Capri Holdings Ltd Q2 FY2023 Earnings Call

Greetings, and welcome to the Capri Holdings Limited Second Quarter 2023 Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jennifer Davis, Vice President of Investor Relations. Please go ahead, Ma'am.

Good morning, everyone, and thank you for joining us on Capri Holdings Limited Second Quarter Fiscal '23 Conference Call. With me this morning are Chairman and Chief Executive Officer, John Idol; and Chief Financial and Chief Operating Officer, Tom Edwards. Before we begin, let me remind you that certain statements made on today's call may constitute forward-looking statements, which are subject to risks and uncertainties that could cause actual results to differ from those we expect. Those risks and uncertainties are described in today's press release and in the company's SEC filings, which are available on the company's website. Investors should not assume that the statements made during this call will remain operative at a later time, and the company undertakes no obligation to update any information discussed on the call. 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 COVID-19 related charges, ERP implementation costs, Capri transformation costs, impairment charges, restructuring and other charges. To view the corresponding GAAP measures and related reconciliation, please view the earnings release posted on our website earlier today at capriholdings.com. Now I would like to turn the call over to Mr. John Idol, Chairman and Chief Executive Officer. John?

Thank you, Jennifer, and good morning, everyone. We were pleased with our second quarter performance as Capri Holdings delivered strong revenue growth and record earnings per share. Results were driven by momentum across all three of our luxury houses, reflecting the continued execution of our strategic initiatives as well as the power of our brands. While we remain confident in our long-term growth potential, we are now more cautious in our revenue outlook for the remainder of fiscal 2023 due to an increasingly uncertain macroeconomic environment, foreign currency headwinds, and the ongoing impact of COVID-related restrictions in China. Accordingly, we will carefully manage our business by focusing on profitability and controlling expenses. Despite near-term headwinds, we will remain focused on executing the strategic initiatives that we presented at our recent Investor Day to drive sustainable future growth. Before turning to second quarter results, I would like to welcome Emmanuel Gintzburger as our new Chief Executive Officer of Versace. He has a proven track record of building global fashion luxury houses. We believe his experience and vision for Versace will help us further accelerate our growth plans and strengthen our strategic initiatives. We look forward to you getting to know him in the future. Now turning to second quarter performance. Revenue was in line with our expectations, increasing 9% on a reported basis and 18% in constant currency. Operating margin of 19.8% was above our expectations, reflecting better-than-anticipated gross margin and diligent expense management. We delivered record second quarter earnings per share of $1.79. In terms of customer acquisition, we added more than 12 million new names across our databases versus the prior year. This is the largest year-over-year increase in our history, demonstrating the strength and desirability of our brands. Now looking at second quarter group revenue trends by geography. In the Americas, revenue increased 15% with double-digit growth across all of our houses driven by sustained demand for luxury products. In EMEA, revenue increased 3% on a reported basis and 20% in constant currency. This was driven by strong growth across all our houses benefiting from robust domestic consumer demand as well as an increase in travel. In Asia, revenue decreased 2% on a reported basis but increased 12% in constant currency. This reflects strong results in Japan and Southeast Asia with Mainland China revenue down in the high teens and down low double-digit in constant currency. Moving to second quarter revenue trends by brand. Starting with Versace. We were pleased with the brand's performance as revenue and operating margin were ahead of our expectations. Revenue increased 9% on a reported basis and 28% on a constant currency compared to prior year as we continue to execute on our strategic initiatives and consumers responded to Donatella's bold and fearless design vision. Turning to product. Starting with accessories, which are a key component of our growth strategy. Women's accessories sales in our retail channel increased approximately 60% versus prior year. We are gaining traction by focusing on our existing pillars of La Medusa and Virtus while expanding the assortment with the launch of Greca Goddess. We are pleased with the initial response to our new Greca pillar. With these three pillars, La Medusa, Virtus, and Greca, we are making significant progress in our goal to position Versace as a leading luxury leather house. Another component of our growth strategy is to expand women's footwear. Versace continued to gain authority as a women's luxury footwear brand as we expanded our core offering focused on iconic codes. Second quarter sales in our retail channel were strong, driven by styles featuring a range of Versace codes, including Greca and Medusa. In women's and men's ready-to-wear, consumers embraced the La Greca pattern as well as new Barocco prints. We also continued to expand our core lines, which incorporate iconic house codes to broaden Versace's reach. Moving to brand awareness and consumer engagement, Versace continued to deepen consumer desire through powerful storytelling. The house's fall 2022 campaign, which was shot in Rome, starred Lily James embracing Versace's Italian heritage and runway glamour. Additionally, Versace was among the top engaged Italian fashion brands on social media during Milan Fashion Week. The spring 2023 show was inspired by Donatella's vision of the modern Versace woman, who is both bold and glamorous. The show generated over 23 million views globally and was the most mentioned show online during Milan Fashion Week. Now turning to Asia. Versace restaged the fall 2022 fashion show in Bangkok, Thailand, coinciding with the launch of the fall collection. Celebrities, models, and influencers attended the event and generated nearly 50 million impressions across social media. The combination of these brand-building activities and our data analytics capabilities led to an increased consumer acquisition driving 40% year-over-year growth in Versace's global database. Overall, Versace's strong second quarter results speak to the strength of the brand and the success of our strategic initiatives, reinforcing our confidence in the luxury house's long-term growth potential. Moving to Jimmy Choo. We were pleased with the second quarter results. Revenue was in line with our expectations, and operating margin was better than anticipated. Revenue increased 4% on a reported basis and 15% in constant currency compared to prior year as we continue to execute on our strategic initiatives and consumers responded to Sandra Choi's glamorous design vision. Turning to product. One of Jimmy Choo's key strategies is to expand accessories. Women's accessories sales in our retail channel increased over 30% in the second quarter. Our iconic Bon Bon continued to perform well, and we expanded our VARENNE family with the launch of VARENNE Avenue. We were pleased with the early response to Avenue, and sales have exceeded our expectations. Another key product strategy for Jimmy Choo is to maximize our casual opportunity. Casual footwear sales in our retail channel increased strong double digits driven by strong performance of the new Diamond Light Maxi with its unique platform sole that resembles diamonds set in stone. Moving to brand awareness and consumer engagement. Jimmy Choo continues to drive consumer acquisition and engagement by combining storytelling and data analytics. We are excited to feature Kendall Jenner as the face of Jimmy Choo's new fall 2022 campaign. In a continuation of our Time to Dare series, Kendall embodies the glamorous, confident, and daring spirit of the brand. Kendall has nearly 300 million followers across her social media accounts, which has increased Jimmy Choo's consumer reach. In Japan, Jimmy Choo introduced actress and model Ayami Nakajo as the latest friend of the house. In a series of images set against the Tokyo skyline, she is featured with autumn's must-have accessories, boots, and sneakers. The actress has over 2 million followers on Instagram and is helping us reach new customers. Our engaging customer communication, which combines storytelling with data analytics, helped contribute to a 30% year-over-year increase in Jimmy Choo's global consumer database. Overall, Jimmy Choo's strong second quarter results speak to the strength of the brand and the success of our strategic initiatives, reinforcing our confidence in the luxury house's future growth potential. Turning to Michael Kors. We were pleased with the second quarter results. Revenue was in line with our expectations, and operating margin was better than anticipated. Revenue increased 9% on a reported basis and 15% in constant currency compared to the prior year as we continue to execute on our strategic initiatives and consumers responded to Michael's glamorous jet set design vision. Turning to product. As we continue to elevate our assortment, we introduced our new Empire Hardware and Art Deco logo design that embodies the style of Michael Kors and his love of New York City. The Empire Hardware debuted on our new Parker bags as well as on a selection of shoes, ready-to-wear, and eyewear. We see a significant opportunity in products featuring our newly highly recognizable MK hardware codes as they build brand identity and consumer loyalty. In accessories, consumers responded positively to the glamorous hardware of our new Parker bags. We are pleased with the initial response to the collection, and sales exceeded our expectations globally. Signature also continued to perform well. As a result, accessories sales in our retail channel increased mid-single digits globally. Turning to footwear. As we discussed during our July Investor Day, we believe we can significantly expand Michael Kors footwear to drive incremental revenue. Footwear sales in our retail channel increased high single digits during the quarter as we continue to capitalize on our brand codes and deliver exciting fashion. Looking at men's, which is another growth opportunity for Michael Kors, second quarter retail sales increased strong double digits globally as we focused on timeless essentials with a modern edge. Accessories sales were strong driven by Signature styles. Now turning to brand awareness and consumer engagement. Michael's fall campaigns reflect his love for New York City as well as his passion for travel. The Michael Kors Collection campaign celebrates the allure and glamour of New York City with opulent extravagance. The MICHAEL Michael Kors campaign highlights the brand's Jet Set DNA as Bella Hadid and friends explore London. In Asia, as we increased our focus in the region, Michael Kors created a localized extension of the global Jet Set campaign featuring Chinese supermodel He Cong. During New York Fashion Week, Michael Kors was the most highly engaged brand on social media. The theme of the spring 2023 show was urban resort, which combined the elegance of city life with the laid-back glamour of our resort getaway. The show generated over 23 million views globally. In China, Michael Kors took over an immersive venue in the heart of Shanghai to view the spring '23 fashion show. Brand ambassadors, Gao Yuanyuan and Wang FeiFei, were joined by over 750 guests, including top models, influencers, and press. As a result, the event generated over 50 million social media impressions, and the fashion show was live streamed by over 21 million viewers on Weibo. The combined power of our Jet Set storytelling and our data analytics capabilities contributed to a 17% year-over-year increase in Michael Kors global database. Turning to our retail fleet. I am also pleased to announce that we will be opening two new Michael Kors flagship locations, one on Madison Avenue in New York City and one on Bond Street in London. They are scheduled to open next year before the holiday season. Both locations are approximately 10,000 square feet and will showcase our entire luxury assortment. These stores are being designed not only to elevate the brand, but also to drive more significant retail revenue in major cities. Finally, I'm happy to announce that we launched Michael Kors Pre-Loved during the quarter driven by our commitment to sustainability. The Michael Kors Pre-Loved site is the official marketplace for buying and selling gently used items from Michael Kors. Our goal is to give consumers the best value for their past purchases while giving those items a new beginning with another stylish Michael Kors customer. Overall, Michael Kors' second quarter results speak to the strength of the brand as well as the success of our strategic initiatives. As we continue to elevate the brand positioning, we are confident in Michael Kors' future potential. In conclusion, we were pleased with Capri's second quarter results as we delivered strong revenue growth and record earnings per share. Looking forward, while we recognize there are near-term macro uncertainties, our powerful brands have enduring value and proven resilience, reinforcing our conviction in Capri's ability to deliver strong revenue and earnings growth over time. Our confidence is also underpinned by the talented group of employees at Capri Holdings that are executing our strategic initiatives. Now let me turn the call over to Tom.

Thank you, John, and good morning, everyone. Starting with second quarter results. Revenue of $1.41 billion increased 9% versus prior year and 18% in constant currency, in line with our expectations. Net income was $245 million, resulting in diluted earnings per share of $1.79. This was above our expectations, primarily reflecting higher-than-anticipated gross margin and diligent operating expense management. Turning to revenue performance by brand. At Versace, revenue increased 9% versus prior year and 28% in constant currency. Global retail sales increased double digits in constant currency. By geography, total revenue in the Americas increased 12%. Revenue in EMEA increased 10% on a reported basis and 28% in constant currency. Revenue in Asia increased 2% on a reported basis and 20% in constant currency, reflecting strong growth in Japan and Southeast Asia, partially offset by an expected decline in China. For Jimmy Choo, revenue increased 4% to prior year and 15% in constant currency. Global retail sales increased double digits in constant currency. By geography, total revenue in the Americas increased 13%. Revenue in EMEA increased 2% on a reported basis and 20% in constant currency. Revenue in Asia decreased 2% on a reported basis but increased 12% in constant currency, reflecting increases in Japan and Southeast Asia, partially offset by an expected decline in China. At Michael Kors, revenue increased 9% compared to last year and 15% in constant currency. Global retail sales increased high single digits in constant currency. By geography, total revenue in the Americas increased 16%. Revenue in EMEA was flat on a reported basis but increased 15% in constant currency. Revenue in Asia decreased 5% on a reported basis but increased 7% in constant currency, reflecting strong growth in Japan and Southeast Asia, partially offset by an expected decline in China. Now looking at total company margin performance. Gross margin of 67.1% was 50 basis points below prior year as we continued to be impacted by higher supply chain costs. But this was above our expectations, reflecting the benefits of our strategic initiatives. Operating expense as a percent of revenue was 47.3% compared to 49.1% last year, reflecting leverage on the increase in sales. On an absolute basis, operating expense increased approximately 5% or $30 million versus prior year, primarily reflecting increased marketing and higher variable expenses associated with the increase in sales. Total company operating margin of 19.8% expanded 130 basis points versus prior year and was 280 basis points above our expectations. Better-than-anticipated results were primarily driven by greater gross margin expansion and lower operating expenses. All brand operating margins exceeded our expectations. At Versace, operating margin of 20.1% expanded 60 basis points versus prior year. At Jimmy Choo, operating margin of 5.6% expanded 490 basis points year-over-year. And in Michael Kors, operating margin of 25.8% expanded 80 basis points versus prior year. Our tax rate for the quarter was 14.6% compared to last year's rate of 3.7%, which reflected a discrete benefit. Now turning to our balance sheet. We ended the quarter with cash of $215 million and debt of $1.6 billion, resulting in net debt of $1.4 billion. As part of our ongoing commitment to return cash to shareholders, we repurchased approximately $350 million worth of shares in the second quarter. Additionally, we repurchased another $100 million worth of shares quarter-to-date in the third quarter. Given our strong free cash flow generation and balance sheet, our Board has authorized a new $1 billion share repurchase program. Looking at inventory, we ended the quarter with $1.18 billion, a 36% increase over a historically low level last year. Relative to pre-COVID levels, second quarter inventory increased 10%. This was a significant sequential deceleration compared to the first quarter and in line with our expectations. As a reminder, we anticipated elevated inventory levels as we implemented new programs to receive seasonal merchandise earlier as well as hold more core inventory given supply chain delays. We feel good about the quality of our inventory and believe we're in a great position heading into the holiday season. As we look at inventory flow for the remainder of the year, we expect levels to moderate sequentially and as planned, be below prior year by the end of the fiscal year. Now turning to guidance. We are taking a more conservative view to our revenue outlook for the remainder of fiscal '23, given the increasingly uncertain macroeconomic environment, foreign currency headwinds, and the ongoing impact of COVID-related restrictions in China. Therefore, we now forecast Capri Holdings annual revenue of approximately $5.7 billion. This represents an approximate 1% increase over prior year on a reported basis, while on a constant currency basis, revenue is expected to increase approximately 7%. While we continue to see solid trends in our own retail channel across all three brands, guidance now includes an approximate $100 million reduction in revenue from the wholesale channel primarily driven by Michael Kors. The remainder of the reduction is split evenly between the impact of foreign currency exchange rates and increased restrictions in China. Looking at full-year revenue guidance by brand, we now assume Versace revenue of approximately $1.15 billion, increasing approximately 6% on a reported basis and approximately 22% in constant currency; Jimmy Choo revenue of approximately $640 million, increasing approximately 4% on a reported basis and approximately 14% in constant currency; and Michael Kors revenue of approximately $3.91 billion, down 1% on a reported basis and an increase of approximately 2% in constant currency. For the year, we now expect gross margin expansion of approximately 50 basis points relative to fiscal '22. The increase compared to our prior outlook reflects the ongoing benefits of the company's strategic initiatives. We now expect a full-year operating margin of approximately 18.3%, an increase of 30 basis points relative to prior guidance. This increase reflects higher gross margin and approximately $60 million of expense savings compared to previous expectations. For Versace, we continue to anticipate an operating margin of approximately 16%. For Jimmy Choo, we continue to expect an operating margin of approximately 5%. And for Michael Kors, we now anticipate an operating margin of approximately 25%. Turning to our expectations around certain non-operating items, we now anticipate net interest expense of approximately $6 million. Our effective tax rate is expected to be approximately 10%, and we forecast weighted average shares outstanding of 136 million. As a result, we are reiterating our diluted earnings per share guidance of approximately $6.85 for fiscal '23, representing double-digit growth versus prior year. Turning to third quarter guidance, we anticipate total company revenue of approximately $1.53 billion. This represents an approximate 5% decrease year-over-year on a reported basis or flat to prior year in constant currency. For third quarter revenue by brand, we forecast Versace revenue of approximately $240 million, decreasing approximately 4% on a reported basis and increasing approximately 12% in constant currency. As a reminder, Versace reports on a 1-month lag, and their third quarter does not include December. Jimmy Choo revenue of approximately $180 million, increasing approximately 1% on a reported basis and 10% in constant currency. And Michael Kors revenue of approximately $1.11 billion, decreasing approximately 6% on a reported basis and approximately 3% to prior year in constant currency. This now includes an approximate $65 million reduction in revenue from the wholesale channel. Looking at operating margin, we now expect third quarter operating margin of approximately 20.5%. This reflects gross margin expansion offset by expense deleverage on lower sales. In terms of operating margin by brand, for Versace, we anticipate an operating margin in the high single-digit range. Third quarter is a seasonally lower margin quarter for Versace since it does not include December, which is the single most profitable month of the year. For Jimmy Choo, we also expect operating margin in the high single-digit range. And for Michael Kors, we anticipate operating margin in the mid- to high 20% range. Turning to our expectations around certain non-operating items, we forecast net interest expense of approximately $6 million, an effective tax rate of approximately 5%, and weighted average shares outstanding of 133 million. As a result, we now expect diluted earnings per share of approximately $2.20. Now I would like to take a moment to discuss our revenue expectations for the fourth quarter. We now anticipate revenue of $1.4 billion, a decline of 6% on a reported basis and flat on a constant currency basis. As a reminder, last year's fourth quarter included a 53rd week. Excluding the impact of the extra week, guidance represents a revenue increase of approximately 5% in constant currency. This reflects growth in our retail channel that is consistent with our third quarter trends as well as lower wholesale revenue. In conclusion, we are pleased with our second quarter results as we delivered strong revenue growth, operating margin expansion, and record earnings per share. While we are taking a more cautious view of the back half of the year, we are maintaining our full-year earnings guidance, which is a testament to the strength of our business model. Beyond fiscal '23, we remain optimistic about the long-term growth potential for Versace, Jimmy Choo, and Michael Kors. Our powerful brands have enduring value and proven resilience, reinforcing our confidence in the ability to deliver strong revenue and earnings growth over time. Now we will open up the line for questions.

Our first question comes from Matthew Boss with JPMorgan.

Great. So John, as we consider the increased caution that you're now embedding in your back half guide, have you seen any notable softening in demand across your brand portfolio to date at direct-to-consumer? Maybe could you elaborate on the $100 million Michael Kors wholesale reduction? And then just how do you see current inventory levels for the accessories category positioned into holiday?

I'll start by discussing our retail channels. In North America and Europe, we're experiencing strong sales in both markets, which we're quite pleased about. Our direct-to-consumer and e-commerce segments are performing particularly well, evident from a 17% increase in our database at Michael Kors, which is already substantial. We're successfully attracting and engaging consumers, leading to impressive results. We're also pleased with the performance of our accessories business. We've been elevating our brand's positioning, especially with Michael Kors, while also implementing price increases for Versace and Jimmy Choo, which is going well. Overall, we're optimistic about our direct-to-consumer channels. However, I must point out the situation in China. There has been a slowdown there, which we noticed about a month to six weeks ago, primarily due to COVID restrictions causing various cities and malls to open and close, leading to significant challenges. Domestic travel within China has also decreased. Consequently, we've adopted a more cautious stance regarding that market, and we anticipate it will take time for recovery. Regarding the wholesale channel, we've observed some slowdown in recent weeks. We're unsure if this reflects a change in consumer behavior or if it relates to reduced stimulus checks. Therefore, we're also approaching this with caution. As we've mentioned previously, particularly with Michael Kors, we prefer to maintain lower inventory levels in the channel to protect our margins. We've invested considerable effort over the past three years to enhance the Michael Kors brand, and we want to avoid going backward. Maintaining appropriate inventory levels is crucial for preserving our brand integrity, which has been beneficial. Another note regarding the department store channel: we've begun to reinstate sales associates in North America and Europe after significantly reducing that program during and after COVID. We're now investing more in it, and as we reintroduce sales associates in our shop-in-shops across these regions, we're witnessing a notable uplift in business. Increasing our clienteling efforts and enhancing the customer journey both in-store and online is clearly resonating with consumers. Now, I'll hand it over to Tom to discuss inventory levels further.

Thanks, Matt. And on inventories, we feel really good about the quality of the inventory. And that's in total and for accessories and believe we're in a great position for holiday. And this compares to last year when we really didn't have the inventory that we wanted or needed. So we feel like we're in a much, much better position. And in terms of inventory levels, as I mentioned in the prepared remarks, up 36% versus prior year but only 10% versus pre-COVID. And that's a significant decline from where we were in Q1 and right in line with our expectations. So as we look forward, we continue to work through inventory and expect levels to be down sequentially and end the year below the prior year.

It's important to highlight what Tom just mentioned about our inventory planning. We significantly accelerated deliveries and advanced our design calendar. We ensured merchandise arrived in time for the fall season and prevented delays with vessels stuck in various locations. We will maintain this approach, which reflects a long-term adjustment to our inventory management. I want to remind everyone that we expect our inventories to be lower than last year in Q4, demonstrating the excellent management from our production, design, and retail planning teams. We are confident about this, and we believe it will positively impact our margins moving forward.

Our next question comes from Kimberly Greenberger with Morgan Stanley.

I wanted to ask about the gross margin results. You're clearly facing significant supply chain challenges, yet the outcomes continue to exceed expectations. John, could this be due to some of the pricing initiatives you're implementing? What would you attribute the improved gross margin performance to? Tom, regarding the cost pressures impacting gross margin, it seems that inbound freight has been the main factor. Are you observing any inflation in product costs outside of inbound freight? Additionally, given that global freight rates are decreasing, when do you anticipate overcoming the remaining challenges with inbound freight?

I'm going to let Tom address both questions, but I want to mention the price increases. We began raising prices in Michael Kors nearly three years ago as we aimed to elevate the brand. We're very pleased with the progress we've made, especially with our new Parker collections and our focus on hardware. As I mentioned earlier, the Signature part of our business has performed exceptionally well, contributing to higher gross margins due to its nature as a carryover product that resonates with consumers, now accounting for 50% of our revenues in Michael Kors, which aligns with our goals. We're also observing a positive trend with our hardware strategy in both accessories and footwear. In footwear, we achieved high single-digit growth in our retail channel, while accessories saw mid-single-digit growth. This reflects a successful strategy and positive consumer response not only to the product but also to pricing, with no significant pushback. I want to note that we will implement one last price increase for spring, but then we will pause most price increases for the fall season and evaluate the situation thereafter. Over the past three years, we've raised prices significantly at Michael Kors, and we've moved quickly with Jimmy Choo and Versace. We believe we are in a strong position, and this is reflected in our gross margin, despite experiencing a 300 to 400 basis point increase in our cost of goods related to freight. Fortunately, our strategies have been effective in managing this. Additionally, we have reduced the amount of promotions, particularly in Michael Kors, over the past two years, and we plan to decrease them further next year. We hope all these factors will positively impact our gross margin. Now, let me turn it over to Tom to discuss costs and freight.

Sure. And then, Kimberly, a little perspective on your gross margin. It is all being driven in terms of the upside by the strategic initiatives. If I look at Q2, our supply chain headwinds, which we knew would be there, were pretty much right in line with what we expected. Costs are higher than last year. And as we look forward, and as we've said before, in the second half, we expect that supply chain costs versus prior year will be a little lower because we're comparing against our highest cost levels and times when we aired product for prior holiday. It doesn't necessarily mean they're coming down dramatically. It just means we're comparing against a much higher period. So as we look at the second half, we look at the strategic initiatives continuing. And as you said and mentioned, they are delivering. And they continue to deliver very nicely above expectations. Supply chain will be a positive. But we have Asia, in particular, China, which is a very high-margin region as a headwind as well as our FX. That all said, we do expect gross margin to be up in the back half. And we felt confident based on our Q2 results and our outlook for the future to raise our guidance for gross margin for the year by 50 basis points. So feeling good on that side. In terms of product costs, while there are pockets of cost increases, we don't see a material cost increase. We're looking forward, and that may be one of the benefits of the stronger dollar at some level. So the last question you mentioned was when will we through the freight cost increases? And I maybe provide a little perspective on what we're seeing out there. As opposed to last year when there were long delays, we were not seeing delays at this point. However, we're remaining cautious because we still have to get through potential port shutdowns if there are COVID-related restrictions and the normal buildup heading into Chinese New Year. So really, I think this is something we'll take a closer look at and monitor as we look at next year and renew our annual contracts for our freight carriers.

Our next question comes from Omar Saad with Evercore.

I was hoping maybe you could elaborate a little bit on the slowdown you're seeing in wholesale but not really in DTC. Any thoughts on why you're seeing a bit more of a slower trend in that channel versus DTC channel? And then maybe, John, you could talk a little bit more detail about the data and analytics. You've mentioned several times in the call, it seems like you're hitting a tipping point in terms of your capabilities there.

Sure. Omar, I can only speak to our understanding of our own traffic, both online and in our stores. Traffic across all three of our brands has increased significantly. This is also reflected in the capture rates, with Versace's database up 40%, Jimmy Choo up 30%, and Michael Kors up 17%. These numbers are impressive. I credit our teams for their storytelling and the excellent product innovation led by Michael, Donatella, and Sandra. The quality of our products and the appearance of our stores are very promising. I'm quite optimistic about this. We're also seeing substantial data capture from point of sale, and our sales associates are highly engaged. As we’ve discussed, the team is improving at clienteling, and we've implemented tools that enable our sales associates to enhance their clienteling efforts and capture names effectively. This strategy has been working well for the past two years and is gaining further momentum, which is exciting for us as it relates to customer lifetime value moving forward. We're observing that store traffic remains stable, particularly in North America and Europe. However, that’s not the case in China, where we're experiencing a slowdown. We hope that will change eventually, but we remain cautious due to the ongoing zero-COVID policy in the region, which may affect us. Regarding wholesale traffic, I can't provide specifics since we don't have counters in the stores. The consumer seems to be more cautious in light of macroeconomic challenges, such as rising interest rates and impacts from fuel costs and potential mortgage resets. Plus, this coincides with the period of the last stimulus check, which might also affect consumer behavior. We believe that shopping patterns may shift later this year compared to last year, as consumers may have thought last year’s offerings would not return. Most companies are currently positioned better to meet consumer expectations. We will remain focused and patient during this time. We feel confident about the positioning of our three brands and the quality of our products. We still anticipate a successful holiday season. We believe the American consumer is in decent financial condition and expect a good holiday season as well, but we aim to approach this through our strategic initiatives, which includes avoiding a promotional strategy. We've mentioned several times over the past two years that we are willing to sacrifice volume to protect our gross margin, as we believe this is the best strategy for our brand health during these challenging times. We managed well through COVID, and we expect to navigate this period successfully as well, thanks to the strength of our three brands. Thank you, Omar.

Our next question comes from Ike Boruchow with Wells Fargo.

I'm actually going to go to Tom for this one. I kind of want to just focus on the balance sheet and on the interest expense that you guys are currently seeing going back to the summer, Tom, I think you guys were expecting about $35 million in interest income. Now I think you said it's $6 million interest expense. Can you just walk us through the components of the balance sheet that are moving around with interest rates rising, what's floating, what's not? And just kind of how we should think about the run rate of payments? And does that impact how you think about capital allocation? It sounds like you just bought $100 million in stock quarter-to-date. So it sounds like the answer is no, but I just kind of wanted to double check on that.

Yes, I'll start with that, Ike, which is we're really comfortable with the strength of our balance sheet and free cash flow generation as well as the levels of debt that we have on now and the leverage rate, which is very manageable for us. So we have pivoted, as we noted in Investor Day, to return cash to shareholders first versus pay down debt, given the value we believe that exists in our share at the moment. So we'll be continuing to focus on that as we move forward. And then what you'll see is a little higher year-over-year debt balance, net debt balance as a result of that. And we believe that's the right position to be in under the current circumstances. In addition, you noted that interest expense has increased versus our original guidance, and it's really a couple of things. The first and foremost, interest rates are higher. So we're just paying more on revolving debt. We do have a bond out there that's at a fixed rate. Our revolver is at a variable rate. So that is impacted by that as well as higher debt balances. The last part is a little lower interest income that we are generating from certain hedges that we had in place that are no longer in place, and we'll be revisiting them in the future. So that's the really the three puts and takes related to that, but it's really managing and buying back shares that we want to focus.

Our next question comes from Simeon Siegel with BMO.

Just to get your thoughts on where industry promotions and inventory go over the near term. And then given the successes you've had on the price and architecture, what guardrails you have in place there?

We can't comment on the overall industry trends, as different companies will have varying approaches to their inventory and sales. However, we have a strategic vision for our three brands, and we are confident that it’s effective and resonates with consumers. For instance, at Versace, our efforts to position it as a luxury leather brand have led to a 60% growth in our accessories business within our retail channel this quarter, which is remarkable. I commend our design team in Milan and our global sales associates for their hard work, as they are gaining significant momentum in that category, alongside strong performance in women's footwear. Looking at Jimmy Choo, the launch of our new Avenue collection led to a 30% increase in our accessories business. Michael Kors has seen mid-single digit growth due to our strategic initiatives. We are committed to preserving this momentum since these strategies are effective. Additionally, as we enhance our accessories offerings, we see improved margins for the company, particularly with Versace's operating margins exceeding our expectations. We are ahead of our original profitability targets by approximately 1.5 years, which speaks to the strength of our products and our sales teams. Jimmy Choo is also seeing forward-moving operating margins and gross margin improvements. While there may be challenges in the upcoming holiday season, we will not overreact and remain focused on our strategies, which we believe will drive consumer interest in all three luxury brands. Thank you.

Our next question comes from Oliver Chen with Cowen.

John and Tom, nice job in a tough environment. On the topic of inflation, you reflected upon it earlier. I just would love your thoughts on how that is impacting the consumer and also the physical store traffic, any color between outlet and full price and what you're seeing with traffic as well.

Thank you, Oliver. I want to acknowledge that last quarter was truly exceptional for us. On a constant currency basis, the group grew by 18%, which highlights the effectiveness of our strategic initiatives and how well our talented employees are executing those plans. I appreciate your recognition of this. Regarding store traffic, it's been relatively strong, particularly in full-price locations compared to outlets, which gives us confidence for a successful holiday season. We're optimistic about our channels, especially in North America and Europe, although we're less assured about China. However, we're experiencing robust traffic in Japan and Southeast Asia, which helps counterbalance the decline we've noticed in China. Australia is also performing well. As for inflation, we hear from customers in North America that they are worried about rising interest rates and costs associated with returning to work, such as commuting expenses, which were minimal last year. In Europe, there is significant concern about rising energy costs, which are substantially up. We expected a slowdown in Europe, but we haven't seen that yet. That said, we remain vigilant as conditions might change. The consumer sentiment in Europe seems to have become more positive lately, with increased travel, primarily by Europeans and some Americans visiting Europe, boosting major cities. We remain hopeful yet cautious, as consumers are dealing with higher interest rates, energy costs, and food prices, which will eventually have an impact. We approach this situation with a clear understanding and maintain strong conviction in our strategic objectives. Thank you, Oliver.

Our next question comes from Adrienne Yih with Barclays.

Great job to the team for achieving this in a challenging environment. I believe this question is for Tom. I want to focus on the wholesale aspect. Total top line sales were about $150 million, and you mentioned a $100 million reduction from the wholesale side, mainly due to Kors for the annualized figure. Can you clarify what the wholesale performance was in the current quarter? Did it grow or stay flat? I apologize if I missed that detail. Additionally, typically, your fiscal third quarter in December represents your lowest sell-through in wholesale. What season does that correspond to in retail? If I'm calculating correctly, it seems like there was a significant decline in wholesale, around 20%. Any insights on those numbers would be appreciated.

Sure. Adrienne, maybe I could take a step back on our guidance versus our original and then walk through how wholesale fits into it. At the beginning of the year, we provided guidance for revenue of $6.1 billion, and we're now at $5.7 billion. And really, the difference is mostly FX. It's about $225 million of FX, 75 of challenges in China related to restrictions and now $100 million of wholesale. I'd point out on a 52-week basis, constant currency for the year, we're growing 9%. So even with those challenges, we believe that the teams and the businesses are really delivering and controlling what they can. With regard to wholesale, of the $150 million, $100 million is wholesale, the other half is FX and China. In Q2, wholesale was positive. In Q3, we expect it to be down as a result of this change primarily for Michael Kors. And as we looked at our guidance, while we do not break out wholesale and retail embedded in our previous guidance, wholesale is expected to be up very modestly for the year. Now for the year, we're expected to be down. And in Q3, I'm not sure particularly if you could repeat the last part of your question on Q3 as to the seasons that it related to?

So one thing. In Q2, the reason why wholesale was up slightly for the group was because we were still facing delays in inventory from our. So we were really getting everybody into position for the fall season. And then as we saw things begin to slow down over the last few weeks, we made the decision. Let's just hold off. Let's not try to put this inventory in place that's going to possibly take away from all the good that we've done. In terms of the order book on a go-forward basis, again, we work very closely with our retail partners. And I would say it's a complete kind of a joint action plan. So we're just looking at sales and retail trends. And our partners pretty much work with us. Business is up by X, then we flow inventory up by X. If it's down by Y, that we slowed down by Y. So we've got the inventory in place for a modest increase next year in wholesale on the retail side of things. We'll see how things play out. Again, there's nothing there that would give us any pause from an inventory standpoint. Again, the wholesale business across the group is kind of in that approximate 25% range. So it's not going to really impact our inventories dramatically one way or the other. So we feel good about how we're going to end the year. We feel good about where we've positioned ourselves going into next year, and we already took a cautious approach to next year in the wholesale channel, given what we know today. So inventory management is key for us. Margin is key for us. Thank you very much.

Our next question comes from Brooke Roach with Goldman Sachs.

John, I'd like to follow up on some of the earlier comments about the momentum that you're seeing across your business within some of the various income demographic cohorts. I think you mentioned in a prior question differences in traffic just between your mainline and your outlet stores. But can you provide any additional context on how that's translating through to brand momentum to total sales and to your expectation for the holiday season?

Yes. Thank you for the question, Brooke. As I think I indicated, traffic is the highest for us right now across the group online. We're very pleased with what we're seeing happening there. And again, I believe that's our team's tactics and how we're engaging with the customer. I hope you've been watching our whole kind of reset with the Jet Set imagery around Michael Kors. I think that's really resonating. I think that Jimmy Choo's Time to Dare campaigns and very excited about having Kendall Jenner as our face for this fall season. And we just launched with Iris Law. Again, we're really attracting fashion customer, an excited customer about wanting to be a part of that brand. And then, of course, Versace, there's never a shortage of excitement around Versace. And we're really focused on our accessories business, and I think the marketing initiatives around there are working. We're hearing, again, from our sales associates in the stores. There's a much younger customer coming to Versace right now and a customer who's coming in just for the accessories. Now we haven't had that in a few years. It started last year with about 1.5 years ago with the launch of La Medusa, but we're now starting to see this regularly and consistently. So I think that, that's driving a lot of the engagement around our e-commerce site. And then in terms of traffic, I think people are back in store shopping. I think that's going to be the interesting part about the holiday season. I do believe people are shopping and looking and getting their lists together. And I think we're going to see something happen here in the next week or so. Hopefully, we get a little cold weather in North America and in Europe, that would be helpful. And lastly, I can't speak to the differentiation between the traffic levels. The traffic levels are still good in the outlet channel, but they're just better in online and full price. And I think that bodes well for the customers' financial health and what we're seeing, again, in North America and in Europe. Thank you for that question, Brooke. On that note, I would like to say thank you for everyone joining us today. We're very pleased with how the second quarter turned out for Capri. We're also very confident in the three luxury brands, Michael Kors, Versace, and Jimmy Choo, and the strategic initiatives that we've put in place. And we are, again, very dedicated to keeping that as our guiding light. And again, we look forward to speaking to you over the next two quarters. And we think the year will end up being a very strong year for the company, and we look forward to the future. Thank you.