, consumers responded positively to new introductions that celebrate our iconic brand coats and align with our new strategic pricing architecture.

For holiday, we introduced smaller silhouettes, such as the Laila extra small crossbody and the Nolita pochettes, which performed exceptionally well with a pricing architecture designed to appeal to Gen Z consumers. These smaller styles complemented the continued strength of our icons, Hamilton, Laila, and Nolita. In footwear, boots continued to perform well across dress and casual styles.

We also saw encouraging momentum in new sneaker styles such as Arla and Rhodes, that embody iconic Michael Kors branding elements and heritage design details. In ready-to-wear, holiday styles that captured Michael's effortless glamor drove strong demand. Jackets, outerwear, and holiday dresses were standout categories. Now I would like to discuss the progress we have made in our store renovation plan. We are redefining our luxury retail experience with a modern, warm residential design.

Our stores remain a cornerstone of our brand and a key driver of our sales recovery, playing a pivotal role in enhancing the client experience, and revitalizing growth. Over the next three years, we plan to renovate approximately 50% of our store fleet and key department store locations as a part of our ongoing investment and brand elevation and retail excellence. While still early, results are encouraging with renovated locations showing meaningful increases in traffic and sales versus last year.

Looking ahead, we are focused on leveraging Michael Kors' 45-year heritage as a powerful fashion luxury brand that continues to resonate with consumers. We are building on this foundation by exciting consumers with our modern jet set storytelling, and delivering on-trend fashion with standout style. Combined with our advanced data analytics and deep consumer insights, we believe our strategic initiatives provide a strong foundation to return the brand to growth in fiscal 2027 and beyond.

Turning to Jimmy Choo. Third-quarter revenue exceeded our expectations, increasing 5% compared to the prior year, driven by strong brand momentum and the continued traction of our strategic initiatives. Retail sales improved sequentially, increasing low-single digits while wholesale revenue grew double digits.

Looking at trends in our own retail channel. Performance was driven by a mid-single-digit increase in the full price retail channel, reflecting strong consumer responses to our holiday assortments. By region, retail revenue increased high-single digits in the Americas and low-single digits in Europe, with a sequential improvement in comp trends in both regions.

In Asia, while overall trends remained negative high-single digits similar to the prior quarter, we are encouraged by a sequential improvement in our full-price channel. In the wholesale channel, revenue at point of sale once again improved sequentially, led by high single-digit increases in North American department stores.

Now turning to brand awareness and consumer engagement. Our storytelling continued to highlight the effortlessly alluring essence of Jimmy Choo. For holiday, we extended our campaign with Sydney Sweeney, who embodied the brand's playful daring spirit while showcasing key holiday styles, including our iconic Bon Bon bag. The campaign generated meaningful brand awareness reaching approximately 150 million consumers across social media platforms. Throughout the third quarter, we further amplified our storytelling with client activations and local events across key markets globally.

Our Meet Me At The Bar series generated 14 million impressions and drove strong consumer engagement. Additionally, we held over 400 in-store events worldwide, helping deliver double-digit growth across our highest value consumer segments. The integration of our storytelling, global activations, and clienteling initiatives continued to strengthen brand desirability, extend our reach, and deepen consumer engagement. As a result, Jimmy Choo's global consumer database increased 8% year over year.

Turning to product. Jimmy Choo's product strategy remains focused on further developing accessories and expanding our casual footwear offering to support sustainable long-term growth. Within accessories, momentum was encouraging as we continue to expand the category with a focus on icons, innovation, and a broader pricing architecture. Collectively, our core groups delivered high-single-digit growth in the full price channel.

The strength of our Bon Bon and Cinch groups underscored the enduring appeal and durability of our core icons. The Bon Bon group performed particularly well, with sales increasing double digits, supported by continued demand for elevated expressions at higher price points, as well as by the introduction of more casual materializations.

At the same time, we have seen highly encouraging early consumer response to our newly introduced curve and bar groups, supported by our new strategic pricing architecture which now includes bags positioned below $1,500.

Turning to footwear. Sales increased high-single digits in our full-price retail channel supported by growth in dress and casual styles. Our holiday collection performed well as crystal detailing, playful ribbons, deep tones and enriched textures resonated with the consumers. Styles, including the new Auria with [Crystal Bose], as well as our iconic Azia sandal, performed well underscoring our ability to balance seasonal newness with timeless designs.

Importantly, our strategy to expand casual footwear continued to gain traction, driving a mid-single-digit increase in full price sales in the third quarter. We saw strength across styles, including casual boots, sneakers, loafers, and ballerina flats. We see significant opportunity to further scale casual footwear, supporting increased lifetime value among existing consumers as well as new customer acquisition.

Looking forward, we are encouraged with the momentum we are seeing at Jimmy Choo and remain confident in our strategies to unlock the brand's unique potential and further strengthen its position within the world of fashion luxury. In conclusion, we are encouraged by the early indications that our strategic initiatives are gaining traction.

As we look ahead, we anticipate a sequential improvement in retail trends in the fourth quarter, and a return to growth in fiscal '27. Long term, we remain optimistic about the sustainable growth potential of both Michael Kors and Jimmy Choo.

Now Raj will review our third-quarter results and guidance in more detail.

Thank you, John, and good morning, everyone. Before we begin, I would like to remind you that today's financial results exclude Versace, which was reclassified as a discontinued operation. My discussion today will reflect results from continuing operations and our financial statements have been adjusted for prior periods to exclude Versace.

Now, looking at third-quarter results. Total company revenue of $1.025 billion decreased 4% versus prior year on a reported basis, and 5.9% in constant currency. Looking at revenue by channel. Total company retail sales declined mid-single digits, representing a slight sequential improvement relative to the second quarter. In the wholesale channel, revenue was flat to last year.

Turning to revenue performance by geography. Revenue in the Americas decreased 7%. Revenue in EMEA increased 5% and revenue in Asia decreased 4%. Looking at revenue performance by brand. At Michael Kors, revenue decreased 5.6% compared to prior year on a reported basis and 7.3% in constant currency. Global retail sales declined mid-single digits.

Similar to prior quarters, store closures negatively impacted retail sales in the low-single-digit range. Wholesale sales decreased mid-single digits. Looking at total Michael Kors revenue by geography, the Americas decreased 9%, EMEA increased 6%, and Asia decreased 1%.

At Jimmy Choo, revenue increased 5% compared to prior year on a reported basis, and 1.9% in constant currency. Global retail sales trends improved sequentially, increasing low-single digits. Wholesale revenue increased double digits. Looking at total Jimmy Choo revenue by geography, the Americas increased 23%, EMEA increased 3%, and Asia decreased 10%.

Now looking at total company margin performance. Gross margin of 60.8% declined 230 basis points. Underlying gross margin expanded by 70 basis points, due primarily to better full price sell-throughs and a reduction in promotional activity. This was offset by higher-than-anticipated tariffs based on the sales mix of new product.

By brand, Michael Kors gross margin of 59.7% compared to 62.6% last year. The decline versus prior year was due to higher tariff rates. Excluding the impact of tariffs, Michael Kors gross margin expanded 60 basis points. Jimmy Choo gross margin of 66.5%, compared to 66.0% last year.

The improvement versus prior year was primarily driven by higher full price sell-throughs. Excluding the impact of tariffs, Jimmy Choo gross margin expanded 80 basis points. Operating expense decreased $32 million, resulting in 80 basis points of expense leverage. The decline versus prior year was primarily attributable to our cost reduction program. Total company operating margin of 7.7%, compared to 9.2% last year.

The decline versus prior year was due to higher tariff rates. By brand, Michael Kors operating margin of 13.9%, compared to 16.2% last year. And Jimmy Choo operating margin of 1.8% compared to negative 3.8% last year. Now turning to our balance sheet. Inventory at quarter end totaled $663 million, a 6.5% decline versus prior year.

Looking ahead, we now expect year-end inventory levels to be approximately flat to prior year, with the decrease in units offset by higher tariff rates and foreign currency exchange rates. During the quarter, we completed the sale of Versace and received approximately $1.4 billion in cash. We used the proceeds from the sale to significantly reduce our debt. As a result, we ended the quarter with cash of $154 million, and debt of $234 million, resulting in net debt of approximately $80 million. This compared to net debt of approximately $1.6 billion at the end of the second quarter.

Looking at guidance. We are narrowing our range for fiscal '26. Revenue is now expected to be between $3.45 billion and $3.475 billion. By brand, we anticipate Michael Kors revenue between $2.86 billion and $2.875 billion, and Jimmy Choo revenue between $590 million and $600 million. Gross margin is now anticipated to be approximately 61%.

Operating expenses are now expected to be slightly more than $2 billion, primarily due to the impact of foreign currency. Operating income is anticipated to be approximately $100 million, with Michael Kors operating margin in the high-single-digit range, and Jimmy Choo operating margin in the negative low-single-digit range.

In terms of nonoperating items, we now anticipate full-year net interest income between $85 million and $90 million, an effective tax rate in the low to mid-teens range, and weighted average shares outstanding of approximately $120 million. As a result of these factors, we now anticipate fiscal '26 diluted earnings per share between $1.30 and $1.40. Looking ahead, based on the progress we are making against our strategic initiatives, we remain confident in our ability to return to growth in fiscal '27.

We also expect gross margin expansion driven by better full price sell-throughs, sourcing cost efficiencies, and targeted price increases. In addition, we remain focused on disciplined expense management across the organization. As a result, we expect to return to both revenue and earnings growth in fiscal '27. Long term, we believe that Capri Holdings is well positioned to deliver sustainable growth while increasing shareholder value.

Now we will open up the line for questions.

(Operator Instructions) Matthew Boss, JPMorgan.

So John, at the Michael Kors brand, could you elaborate on the drivers of the slight sequential improvement in retail sales between the second and the third quarter? If you could break down maybe trends at full price relative to outlet? And more specifically, could you break down the low double-digit decline in the Americas that you saw in the third quarter, and just walk through the progression that we should expect for Americas retail sales in the fourth quarter?

Good morning, Matt, and thank you for the question. I want to start out by saying that we really feel that our strategic initiatives are starting to take hold. I want to remind everyone that we've only been at this for literally one year, almost to this week, when we started to reposition the Michael Kors brand. Under the new jet set brand positioning, we've really been looking at the use of social media channels differently than we had used them previously.

We've taken influencers. We have hundreds of them now that are brand advocates, and we're seeing real progress for how they're changing the perception of the brand and the way the consumers are interacting with the brand. We -- I think as we told you about a year ago at this time, we're really focused on what we call standout style.

So a unique product that feels very Michael Kors and we've honed in on being much more consistent around what those styles are and how we talk to the consumer about that. We have restructured our pricing architecture in all areas of the business, and we're seeing excellent traction around that initiative. We reduced promotional activity in both channels in the full price and the outlets.

And while that's creating some headwinds for us, I think you heard in my prepared remarks, what we're seeing coming out that is improved full price sell-throughs. Now we're in our second quarter of seeing that in our full price channel. We're seeing higher AURs, higher gross margins. That's all related -- that all points to healthier business. And as it relates to your question, we significantly reduced the promotional activity in the full price channel.

So that has -- so we saw a double-digit increase in full price selling in the full price channel, but reduced selling in the markdown channel, which we had more of previously. So therefore, that impacted the channel. And what we're seeing in the outlet channel is some very early indications of the -- of new product flow into that channel. And we're experiencing, again, better full price selling on that. Those products are actually at higher prices than we've been at in the last few years.

The customer is responding because of the design -- and still the value related to that. And so I think we're very comfortable with what we've seen and what's really driving that sequential improvement. It's better full price selling, better focus on icon products in the full price channel. Some very early indications in outlet with what's working in terms of new product.

I would also remind you that in outlet, we've -- we're reducing millions and millions of dollars of [daigou] sales, which is having quite a bit of headwind for us. But again, we know that that's going to be a result in a healthier business. And we'll be kind of through that by about August, September of next year. That's -- was the beginning of when we really started to reduce that channel and consumers' ability to purchase from us for that product.

And so all in all, I would say we're very cautiously optimistic that the strategic initiatives are working. In terms of the Americas, let me turn that over to Raj, because I think he can talk to you a little bit about what we saw and why there's been that double-digit decline in North America.

Thanks, Matt, and thanks, John. We were -- as John said, we were pleased with the sequential improvement, particularly in the retail trends in North America for Michael Kors. We did benefit slightly from some anticipated wholesale shipments, and that was really just due to timing as some came in earlier than we anticipated. But as we look to Q4, we expect continued sequential improvement in retail in the fourth quarter. And most importantly, we expect to return to revenue growth in FY27 as we look forward.

So we'll provide a little bit more color on that in Q4, but we're pleased about the retail trends in North America that we're currently seeing.

Simeon Siegel, Guggenheim Securities.

Roger, John, maybe just a follow up on that last point you made. As you think about the revenue growth next year. Any way to help us think about how you're thinking about units versus price, maybe new customers versus reactivating lapsed?

And then any way to just help us just elaborate thinking about those go-forward gross margins? Maybe just bringing apart your thoughts on where you're setting the initial ticket pricing versus promotions, lingering impacts of tariffs, fixed cost leverage, deleverage. Is there anything else we should think about for puts and takes on gross margin?

Good morning, Simeon. I'm not sure I followed all the questions in the one question, but we'll do the best we can. So number one, as I said, we're feeling cautiously optimistic. We've been at this with Michael Kors for one year and we're seeing very tangible results. Better full price sell-throughs, higher AURs in the full price area. We're not yet there in outlet, but on the new product we are.

And we're seeing higher gross margins from all of the new product flowing through because we've reduced promotional activity. So I think those are all very solid tangible results from our initiatives. The other thing that's happened that I mentioned earlier was that we've really looked at influencers and the social media channel to reengage the Michael Kors existing customers and newer customers. Gen Z, certain of the younger millennials, and we're seeing that start to really play through. And what we can see is brand awareness is starting to rise and consumer desirability.

So our data analytics, we're studying the consumer response to everything from our marketing campaigns to products. And all the indicators are positive. The other positive indicator for us is we have had three sequential quarters of traffic improvement online. And that's really quite interesting because as we drive a lot of our traffic to our website, the consumer is really responding and converting. So we like what we see there.

Store traffic is still running about in line with sales declines as well. So we'd like to see that be the next kind of step up for us to see the next leg of improvement. And as Raj mentioned before, Q4, we will see a sequential improvement in our retail channel, which is what we've been seeing for the last few quarters. And then ultimately, in fiscal year '27 turning positive.

So we think that we've got a number of initiatives in place being led by our brand, which is really Michael Kors and our jet set strategy, with our storytelling to Hotel Stories, now with a very large group of influencers that are helping us tell that story and connect in particular, with a younger customer, and we've got product that's really resonating that's got the right price value architecture around it.

So I would say we feel that that creates the foundation for us to really build off of. In terms of units versus price next year, units are going to be down. We are -- as Raj said in his prepared remarks, inventory will end approximately flat. And then when you put the tariffs on top of that, actually units will be down for us. And I think our inventory ends at a very, very healthy position.

We ended down approximately 6.5%, and that's including the tariffs in that number. So we're in a healthy position to really go into our fiscal '27, and we are really trying to drive, as we've said a number of times, full-price business, so that should, for the year, mean that units will be down. Let me turn it over to Raj to talk to you about gross margin.

Thanks, John. And good morning, Simeon. Yeah, let me start by giving you a little bit more color on what happened in Q3. We saw a little bit of a higher-than-anticipated tariff impact of approximately 50 basis points in the quarter. And that was really due to better sales of new product that had the higher tariff rates on them. We were pleased with the underlying gross margin as it expanded 70 basis points, which is better than we anticipated.

And that was really driven by the better full price sell-throughs at both Michael Kors and Jimmy Choo. And we're really pleased with what we're seeing with the new product. As we look to the fourth quarter, you'll begin to see some of the tariff mitigation efforts continue regarding our sourcing efficiencies and targeted price increases with the continued benefits of our higher full price sell-throughs.

And then as we look forward into FY '27, we expect to offset a majority of the tariff impact of the higher tariffs. We continue to deliver on our strategic initiatives and driving higher full price sell-throughs. So we're excited to return to gross margin expansion next year.

And Simeon, one other thing too, what also gives us confidence in terms of revenue growth for next year, Jimmy Choo's results during the quarter were actually very, very strong. And again, the initiatives that we're putting into place at Jimmy Choo to, first off, drive the consumer desire. We are definitely seeing that working. We're -- same thing that we're doing in Michael Kors, we're leaning much more into social media channels, influencers, and clienteling, that's working for us as well. We are seeing some very nice, now two quarters in a row, on our initiatives around accessories.

And you can see that we are selling our existing icons as well as the new pricing architecture that we've put around some additional product that we've introduced in the line. We get very strong reception to that, both at the consumer level and at the wholesale level, which gives us some very good feeling about what that looks like. And then we discussed in the prepared remarks that our casual business also saw a very nice sequential improvement during the quarter.

So -- and we can, I think, say to you that the trends are continuing in this quarter for Jimmy Choo in particular, that we are excited about what is happening there and the opportunity to not only return that brand to growth, but also to see some very nice operating margin expansion for that next year.

(Operator Instructions) Brooke Roach, Goldman Sachs.

Given the sequential strength that you're beginning to see in the green shift at the Michael Kors brand, I was hoping you could help frame the potential operating margin expansion potential that you see as you look ahead into FY27. I understand it's a little too early for guidance, but given the magnitude of the gross margin headwind from tariffs on the Michael Kors brand that you're seeing today, how should we be thinking about the opportunity for op margin expansion for Michael Kors and for total consolidated Capri?

Thank you. Good morning, Brooke. I think it's -- I think we've talked about this before. We believe we will return to revenue growth for the group next year. I think we've said that it's probably in the low-single-digit range. We think that our SG&A will continue. We're going to be very focused on our expense control in the company, and we'd like to see that relatively stable.

And then with gross margin expansion that Raj spoke about, we think that those will lead to leverage and create operating margin expansion for the business. And again, what we're pleased about is -- we're in the early signs with Michael Kors of seeing our retail business improve.

One of the other things, as you may recall, Michael Kors had a substantial wholesale business, which because of our initiatives to really pull back on the distribution on that business, and performance related as well, that business has declined substantially. We are forecasting for a decline for next year. I think we mentioned that in our last call that -- and that's really to clean up some of the off-price distribution that's been historical for us.

That being said, at POS and wholesale, we saw a substantial step-up with our wholesale partners, and departments [for our] partners. What we saw, in particular at Michael Kors, was the performance on the icon products where I had mentioned in our last call that they had not really gotten to the same rates of success that we saw in our own stores. That is now starting to equal out.

And so while we were very, very pleased with that, we think long term, there is an upside for us in wholesale as our partners continue to experience this very positive selling. And as you heard in Jimmy Choo, we had an outstanding quarter with our wholesale partners and the product really resonated, and that was both in accessories and in footwear.

So I think that that gives us the confidence to go into next year and look at revenue growth, look at margin expansion, controlling our expenses, and with some modest increase in SG&A, and that should really turn into operating margin expansion.

Adrienne Yih, Barclays.

Great. It's really nice to see the progress at full [light]. It's very evident. John, can you talk about kind of what the contribution of sales outlet versus full line? And where you kind of want that mix to be over time?

Secondly, we did see you move through, whether it's SKU count or however inventory from the beginning of the quarter and outlook to the end of the quarter. It looks like you're really clean, or much cleaner in outlet. So wondering if we could potentially see a gross margin inflection at outlet in this current quarter?

And then just a comment on the tax reserve that you took, the $15 million. Who is selling into them? And was it two collection? Was there a little bit of Versace? And how should we think about kind of derisking that kind of on the forward 12 months?

Thank you, Adrienne. First of all, we don't break out the full price versus outlet numbers. And we think they're both opportunities for us. So we're excited about, again, what we've seen in the last year. As it relates to outlet, I think we have been clearing some of the core product that was part of our more historical strategies, and that product just wasn't working as well as it had in previous years. And so we're not quite finished with that yet.

There'll be some more of that going on towards the first half of calendar 2026. But that's really going to start to mitigate as we get into the back half with new product coming into outlet. I think I had mentioned to you on the last call that we've only really begun to have a small amount of product coming into the outlet channel that is new. And it's going to continue to flow throughout the spring season, much more trend on, and trend-styled product, that will be coming into that channel.

And that channel is because consumers just as discerning on what they want in terms of fashion and trend as the full price channel is today. They're excited to see great product from Michael Kors associated with some very strong value with that. So I think you'll see gross margin expansion in the outlet channel. We would think more towards the second half of calendar year but that will be included in some of our guidance that we talked to you about in our May call, where we will talk about overall gross margin expansion for both Jimmy Choo and Michael Kors, because we think there's some very significant opportunity also on gross margin for Jimmy Choo.

And I might remind you that Raj mentioned that both Michael Kors and Jimmy Choo, we've been taking selective price increases. They're moderate -- are modest. But you'll start to see that flow through in our gross margin even in Q4. I'm going to let Raj take the Saks question.

Thanks. Very helpful.

Thanks, Adrienne. Yeah, regarding Saks, as you mentioned, we did a reserve for $15 million, which is really not too material for us. It is across all the brands areas within Jimmy Choo, Michael Kors collection as well as MK product. But as I stated, we have reserved for that, and we are encouraged that we can work with them to begin shipping to that --

Yeah. Let me further add that we're excited about the new management team that's leading Saks Global now. They've been through this before with (inaudible). And we have a lot of confidence in what their strategy is. We also think that a leaner Saks Global will be one that will be successful and very focused.

And so we intend on being very, very supportive of their strategies and to help them succeed. We think that's good for the industry and ultimately, good for the consumer as well.

Fantastic color. Thank you.

Oliver Chen, TD Cowen.

Regarding the opportunity for positive growth at Michael Kors, it sounded like the back half was more likely for next year? Would love any color there? And as you look across the channels, what do you (inaudible) with traffic levels that we should be aware of? It looks like online has been attractive?

And lastly, marketing spend and marketing dollars, or as a percentage of sales, what's your framework for thinking about how to leverage that? And nice job on all the new products.

Thank you, Oliver. So I think your assessment of a little more acceleration in the back half of next year, on a TY/LY basis is probably right. And when I say back half, it's more calendar back half of the year. I'll start out by saying we will, hopefully, at that point, be fully transitioned in our full price with all new product in the channel. We will not be up against this year's where we didn't anniversary the promotional activity. So that should be a positive for us.

I think we will also have our full expansion in the additional social media channels in place at that point in time. A good part of that will be in place in the spring season, but I think we'll be even in a much better place in the fall season. And then on the outlet side, we should be, again, maybe not fully transitioned, but we should be 75% transitioned at that point in time, which would put us again in a very good place for the back half of next year. And then the other thing is we will -- as I said, hope -- not hopefully, but we will be -- we will have the daigou sales reductions behind us.

So we think there will be less headwinds in the back half of next year, and quite frankly, some tailwinds that really will be driven by product and by marketing. And then the headwind will be -- we will be continuing to reduce our off-price distribution and that's primarily in New York -- I'm sorry, US issue. So you'll see that in North America. But we're committed to continuing to reduce that and create a healthier place for of the consumer to see the Michael Kors brand.

Why don't I turn it over to Raj to talk about marketing because we have taken that up, but I'll let him speak to that.

Yeah. Thanks, Oliver. So regarding the marketing, we're spending just north of approximately 8%, which we feel is a healthy percentage, and we're looking to where we spend those dollars regarding influencers, TikTok spend and spending a little bit more wisely. The Michael Kors number is a little bit more north of that. But overall, we feel really good about the levels that we're spending to and which will drive the growth for next year.

(Operator Instructions) Paul Lejuez, Citigroup.

Curious if you can talk a little bit more about performance at the Kors brand by price range, where you saw the strongest trends overall? But also, where did you see the strongest full price selling in what bands, and then price bands. And then also curious about performance by age, what you saw during holiday?

Thank you, Paul. So what is very interesting for us is we've kind of seen two steps in the business. The first step was our -- when we looked at our strategic pricing architecture and in our full price business, we changed that in the spring season of this past year. And we saw an immediate lift based upon that.

In the fall season, what we were able to do is we have brought in a lot more product between the $150 and $250 range. And those are just smaller bags. In particular, that is where we're seeing the Gen Z customer, in particular, lean into that product, both from a trend standpoint and a pricing standpoint. So we're definitely seeing a lift in that customer based around that product that we are delivering into the full price channel.

And as I mentioned also in our previous call, actually, in the outlet channel, we took prices up slightly in our Q3. And we're not seeing resistance in particular in the newer product that we're bringing in where she is excited because it is representing trend for the company. So we think that we're making the right decisions on product, both styling and leaning into certain price areas that are more relevant to certain cohorts.

Rick Patel, Raymond James.

I'm hoping you can paint a picture with a little bit more detail about the return to growth in fiscal '27. Just curious which areas of the business you have the most confidence in? It sounds like it might be led by full price retail, but just wondering what will take a little bit longer to turn aside from wholesale? And then any thoughts on just the geographic performance as we think about variability by region?

Thank you, Rick. Well, first thing I'm going to point out is that we're excited about the growth that we're seeing with Jimmy Choo. And we continue to believe that, that business will be an $800 million business for us over the next few years. \

And we're excited about the fact that we think the accessories part of that business is a very big opportunity for us, and the response that we're getting from not only the consumers but from our wholesale partners around the globe, given that luxury prices have moved into certain areas where they think there's a very big opportunity for a well-loved brand like Jimmy Choo to begin to be a part of their assortments.

So we're excited about that in our own stores, and we're excited about that in our wholesale distribution. We also think that Jimmy Choo has an opportunity to significantly increase the productivity in our store fleet. I think we've told you before, we've spent a fair amount of money over the last few years rebuilding that store fleet. And so we're in a good position now to leverage what we've put in place. So we think Jimmy Choo is going to provide some very nice revenue growth for us.

In terms of Michael Kors, again, we're -- I think we said to you before, that we want to build sustainable growth for us. And we think that's about creating an exciting story for the consumer around the jet set positioning, which is traveling the world in style.

And we think that's a very relevant concept given especially how younger consumers really embrace and love travel, and how we're doing storytelling around that. And now we're making the product the hero in that storytelling, and that's also resonating particular with the influencers and the media channels that we're targeting around social media, in particular, to tell that story to that younger consumer.

And so I think that full price will be a part of that expansion in revenues, but also return to growth in our outlet channel. There's a very strong business there. And we want to be exciting for the customer wherever they shop, whichever channel it is that they shop. So again, we are optimistic about our return to growth.

We're also optimistic about our SG&A expansion next year. With modest price increases. With -- we've been working very closely with our suppliers on cost reductions. That's starting to come through, as well as better full price sell-throughs. That's all going to impact our gross margin.

And then, of course, we've, I think, done a very good job over the last two years, reducing our SG&A and controlling that, and we think there's opportunity for us to continue to do work in that area across the both Jimmy Choo and Michael Kors. So we think we're in a very good place with two excellent brands that are beloved by consumers and we're seeing with our database growth. I think you saw that.

We've been doing this quarter after quarter, and you're also seeing the resonation in particular at Michael Kors on e-commerce with three quarters of traffic growth in a row, and we think that's going to also have a halo impact on our stores, and we would expect that to be coming in the not-too-distant future. So Rick, thank you very much for that.

Jay Sole, UBS.

My question is just about the balance sheet. Now that you've reduced net debt to just $80 million, what are your plans with free cash flow? Do you plan on using it to update the stores, or buy back stock? More other actions? If you could maybe help us with that, that'd be great.

Thank you, Jay, and good morning. Well, let me start by saying, as you stated, in December, we successfully completed the sale of Versace, which we stated was a thoughtful decision. And immediately following the close, we significantly reduced our debt to approximately $80 million net debt, which we feel it puts us in a great position to continue to invest in the business.

Our priority remains to invest in the brands through the store renovation program that we spoke about, as well as technology and digital enhancements and other brand-building initiatives. And our second priority is to return cash to shareholders via the share repurchase program.

We announced last quarter that our Board of Directors have authorized a $1 billion share repurchase program, which will commence in FY27. And it really shows the belief that the Board has in Capri Holdings. So with our strong balance sheet, it really gives us flexibility to continue to invest in the brands for future growth.

Got it.

Bob Drbul, BTIG.

Just on Michael Kors business, can you just tell us where the signature piece of this is, the penetration of it, and the trends that are going on with your signature offering?

Bob, thank you for that question. Yeah, signature, as you know, we -- about two years ago, there was a very strong position to reduce that in the company. And we probably went too far on that, bringing it down significantly. It's running now approximately 40% of our sales. We think that will probably go down a little bit more.

We think that leather and suede and some of the other materializations are much stronger from a trend standpoint than where signature had been, traditionally had gotten up to as high as 50% of our business. So I think we always are going to see it as a balance inside the organization. It was probably also a little more prevalent in some of our ready-to-wear and some of our footwear where it's come down there as well.

So I think we just have to look at it, like everything is a trend. Some companies are actually leaning back into it more strongly this as we speak, some of the big luxury houses. So we'll just watch that also with our data analytics. I think we can quickly see how the consumer feels about how much that represents of what our brand and marketing is.

Aneesha Sherman, Bernstein.

I have a question about long-term margins. You talked a lot about the puts and takes on margin going into next year. Historically, Michael Kors operating margins have been just over 20%. That was the number that was in your last Investor Day a year or two ago. As you think about long term, is there anything structural preventing an eventual return to those levels of margin?

Yeah. Thank you, Aneesha. So number one, as we've said previously, we think Michael Kors over the next few years will reach approximately $4 billion of revenue. And as we see that happening, you're going to see leverage clearly take place. I think as we demonstrate the ability to -- we shrunk our cost structure in the company fairly significantly over the last couple of years.

A big piece of that was our store a closure program. We're close to over 150 stores. We have a few more to go. Still going forward, we're going to look at those stores where they're not profitable, and continue to do that. We'll also open a few stores as well. I think I talked about that we're excited about.

We've had a number of mall owners come back to us. They love the new store program that we've opened a number of locations around the world. And so that's got some of our mall partners very excited about us coming back into that. So we'll look at that as well.

And we've also rationalized the overall structure of the employee base inside the company. So I think as we see revenues grow, we're going to see a leverage created for us. So I would tell you in Michael Kors, that we absolutely believe that, over time, we could reach a 20%-plus operating margin. We just want to make sure that's sustainable. So I would tell you that over the next couple of years, we're going to be focused on really making sure that the consumer is drawn to the brand, and we're not just trying to push the brand on to the consumer.

As it relates to Jimmy Choo, again, I just mentioned, we think that, that is an $800 million business. Could be bigger depending on how big the accessories portion becomes of the company. And as that accessories part of the business becomes bigger, it carries higher margins, which we think Jimmy Choo will definitely return to a double-digit margin also over the next few years.

So given the fact that we have this opportunity with Michael Kors and with Jimmy Choo, and we're seeing product resonating with the consumer, and we're seeing brand desirability increase at both brands. We're seeing our database increase. I would say we are cautiously optimistic. I think we'll become more optimistic after spring season when we've seen a longer-term consistency with the initiatives that we put in place.

But we're getting close to a place where we can come back to you and say, it's fully working, and we are ready to, even possibly, invest more to accelerate the growth inside the company. But as I said, we really want the customer to come to us and we're definitely seeing that happen. So thank you very much for the question, Aneesha.

I'd like to conclude by saying thank you for spending the time with us today. We're excited to report back to you in May with our fourth-quarter results, as well as our guidance for next fiscal year. I want to thank, in particular, our 11,000 employees around the world. They are really the heroes of this story. They worked incredibly hard in a very short window of time at both Michael Kors and Jimmy Choo, to really begin the turnaround for both of these companies to return to growth, and we're excited about what the future holds for us.

Thank you very much.

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.