Celebrity Fashion: Capri Holdings Ltd (CPRI) Q1 2020 Earnings Call Transcript

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Celebrity Fashion: Capri Holdings Ltd (CPRI) Q1 2020 Earnings Call Transcript

Celebrity Fashion:

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Capri Holdings Ltd (NYSE:CPRI)

Q1 2020 Earnings Call

Aug 7, 2019, 8:30 a.m. ET

Celebrity Fashion: Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Celebrity Fashion: Prepared Remarks:

Operator

Good day, and welcome to the Capri Holdings Limited First 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, Vice President of IR at Capri. Please go ahead.

Jennifer DavisVice President of Investor Relations

Good morning, everyone, and thank you for joining us on Capri Holding Limited’s first quarter fiscal 2020 conference call. With me this morning are Chief Executive Officer, John Idol and Chief Financial and Chief Operating Officer, Tom Edwards.

Before we begin, let me remind you that certain statements made on today’s call may constitute forward-looking statements, which are subject to risks and uncertainties that could cause actual results to differ from those we expect.

Those risks and uncertainties are described in today’s press release and in the company’s SEC filings, which are available on the company’s website. Investors should not assume that the statements made during this call will remain operative at a later time and the company undertakes no obligation to update any information discussed on the call.

In addition, certain financial information discussed today will be presented on a non-GAAP basis. These non-GAAP measures exclude certain items related to transaction, transition and integration costs associated with the Jimmy Choo and Versace acquisitions, restructuring and non-cash impairment charges. Unless otherwise noted all 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 to 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.

John D. IdolChairman and Chief Executive Officer

Thank you, Jennifer, and good morning everyone. As we outlined in our recent Investor Day presentation Capri Holdings strategy is to focus on international fashion, luxury brands that are leaders in style and trend. The foundation of our strategy is innovation and fashion leadership led by the design visions of Donatella Versace, Sandra Choi and Michael Kors. With the resources and investment that our group will provide both Versace and Jimmy Choo are positioned for significant growth.

We believe both luxury brands have significant opportunity to expand in accessories and footwear. Supported by our group expertise, we are already executing on initiatives with both houses to rapidly develop these categories. Additionally, both Versace and Jimmy Choo will increase revenues with global retail expansion. At Michael Kors, we continue to execute on our plans to position the brand for future growth by continuing to develop the Asian market and accelerating growth in our men’s category. With the power of Versace and Jimmy Choo and strength of Michael Kors, we believe our three iconic founder-led fashion luxury brands position Capri Holdings to accelerate revenue to $8 billion over time and deliver multiple years of earnings growth.

Now turning to Capri Holdings first quarter results. Revenues of $1.35 billion increased 12% year-over-year. Earnings per share of $0.95 exceeded our expectations. Based on the first quarter performance and our plans for the remainder of the year, we are reaffirming our earnings outlook for fiscal 2020 of approximately $4.95 per share, which includes the impact of the strengthening U.S. dollar and additional tariffs on imports from China.

Starting with the House of Versace one of the most storied luxury brands in the world. We were very pleased with, first quarter results. Revenues of $207 million and double digit comparable store sales growth, were both ahead of our expectations. Versace’s strong momentum as a reflection of the enthusiastic customer response to our spring line. Seasonal offerings incorporated the iconic codes of the house. While we continue to focus on expanding our core lines to create a solid base for long-term results.

Both women’s and men’s ready to wear as well as active footwear, continue to be key drivers of growth. In women’s ready to wear dresses featuring Versace iconic safety pin and reimagine to Barocco prints performed well in the quarter. For the men’s line customers responded to seasonal versions of our classic prints while fashion innovation helped drive strong outerwear sales. In accessories, we saw positive response to our new introductions in smaller size bags capitalizing on market trends and we were pleased with the strong performance of the new Versace vintage logo offerings.

Turning to footwear performance it was led by the continued expansion of Fashion Active. The introduction of cross chainer performed well and built on the success of our chain reaction line. In terms of brand awareness and engagement Versace enjoyed a strong presence across multiple events and regions. On the red-carpet Versace’s presence at the Met Gala was exceptional. With the Italian [Phonetic] dressing Jennifer Lopez, Alex Rodriguez, Kendall Jenner, Kylie Jenner, Serena Williams, Idris Elba and Henry Golding.

The utility is extensive presence on the Met’s red carpet was further amplified on social media by sharing the design and artistry in the creation of each dress worn at the event. As a result, Versace was the most engaged brand across all social media channels for the Gala. In Asia, we opened our China world Beijing flagship during the quarter Versace is largest store in the region. The store features our new retail concept, which is part of the brands global fleet renovation program that recently debuted in several major international locations.

We have seen strong results from our new store formats. In addition, we announced our first Asia brand ambassador Yang Mi a celebrated actress and singer with approximately 100 million followers across social media. These initiatives further amplify the vibrant image of the brand in the region where we continue to see strong growth. Capping off the quarter for Versace played an integral role celebrating the 50th anniversary of world pride in New York City.

Donatella Versace was named a Stonewall Inn Ambassador honoring her commitment to promote and defend diversity, equality and inclusivity all over the world. Taking the stage at the Stonewall Inn 50th anniversary celebration. Donatella was one of the main speakers and shared the stage with Lady Gaga for a custom-made rainbow flag inspired for Versace Atelier look designed for the occasion. Donatella was also the honorary guest of the Stonewall Inn float during the famous parade that close the month-long celebration which was capped off with a concert by Madonna who also wore Versace Atelier.

Our total media coverage was extensive and during the quarter Versace’s Instagram followers grew to 18.6 million an increase of 41% over prior year. Additionally Donatella’s Instagram personal following reached 4.4 million. Overall, we could not be more pleased with the continued momentum and strong start to the year from Versace. We are aggressively executing against our growth initiatives and investing in the brand and remain confident in our goal to accelerate growth and achieve $2 billion in revenue.

Moving to Jimmy Choo revenue declined 9% reported and 6% on a constant currency basis. Retail revenues increased double digits in the quarter and comparable store sales were flat. As previously anticipated wholesale revenues declined during the quarter. These results were slightly lower than we anticipated, due to the pound weakening in the quarter. And later demand fulfillment in our key active footwear category. Jimmy Choo continue to deliver comparable sales growth in footwear, led by the design vision of Sandra Choi. The brand introduced new seasonal updates of our core groups across all classifications, while continuing to focus on the rapidly expanding fashion active category. The recently introduced Diamond and ring sneakers both continue to exceed our expectations.

As previously stated, demand has been stronger than anticipated and we are working to fill backlogs for both Diamond and ring. We anticipate being back in an appropriate inventory position in Q3. In accessories, we continue to build our new collections introducing Madeline during the quarter and the initial results are very encouraging. Additionally, we are excited about the future introduction of our first JC signature group [00:02:06 Part 07]. We believe comparable store sales and accessories will begin to show growth later in the year, supported by these two new introductions.

In terms of brand awareness and engagement Jimmy Choo continue to dominate the red-carpet with celebrities such as the Duchess of Cambridge, Gemma Chan, Dua Lipa, Emily Blunt, Priyanka Chopra, Amal Clooney and Lady Gaga. Jimmy Choo built on the positive response to Gemma Chan, wearing the SHILOH pump at the Oscars and use this platform for a broad social media campaign around the launch of a capsule collection of our most iconic red carpet worthy shoes, and evening clutches. In Asia, the brand partnered with Ambassador Victoria Sonequa to design the launch — and launch a Bispo Capitao [Phonetic] collection, supported by a social media campaign on Weibo, and WeChat. The capsule was very successful. We also expanded our online presence in China during the quarter launching our own brand website and opening a Jimmy Choo store on WeChat. During the quarter, Jimmy Choo’s Instagram followers grew to 10.5 million, an increase of 25% versus last year. Looking at Jimmy Choo more broadly, we are pleased with the significant progress of our investment initiatives, retail store fleet expansion and accessories product development. We look forward to the brand’s growth for the remainder of the year and beyond, as we build toward our goal of 1 billion in revenue.

Turning to Michael Kors brand, first quarter revenue declined 5% on a reported basis and 3% on a constant currency basis compared to prior year. Revenue was below last year primarily due to unfavorable foreign currency translation and lower American — America’s wholesale shipments. Comparable store sales declined in the low single digits in line with our expectations. We delivered positive comparable store sales growth in Asia and Europe, while comparable sales declined in the Americas. Excluding the impact of watch declines, comparable sales would have been positive.

Moving to our product performance, Michael’s vision continues to create energy, excitement and engagement with our customers. And accessories the Michael Kors collection iconic Bancroft group remains a customer favorite. New shapes such as disco pouch, medium shoulder and mini satchel have received a positive response. In our Michael — Michael Kors line our recently introduced CeCe which features an elegant fold over silhouette and lock and key detailing quickly grew into a top performer during the quarter.

We saw strong success with the launch of our new Manhattan group. Manhattan was also featured in a collaboration with Japanese celebrity Tsubasa Honda. Our Michael Kors signature styles continue to enjoy increase consumer demand and we saw strong comparable sales growth in this classification. We continue to improve our inventory position signature with penetration increasing to the mid 20% range. However, we remain under inventory and plan to grow this signature to approximately 30% of our retail accessory sales by the end of the year. Moving to footwear performance was driven by Fashion Active, which was led by our Georgia, Billy, and Ally sneakers. Our customers responded well to seasonal color combinations new soft colors presented in luxury mixed media materials and novelty, detailing. Signature continue to perform well across all classifications with a strong response to our signature printed denim fabrics as well as lighter more subtle signature mixes.

In women’s ready to wear, dresses remained our largest platform with strong customer response to Michael summer collection, featuring medallion lace with applique details, studded floral motif combined with lux, artisanal texture fabrics, as well as metallic foil prints that evoke an elegant Mediterranean chart. Beyond dresses, fashion outerwear continue to trend positively. With best sellers including our iconic, leather motorcycle jacket and an oversize anorak offered with trademark hardware detail.

In our men’s business the accessories collection continued to be a key strategic focus and is performing well. Growth was led by backpacks including our CORE Grayson and Henry groups as well as our newly introduce Brooklyn mesh backpack trimmed with leather and supporting a suede bottom and Neon accents. Sportswear also performed well with the Greenwich Polo remaining a top seller. Additionally, our recently introduced sport capsule collection featuring signature taping and bold color choices continued to perform well, globally.

In our watch category, we continue to innovate in fashion watches launching the Whitney and Runway Mercer which feature feminine details and semi-precious access. We also introduced our new access Sofie smartwatch with heart rate monitoring and new sport features. Despite these initiatives, the overall watch category remains more challenged with declines remaining above historical levels. We are focused on accelerating the distribution of our fine jewelry line to offset watch declines longer term.

During the quarter, we saw a sequential improvement in jewelry sales, driven by strong performance of collections featured in our Bella Hadid Spring marketing campaign including Kors love and Mercer link offerings. With respect to brand awareness and customer engagement. We continue to benefit from Michael Kors personal and extensive global presence. At the Met Gala, Michael dressed a wide array of celebrities, including Gigi Hadid. We are also excited to announce the Gigi will be the new face of Michael Kors wonderlust fragrance campaign. This new relationship will build on our successful fashion campaigns with Bella Hadid. By partnering with both Bella and Gigi, two of the most highly recognised fashion icons in the world, with a combined Instagram following of 74 million. We are further deepening our connection with Millennial and Gen Z consumers.

Turning to world pride day in New York, Michael was at the forefront of celebrating his lifelong support for the LGBTQ plus community. Michael sponsored his celebration at the Stonewall in support of God’s Love We Deliver, which highlights his philanthropic commitment to support those in need. In June, we launched MKGO Rainbow, a capsule collection celebrating pride across all categories of men’s and women’s businesses. As a result, the company was able to raise significant funds to support LGBTQ plus organisations. Reflecting on our strong brand communication initiatives, we increased our global social media audience by 9% to over $46 million followers and expanded our database by 25% to approximately $36 million customers both demonstrating the strength and desirability of the Michael Kors brand.

Overall, we remained very encouraged by the continued progress we’re making with Michael Kors to ultimately return the brands to growth. We believe these efforts will support better results for the entire brand including a sequential improvement and comparable sales in the second half, and solidify Michael Kors as the foundation of our group. In conclusion, we are pleased with the start to the year. We are investing in Versace and Jimmy Choo to position these preeminent luxury houses for future revenue growth and margin expansion. Additionally, we continue to execute on our strategic initiatives at Michael Kors. The combined power of our three fashion luxury houses gives us the confidence and our ability to achieve our long term goals.

Now, let me turn the call over to Tom.

Thomas J. EdwardsExecutive Vice President, Chief Financial Officer & Chief Operating Officer

Thank you, John. Starting with first quarter results, revenue of $1.35 billion increase 12% compared to last year, driven by incremental revenue from Versace partially offset by lower results from Jimmy Choo and Michael Kors. Net income of $145 million and diluted earnings per share of $0.95 were ahead of our expectations and included $0.8 dilution from Versace. Looking at revenue performance by grand Versace revenues were $207 million and comparable store sales increased double digit compared to prior year, both ahead of our expectations. Comparable sales continued to be driven by strong ready to wear and active footwear performance. Versace ended the quarter with a global luxury fleet of 196 retail stores and that increase of eight from prior quarter as we begin to accelerate our retail expansion.

Turning to Jimmy Choo revenues during the quarter were $158 million and 9% decrease compared to prior year. On a constant currency basis total revenue decline 6% versus prior year. These reported results were below our expectations, reflecting unfavourable foreign exchange translation, lower wholesale shipments and flat comparable store sales driven by late active footwear deliveries. Jimmy Choo ended the quarter with a global fleet of 215 retail stores a net increase of 24 from prior year.

Turning to Michael Kors, total revenue of $981 million declined 5% compared to last year on a reported basis and 3% on a constant currency basis. Comparable sales declined in the low single digits in line with expectations, excluding watches, which continued to be a significant headwind in the quarter of approximately 170 basis points comparable sales would have been positive. Comparable sales grew in Asian Europe offset by declines in the Americas. Global e-commerce benefits comparable sales by 130 basis points. Michael Kors ended the quarter with a global fleet of 853 retail stores and net increase of six from prior year.

Now turning to total company margin performance. Gross margin was 62.4%, approximately flat compared to prior year. Total company operating expense increased $129 million compared to prior year, reflecting $142 million and expense related to the addition of Versace partially offset by lower expenses at Michael Kors. As a percentage of revenue operating expense increased 500 basis points to 48.3% reflecting the addition of Versace.

Total company operating margin of 14.1% was ahead of our expectations, this compares to 19.4% last year, reflecting the addition of the Versace business and anticipated lower operating margins for Jimmy Choo and Michael Kors. Versace’s operating margin was 1.4%, which was above our expectations due to higher revenue. Versace’s first quarter operating margin was expected to be low due to normal seasonality and additional brand investments. Jimmy Choo’s operating margin was 7% during the quarter compared to last year’s margin of 14.5%, probably we expected a lower operating margin due to revenue timing and higher investments actual results were further impacted by lower than anticipated revenue in the quarter.

Michael Kors operating margin of 20.5% was above our expectations. Our tax rates for the quarter was 18.1% compared to 9.9% in the prior year, primarily reflecting lapping the tax benefits related to employee equity compensation recorded in the prior year quarter.

Turning to our balance sheet, we ended the quarter with $160 million in cash and cash equivalents and $2.4 billion of debt. This quarter marked the implementation of the new lease accounting standard for Capri Holdings, and we reported right of the use [Phonetic] lease assets of approximately $1.7 billion and liabilities of approximately $2.2 billion. For the quarter we also recognize a $97 million store impairment charge, primarily related to new least assets recorded in connection with the update of the standard and predominantly impacting the Michael Kors retail fleet.

Looking at inventory, we ended the quarter with $1 billion compared to $697 million last year. With the increase primarily reflecting the addition of Versace inventory of $202 million. Jimmy Choo inventory increased 9% compared to the prior year reflecting anticipated revenue growth. Michael Kors inventory increased 19%. We expected inventory to be elevated this quarter, partly due to lapping and 11% decline in the prior year, as well as reflecting higher in-transit inventory, and an increase in signature and core accessories products as we build these classifications to higher mixed levels. Going forward, we expect smaller increases, but continue to anticipate inventory will be above prior year over the next few quarters.

Now turning to our capital allocation. Our first priority remains debt repayment, and we expect to pay down approximately $500 million during the fiscal year. Additionally, our board has authorized the new $500 million share repurchase program, further demonstrating the strength of our cash flow and providing capacity to return cash to shareholders over the longer term.

Now we’d like to turn to our guidance. For full year fiscal 2020 for Capri Holdings, we now expect revenue of approximately $5.8 billion compared to our prior estimate of $6 billion. Approximately half of this reduction is driven by additional unfavorable foreign exchange translation, due to the strengthening of the U.S. dollar against multiple currencies and half is related to reduce Michael Kors revenue in the Americas, which is predominantly associated with the wholesale channel. We believe the largest proportion of the revenue reduction [Indecipherable] in the third quarter.

For the year, we continue to expect an operating margin of approximately 15.5%. Interest expense in a range of $15 million to $25 million and effective tax rate of approximately 14% and weighted average shares outstanding of $153 million resulted — resulting in diluted earnings per share of approximately $4.95, including anticipated Versace dilution of approximately $0.20. Also included in our guidance is the impact of the recently announced U.S. tariffs on China, which now include ready to wear and footwear.

Turning to our second quarter guidance, we expect total company revenue of approximately $1.45 billion, a double-digit increase from prior year. We forecast Versace revenue of approximately $220 million and mid single-digit growth in comparable sales. For Jimmy Choo, we expect revenue of approximately $125 million and comparable sales to be flat for the quarter.

For Michael Kors, we expect revenue moderately below prior year and comparable sales to be flat for the quarter. Our second quarter operating margin is expected to be approximately 15%. For Versace we expect a slightly positive operating margin reflecting favorable seasonality and revenue growth, partially offset by increased investments to support our growth initiatives.

For Jimmy Choo, we expecting negative operating margin in line with normal seasonality. Michael Kors brand operating margin is expected to be lower than prior year, but a more moderate reduction from prior year compared to first quarter performance. Interest expense is expected to be approximately $5 million. Our effective tax rate is expected to be approximately 11%, we forecast weighted average shares outstanding of $153 million resulting in diluted earnings per share in the range of $1.21 to $1.26 including Versace dilution of approximately $0.05.

Additionally, to give some color on second half earnings. I would like to provide an update on our Q3 and Q4 expectations. In Q3, we anticipate earnings per share to decline in double digits versus prior year. This is driven primarily by the previously mentioned revenue reduction which is proportionately higher in the third quarter due to lower Michael Kors wholesale shipments in the Americas.

Looking at the fourth quarter, we expect earnings per share to be approximately double compared to prior year. This increase will be driven by the benefit of an additional month in the quarter for Versace, higher operating margins for Jimmy Choo and Michael Kors and a lower tax rate.

In conclusion, we remain on a path to deliver our earnings commitment for fiscal 2020, while investing and executing against the strategic initiatives that position our global luxury group to achieve meaningful long term revenue and accelerated earnings growth.

Now, I will open up the line for questions.

Celebrity Fashion: Questions and Answers:

Operator

Thank you. [Operator Instructions] We will take our first question from Paul Lejuez from Citi. Please go ahead. Your line is open.

Paul LejuezCitigroup — Analyst

Thanks, guys. I think you’ve given us the percentage of handbags that come from China in the past. Can you remind us what percent of apparel and footwear sourced from China today versus where you see that going based on any adjustments you might have made? And then also can you tend to reduce the dilution number for Versace keeps talking about what drove that? Also curious what’s the reason you expect comps to slow-to-mid single digits this quarter actually running up double digits in Q1? Thanks guys.

John D. IdolChairman and Chief Executive Officer

Good morning, Paul. Paul, let me address this — I think there’s three questions. I’ll let Tom take the dilution one and then I’ll come back to the Versace comps. Number one, the percentage of footwear and ready to wear that is made in China today, while it represents a more significant piece of those two categories, we do not feel even if the tariffs were to go to the top four 25%, that would be impact our earnings, we believe we have enough opportunity to mitigate some of those issues, as you saw we just did with the increase of the 10% on those categories. So we’re comfortable that both in this year and as we move forward, that will not impact our earnings projections.

And I also might add our intent is to not raise prices, we believe that as we stated in our previous — in our prepared remarks that Michael Kors, the brand will return to flat and even positive comp store growth in the back half of the year. And we think it’s very important that we continue to maintain our pricing strategy that we have both domestically and globally. And as we’ve been saying, we are absolutely seeing traction in the business in particularly in accessories, we’re seeing a pretty — a pretty good rebound at the more signature inventory we get into the — our own retail stores. It’s really helping the business considerably and so we want to stay on the strategy. I might also add that we are seeing traffic inside our stores, really kind of level off, which is a great sign in the marketing initiatives in the Michael that’s being led by our teams here Michael and also Francesca Leoni are really taking hold with Bella Hadid and now the announcement of Gigi. We’re reengaging with certain customers that may not have been focused on the brand in the past.

So we’re feeling really good about the initiatives that we’re taking, and we’re seeing that reflect and as you know, we also stated that our comparable store sales in Asia and in Europe remain positive and we’re seeing great growth in those two regions. We think we’re going to be able to achieve the same thing in North America, and that’s going to be coming pretty quickly. I’ll turn the second part over — undiluted to Tom.

Thomas J. EdwardsExecutive Vice President, Chief Financial Officer & Chief Operating Officer

Sure, Paul, and you’re looking for Versace’s performance in Q1, we had expected dilution of around $0.15 that came in much better at $0.08 and that’s really driven by the better sales performance, higher comparable sales as well. So we’re flowing through that mostly to the year, moving from $0.25 dilution to $0.20 with — slight piece not going through due to the FX headwinds from the U.S. dollar. So we feel we’re really reflecting a great start to the year for Versace in that full year dilution outlook, which is much lower than what we had anticipated when we originally discussing this acquisition.

John D. IdolChairman and Chief Executive Officer

Yeah, and turning to the Versace comps again, we are very, very pleased with what we saw in the quarter, which was ahead of our expectations. I can tell you that we hopefully won’t be in the same position we’re on this call in a few months from now. We are certainly planning the business aggressively, I think that we are going to take a conservative approach, always with the luxury businesses. Did you see good steady solid growth. So mid-to-high single digits is where we kind of we’ll always be thinking about the Versace a business. And so I think we’re very comfortable with that range etc, but we’re well positioned to do that. The other thing that we will also do with Versace which is exactly what we did with Jimmy Choo and we talked about this in our prepared remarks. We’re going to start to wind out of some of the current accessories collections we’re introducing the new Barocco V logo, which you saw on the runway the Virtus bag, which has already before we’ve even tried to accelerate this — is really getting some very nice reaction.

So we’re going to do a little tweaking on that side — that as I’ve told you before whether that takes us about 12 months exactly, more or less what we’ve gone through with Jimmy Choo and by the way, if you get a chance to go into the Jimmy Choo store the new Avarana [Phonetic] collections have arrived in not only the accessories, but in the footwear and we’re really pleased with the early results that we’re seeing from those signature collections in the stores. So I think we’re executing just right on the mark for what we had planned for Jimmy Choo and we’ll be doing the same thing in Versace. Thank you, Paul.

Paul LejuezCitigroup — Analyst

Thanks and good luck.

Operator

[Operator Instructions] We will now take our next question from Matt Boss with JPMorgan. Please go ahead. Your line is open.

Matt BossJP Morgan — Analyst

Great. John, maybe — can you speak to the health of the — accessible luxury handbag category, specifically what changed over the past three months in North America wholesale relative to your prior outlook. And then just larger picture what are you seeing in terms of traffic trends, channel inventories and promotional activity today in North America?

John D. IdolChairman and Chief Executive Officer

Okay. Lot more questions very good, Matt. First, and good morning. So the accessible luxury category, I think we see it as the following, and we still see it growing mid-single digits in Asia. So we feel good about that category is still growing there in Europe. I think we’re actually seeing a little acceleration in the category, which is something we feel really good about, we’re have had multiple quarters of comp store increase in our Europe business in very clearly our accessories businesses is healthy there. And again, both product and the marketing based around Bella Hadid. In North America, I think the accessible luxury category is actually down slightly and I think that is — some of that is a little bit of lack of innovation, which I think we’re now starting to see some really good reaction to when I — getting into our prepared remarks I talked about the fact that we have now three new collections being Manhattan, Cece and Whitney that are really doing well inside of our stores, and quite frankly it’s been a while since we’ve had three strong collections all simultaneously performing and then on top of the signature styles.

So I think we will begin to leave some of that rebound for the category and I think you’re going to see that happening relatively quickly. I think the consumable once innovation and they’ll respond when there is innovation. In terms of channel, we definitely see the department store channel as being the weakest channel for North American department store channel is the weakest channel for us around the world.

And I think there, we are behind on the strategy that we have in our own stores they are a significantly below the 20% mark in our signature category. We believe we will get the department store channel caught up I’d say it’s probably going to be more like fourth quarter, we’re working very hard, it’s not easy to just turn that production in terms of the kinds of quantities that we’re talking about as quickly, but our partners are very encouraged by what they are seeing, they’re also seeing excellent sell-throughs in this category for us. I can’t tell you when I see that channel turning positive because I just don’t know and this is by the way, it relates to accessories. Because in our men’s sportswear business, our women’s ready to wear and our footwear business we’re seeing pretty good responses in all three of those categories in that channel. So I can’t tell you when this channel is going to turn more positive and accessories, but I can tell you that we’re working hard and our partners are working very much alongside of us.

In terms of traffic as I commented before, we’ve now seen two quarters where traffic has stabilized in our own stores and we’re actually seeing some growth in traffic in the stores we saw a little bit last month, so some things happening something starting to turn, and again we feel really good about that inside the stores. And I believe again part of this is driven by product and also partners [Phonetic] being driven by our exciting marketing campaigns. Promotional activity remains about the same as it’s been from where we were before. So I don’t really see that as impacting the business positively or negatively. This is about product, about marketing, about engaging the customer and exiting them in this category again. Thank you very much, Matt.

Matt BossJP Morgan — Analyst

Thanks for all the color.

Operator

And we will now take our next question from Kimberly Greenberger with Morgan Stanley. Please go ahead. Your line is open.

Kimberly GreenbergerMorgan Stanley — Analyst

Great. Thank you so much. Good morning. Gentlemen, I had a couple of questions on Michael Kors and Jimmy Choo. In the course brand when do you think the wholesale de-stocking might be finished? Do you think that sometime this fiscal year, do you think we’ll continue to see a destocking of the Americas wholesale channel into next year as well? And in terms of the margin performance for the chorus brand here, this quarter, the 180 basis point decline was that pretty exclusively gross margin driven or if you have any margin color there, that would be helpful. The revenue for Jimmy Choo the wholesale decline, was that strictly timing? Or are you seeing any destocking in the wholesale channel, we’re just looking, wondering if there’s going to be a little bit of a catch up, perhaps in upcoming quarters.

And then last question on the share count guide. Tom, I’m not entirely sure I understand the share count guidance. I think you said $153 million for the year, but the first quarter was $152 million. So I’m just — I’m sure why that goes up. Thank you so much.

John D. IdolChairman and Chief Executive Officer

Okay. So a lot of questions, Kimberly, and good morning. So number one, the — I would not call what is happening in North America Michael Kors accessories to be a wholesale de-stock — the performance has been negative on a comp-store basis. Whereas last year, we were actually trying to put less stock into the stores to have less promotional activity. So this is more of an issue of us getting the right product in the stores, exciting the consumer and we believe that’s going to be led by first and foremost our signature, collections, which are performing very well.

And as I said to you the department store, a channel is running five, six points behind us in our own-freestanding stores and we’re working very hard to get them back in position and they’re on board with us so that’s all we’re all aligned. And secondly is more and better — better product from us in terms of excitement. And I think we’re there, I think you’re starting to see some very interesting product come from Michael and the design teams and we’re seeing that positive response we’re having strong sell-throughs on various groups and as I — as we’ve said again in our prepared remarks, we believe in our own channel we will return to flat to positive comp store starting next quarter. So we’re feeling good about that and clearly the department store channel is having some traffic issues and so we can only hope that begins to mitigate. We’re very excited about what we’re seeing in our own stores in terms of traffic and that’s in North America in particular. So we can’t sit here and tell you when that is going to turnaround per say, but I think we’re feeling positive about the actions that we’re taking.

I’m going to jump to the Jimmy Choo. The wholesale revenue number as you recall from last quarter, we have said — we shifted about $10 million into last quarter, just we’re changing the flows on the deliveries on the product and that’s, so we can get the product of affordable earlier and have a little higher sell through and that is working for us. But we do have a negative, and that is that the active footwear business in luxury as you know is substantial piece of business, and when we bought Jimmy Choo that was not one of their core focus is we have subsequently made that a core focus for the company and we have two very successful products, one being our diamond, sneaker and also our Raine sneaker.

We got caught off guard that is moving much more quickly than we had anticipated and we anticipate — the sneaker category could represent 20% of sales for Jimmy Choo which by the way is still below our luxury competitors in terms of our development of that classification. And so, given that we are quite frankly we’re out of stock in many cases, we weren’t able to deliver to our own retail stores and that has impacted some of our wholesale shipments in the quarter.

So we received, we believe that we’ll begin to return as early as next quarter and we’ll be back on track for the double-digit growth in the next quarter. And I want to caveat that all by whatever happens to the pound because the pound is definitely having some very significant effect on Jimmy Choo’s results as you know it’s devaluing quickly against the U.S. dollar.

I will turn over the margin performance question to Tom in the share count.

Thomas J. EdwardsExecutive Vice President, Chief Financial Officer & Chief Operating Officer

Sure. Good morning, Kimberly. So with regard to the share count, we typically issue stock incentives for management when on the June time frame, so you would see that, you’re fully impact the dilution or above this share count on the diluted fully diluted basis coming in our second quarter. So that’s why you’re seeing that increased from $152 million to $153 million. And then with regard to Kors margin we’re talking now and guiding to operating margin and I’d like to talk a little bit at that level and then provide a little color commentary perhaps on some of the components, but as I mentioned in the prepared remarks our Kors operating margin was a hazard expectations this quarter.

And when you look at it compared to prior quarters it’s an improving trend we expect that to continue to improve through the year and will be supported in large part by our inventory initiatives to build signature, which is we’ve noted will help support the gross margin as that will reduce our needs to do any markdowns as we have done in the past or as many. And then we have cost control on the SG&A side, that is really helped the margin this quarter and when you look at the broader ability to hold our 495 EPS for the year, it’s largely driven by effective cost control across the business and we see the beginnings of that in this first quarter with Michael Kors.

Kimberly GreenbergerMorgan Stanley — Analyst

Great. Thank you so much.

John D. IdolChairman and Chief Executive Officer

Thank you, Kimberly.

Operator

[Operator Instructions] We will now take our next question from Michael Binetti from Credit Suisse. Please go ahead. Your line is open.

Michael BinettiCredit Suisse — Analyst

Hey, guys, thanks for all the detail here today. I wanted to see if I could ask you just a question on the guidance, as you laid it out between the third quarter and fourth quarter timelines fairly interesting detail. With the EPS down the way that you pointed to, in the third quarter would you might helping us think about how Michael Kors revenues track in the third quarter if those would be down to a similar extent like should be thinking double digits or should we thinking more like mid to high-single digit revenue declines and get to the rest of the EPS that you pointed to on sales deleverage. And then also wanted to ask you on Jimmy Choo and I apologize if I missed this, but with the comps in the second — first quarter in the guidance for flat in the second quarter is the mid-single digit comp for the year is still valid at Jimmy Choo. Is it still valid ex-currency, if that’s an impact. I know the UK probably factors into that a little bit? Thank you.

John D. IdolChairman and Chief Executive Officer

I’ll take the comp guidance on Jimmy Choo first and let Tom discuss the guidance for the year and Michael Kors, and good morning, Michael. So in Jimmy Choo again the inventory issue we’ve got to get back into inventory in the trainer category as we said in our prepared remarks . We believe we’ll be back in inventory in Q3. So I don’t want to say either way whether we think that the mid-single digits or low single digits, is going to be what we’re going to achieve. We’re going to have comp store growth and a little bit of that’s just going to depend on the development of the accessories in the back half of the year which we are feeling very good about. And as we also said initial reaction to modeling which I think many of you probably seen either in-store online. We’ve got some, we’re off to a great start on that, on that group and we’re in a while, it’s only in the past few weeks. The sales associates are very excited we’re absolutely selling bags and what’s interesting is, we’re selling footwear, the new boot that came out with the JC signature on it and our new pump with the JC signature on — are both retailing very well.

So I think it bodes well for us, I think we feel good about what we have and again, I want to remind everyone this currency situation with the pound is something we believe we will be dealing with for at least the next year as the UK goes through Brexit. So it’s a little hard for us to kind of sit here and be as 100% — specific on some of the Jimmy Choo numbers, I might also add there are not for the moment as material for us in terms of earnings. So while it’s important, it’s not going to be the key for us next year obviously both Jimmy Choo and Versace start to become a much more significant part of our earnings growth story. And so again we’ll be watching the currency very closely, but our current forecast include what we believe is going to happen for the strength of the American dollar.

Thomas J. EdwardsExecutive Vice President, Chief Financial Officer & Chief Operating Officer

And Michael, with regard to Q3 and Michael Kors, so we did want to provide some color on the EPS directionally for Q3 and Q4, we thought it was important given the change in revenue. Overall for the year and how it pieces out in the quarters. So while we’re not going to provide specific guidance at this point on revenue. I would say that the Michael Kors wholesale looking at all the quarters that will be the quarter, that will be most impacted by this reduction, given the holiday timing and seasonality of that business. And the reduction in EPS versus our prior guidance is related directly to that, while the cost savings that we are generating and are flowing through our quarters at a more even level through the year.

John D. IdolChairman and Chief Executive Officer

Yes. And also in Q4, I think we — as previously stated that it includes Versace December, because there are — on a one-month lag and that is a very profitable quarter on for them. So that also impacts our Q4 so when you’re looking at your modeling that’s one of the other reasons why Q4 we get the lift as well as Tom had mentioned previously, we are going to see margin expansion from Michael Kors, in particular in the fourth quarter related to inventory positioning and the quality of that inventory positioning. Additionally, we’ve been getting certain additional manufacturing cost reductions, which will start to flow through as well. So we’re feeling very good about where the margin story in the company is going to be going in particular in the back half of the year.

Michael BinettiCredit Suisse — Analyst

All right. Thanks a lot for your help guys.

John

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