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Capri CEO: Wholesale Will Be a ‘Smaller Business’ in the Future

Michael Kors owner Capri Holdings Ltd. saw sales bounce back in the second quarter, led by growth in Mainland China, and will focus on generating more of its revenue from owned stores versus wholesale doors going forward.

In a Nutshell: Noting the Covid-19’s pandemic ongoing impact, chairman and CEO John D. Idol said Capri company-owned retail recovered more quickly relative to wholesale partners. While the company still believes in the wholesale channel, it will “become a smaller business for us over time,” he added. Noting that it was about 30 percent of the company’s overall business last year, that component “over the next couple of years will go down to 20 percent,” he said. Capri plans to open more Versace and Jimmy Choo stores, growing its owned retail-omni distribution channel, and will invest in e-commerce to drive growth as well. Idol said the wholesale channel is “highly profitable” for Capri, but noted bankruptcies and other challenges facing retail partners.

Idol said second-quarter revenue and earnings results topped company expectations.

“Our performance demonstrates the power and desirability of the Versace, Jimmy Choo and Michael Kors brands. Through creativity and innovation, our luxury houses inspire excitement and passion, creating an emotional connection with our consumers. We are also attracting new consumers to each of our luxury houses as evidenced by the double digit increase in our consumer databases,” Idol said.

In an earnings call, Idol said he is “increasingly optimistic about the fashion luxury industry.”

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The industry, he added, has “proven resilient, with sales historically recovering rapidly following economic downturns and global health crises,” while consumers shift dollars that would otherwise be spent on travel and experiences to purchasing luxury goods.

“Wholesale at point-of-sale also continued to improve, but lower than at our own stores. By geographic region, the fastest recovery was in Asia, led by Mainland China. Revenue in the Americas also was increasing faster than anticipated,” Idol said. In Europe, Middle East and Africa (EMEA), sales improved sequentially, with sales at all their brands trailing other regions mostly due to the lack of tourism.

Looking ahead, Capri will focus on designing the most innovative and fashion luxury products, inspiring, engaging and delighting consumers through marketing campaigns, leveraging the global databases of all three brands, accelerating revenue growth at the three fashion luxury houses, and being an exceptional corporate citizen, Idol said.

The company said net inventory at the end of the quarter was $930 million, representing a 13 percent decline from the same year-ago period.

Net Sales: Total revenue for the quarter ended Sept. 26 fell 23 percent to $1.11 billion from $1.44 billion. E-commerce sales were up 60 percent, improving sequentially from the first quarter, the company said. Luxury sales across all three luxury brands were positive in Mainland China in the quarter.

By luxury house, Versace posted revenue of $195 million, representing a 14.5 percent decrease from a year ago. Operating income was $20 million, with operating margin at 10.3 percent. That compares with operating income of $14 million in the year-ago quarter, with operating margin of 3.9 percent. The brand also saw mid-single-digit growth in retail sales from July through September. It saw sales in retail in Mainland China grow in the high-single digit and strong double-digit growth in North America. E-commerce sales rose in the triple digits for the quarter. The brand grew its global database to up 20 percent year-over-year to three million.

At Jimmy Choo, revenue fell 2.4 percent to $122 million, versus year-ago results. Operating income was break even, versus an operating loss of $10 million and operating margin of negative 8 percent a year ago. The brand saw strong double-digit retail sales growth in Mainland China, and low single-digit gains in North America. E-commerce sales were up triple digits for the quarter. The global database for the brand in the quarter rose 22 percent year-over-year to over three million.

Michael Kors revenue declined 27.2 percent to $793 million, compared with the year-ago figure. Operating income was $190 million, while operating margin was 24 percent, versus $222 million and 20.4 percent in the prior year, respectively. “We are pleased with the pace of recovery,” Idol said. The Kors brand saw high single-digit retail sales growth in Mainland China during the quarter. E-commerce improved sequentially, with sales up in the double-digits. Gross margin expansion was primarily driven by higher average unit retail. The expansion of its Signature line in accessories grew nearly 40 percent versus 30 percent penetration a year ago, which also helps provide higher average unit retail and margins, Idol said. The brand’s global database was up 16 percent year-over-year to 46 million.

Capri said net inventory at the end of the quarter was $930 million, representing a 13 percent decline from the same year-ago period. Also, executives said consumers have shown “no resistance” to higher prices, while sales of larger bags remains strong. Idol said select items at higher prices don’t need to be at all stores to get the higher sell-throughs. In addition, prices in Asia are higher than at their North America or EMEA counterparts.

For the six months, net sales were down 44 percent to $1.56 billion from $2.79 billion.

Earnings: Net income jumped 67.1 percent to $122 million, or 81 cents a diluted share, from net income of $73 million, or 47 cents, in the year-ago quarter. On an adjusted basis, net income was $137 million and diluted earnings per share were 90 cents.

Wall Street had expected adjusted diluted EPS of $0.04 on revenues of $924.91 million.

Capri is not providing annual earnings guidance for fiscal year 2021.

For the six months, the company posted a net loss of $58 million, or 39 cents a diluted share, against net income of $118 million, or 77 cents, in the year-ago period.

CEO’s Take: “As the world continues to emerge from this crisis, we are increasingly optimistic about the outlook for the fashion luxury industry and Capri Holdings. We have an incredible portfolio of luxury houses, each with their rich heritage, exclusive DNA and strong brand loyalty. We are uniquely positioned to drive multiple years of strong growth as we continue to execute on our strategic initiatives,” Idol said.