Earnings Call Transcript - CPRI Q2 2026

Operator, Operator

Ladies and gentlemen, greetings, and welcome to Capri Holdings Limited Second Quarter Fiscal 2026 Financial Results 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.

Jennifer Davis, Vice President of Investor Relations

Good morning, everyone, and thank you for joining us on Capri Holdings Limited Second Quarter Fiscal '26 Conference Call. With me this morning are Chairman and Chief Executive Officer, John Idol; and Interim Chief Financial Officer, Raj Mehta. Before we begin, let me remind you that certain statements made on today's call may constitute forward-looking statements, which are subject to risks and uncertainties that could cause actual results to differ from those we expect. Those risks and uncertainties are described in today's press release and in the company's SEC filings, which are available on the company's website. Investors should not assume that statements made during this call will remain operative at a later time, and the company undertakes no obligation to update any information discussed on today's call. Unless otherwise noted, all financial information on today's call will be presented on a non-GAAP basis. These non-GAAP measures exclude certain costs associated with impairment charges, Capri transformation costs, restructuring and other charges, store renovation program costs and transaction-related costs. To view the corresponding GAAP measures and related reconciliation, please review our latest earnings release posted to our website earlier today at capriholdings.com. Additionally, the company has classified the results of operations and cash flows of its Versace business as discontinued operations. Unless otherwise noted, all information on today's call relates only to continuing operations. Now I would like to turn the call over to Mr. John Idol, Chairman and Chief Executive Officer. John?

John Idol, Chairman and CEO

Thank you, Jennifer, and good morning, everyone. With the Versace sale expected to close in our fiscal third quarter, we are now fully focused on the growth of our two iconic brands, Michael Kors and Jimmy Choo. We plan to use the proceeds of the sale to repay the majority of our debt, substantially strengthening our balance sheet and providing greater financial flexibility to both invest in growth as well as return capital to our shareholders in the future. As we stated in our press release earlier today, given our planned reduction in debt levels, and the signs of stabilization across our business, our Board of Directors has authorized a new $1 billion share repurchase program, which the company expects to begin implementing in fiscal '27. Now turning to our fashion luxury houses. We continue to advance our strategic initiatives across Michael Kors and Jimmy Choo to unlock their full potential. We are encouraged by the early signs of recovery at our fashion luxury houses and remain optimistic about the direction of the business. However, we recognize that it will take more time for the full effect to be reflected in our results. Despite the dynamic global macroeconomic environment, we are on track to stabilize our business this year while establishing a solid foundation for a return to growth in fiscal '27. Now turning to second quarter results. We are encouraged with the continued sequential improvement in trends, which resulted in revenue, gross margin and operating income exceeding our expectations. However, our results were negatively impacted by $0.20 per share versus our original guidance due to a higher-than-anticipated effective tax rate related to our valuation allowance position. Looking at results in more detail. Total company revenue decreased 2.5% versus last year to $856 million on a reported basis. At Michael Kors, second quarter revenue decreased 2% on a reported basis compared to prior year. In our own retail channel, year-over-year trends were consistent with the first quarter, while wholesale trends improved sequentially, turning positive primarily due to shipment timing. In our retail channel, we continue to see signs of momentum with a sequential improvement in trends in our full price channel across all regions. In fact, comps in our full price channel turned positive in the second quarter, demonstrating that our strategies are beginning to take hold. Consumers are responding to our modern jet-set lifestyle marketing, standout styles and updated pricing architecture. In the outlet channel, revenue was impacted by our strategy to improve our quality of sales through reduced promotional activity. Additionally, the outlet channel assortment continues to reflect the previous product strategies, which emphasized core and basic styles. More modern on-trend styles will be introduced in our third quarter with a more substantial update planned for the fourth quarter. Now looking at total Michael Kors retail sales by region. In the Americas, revenue was negatively impacted by our quality of sales initiative in our outlet channel, which we believe is an important step to strengthen brand health and increase AURs over time. In Europe, trends remained strong with year-over-year increases consistent with the first quarter. In Asia, trends were also similar to the first quarter, though we saw a modest sequential improvement in China. Now looking at wholesale. Revenue at point of sale, while still negative, saw a meaningful sequential improvement in trends. Turning to brand awareness and consumer engagement. We continue to reinforce Michael Kors modern jet set lifestyle positioning with our brand vision of traveling the world in style. Through our Hotel Stories franchise, we are bringing the joy of travel and the discovery of new destinations to our consumers each season. For fall, we traveled to Rome with English actress and singer, Suki Waterhouse; actor, Logan Lerman and our new global brand ambassador, Chinese actor and singer, JC-T. The campaign highlights fall's must-have looks, including new interpretations of our iconic Nolita, Leila and Hamilton groups set against the timeless backdrop of Rome's historical landmarks. During the second quarter, we amplified our storytelling through local activation and immersive experiences. We also continue to enhance our social media strategy by broadening our presence across a wider range of platforms and deepening partnerships with influencers. This is enabling us to connect with consumers through authentic relevant voices in fashion and is reigniting brand desirability. According to our consumer insights, we have continued to see a further increase in brand affinity. Additionally, Michael Kors iconic runway shows cast a powerful halo over the brand, reinforcing our leadership in fashion luxury. The Spring/Summer 2026 Runway Show in September drew a notable audience of celebrities and a powerful network of global influencers. Supported by a strong social media amplification, Michael Kors generated 5.5 billion impressions globally and was the second most engaged fashion brand during New York Fashion Week. These activities contributed to a 9% year-over-year increase in Michael Kors global consumer database. With our advanced data analytics capabilities, we are leveraging the strength of our extensive consumer database, which now exceeds 90 million to create deeper, more personal connections with consumers. Now turning to product. Guided by Michael's creative vision and enhanced by data analytics, we are delivering exciting on-trend fashion with standout style. Additionally, we have refined our pricing architecture to better align with historical levels and are seeing encouraging results from this strategy. In accessories, consumers continue to respond positively to new introductions that celebrate our iconic brand codes and align with our new strategic pricing architecture. For Fall 2025, we introduced new accessories groups, including the Hamilton Moderne, a reinterpretation of the brand's iconic 2009 "it bag", along with exciting updates to our successful Leila and Nolita styles. These groups are experiencing strong full price sell-throughs, driving growth in accessories in the full price channel. In footwear, trends improved sequentially in our full price channel. We saw strong performance in new fashion boots, while casual footwear gained momentum. Consumers responded positively to new sneaker styles that represent modern trend-right evolutions of proven historical bestsellers as we blend timeless appeal with modern style. Looking at ready-to-wear, revenue in our own retail channel increased driven by the strong consumer response to seasonal styles that captured Michael's effortless glamour. The fall assortment balanced trend-right designs and timeless wardrobe staples with dresses and outerwear performing exceptionally well. Turning to men's, revenue in our own retail channel was approximately flat. Men's sportswear styles performed well as we continue to focus on timeless essentials with a modern edge. Next, I'd like to review our store renovation plan, where we are redefining our luxury retail experience with a warm residential design. Our stores remain a cornerstone of our brand and a key driver of our sales recovery, playing a pivotal role in enhancing the client experience and revitalizing growth. Over the next three years, we plan to renovate approximately 50% of our store fleet and key department store locations as part of our ongoing investment in brand elevation and retail excellence. We recently reopened our London and New York flagship locations. Michael Kors signature jet set lifestyle is evident throughout these stores, transporting consumers to the featured destination of the season and further enhancing the immersive shopping experience. At the heart of our New York flagship store is our new Jet Set Lounge, the brand's first in-store cafe. The lounge embodies a new dimension of the brand's lifestyle experience and is the first of a planned rollout to flagship stores around the world, including Paris, Beijing, Tokyo and Las Vegas. We believe that our store renovation plan will further strengthen the brand's desirability and drive higher sales productivity. Early results are encouraging with locations showing significant increases in traffic and sales versus last year. We look forward to sharing our progress and results with you in the future. Looking ahead, Michael Kors is a powerful fashion luxury brand with a 44-year heritage that continues to resonate with consumers. We are building on this foundation by delivering exciting on-trend fashion with standout style. Combined with advanced data analytics and consumer insights, we believe we have the right strategies underway to return the brand to growth. Now moving to Jimmy Choo. Second quarter revenue decreased 6% on a reported basis compared to prior year. Retail sales improved sequentially, declining low single digits. Wholesale revenue declined mid-teens due to shipment timing that negatively impacted the second quarter. Looking at trends in our own retail channel. While still negative, second quarter improved sequentially, driven by comp growth in our full price channel. We saw a sequential improvement in Jimmy Choo revenue year-over-year across all regions. In the wholesale channel, revenue at point of sale once again improved sequentially, increasing low single digits in North American department stores. Turning to brand awareness and consumer engagement. Our storytelling continued to highlight the playful daring spirit of the house, combined with a relaxed modern sense of glamor. For autumn, we welcome back Sydney Sweeney, who embodies the modern glamour that defines Jimmy Choo. She perfectly encapsulated the brand's playful daring spirit while showcasing new fall fashion styles, including our newest Bar Hobo handbag and Tylor loafer. In Asia Pacific, brand ambassador, Bai Lu unveiled the Bar Hobo handbag, further amplifying its launch across the region. We also continued to extend our reach and deepen consumer engagement through localized immersive brand experiences. These were amplified with high-impact influencer partnerships that authentically express our modern glamor and daring spirit. These initiatives helped expand our reach. Enhanced by our data analytics capabilities, these efforts contributed to a 9% year-over-year increase in Jimmy Choo's global consumer database. Turning to product. Jimmy Choo's product strategy remains focused on further developing accessories and expanding our casual footwear offering. In accessories, revenue increased in our full price channel, driven by the continued strength of the Bon Bon and Cinch groups. Our recently introduced Curve group launched last quarter also continued to perform well with prices designed to appeal to a broader segment of luxury consumers. Additionally, during the second quarter, we introduced the Bar Hobo Group, which also features price points under $1,500. While still early, we are encouraged by the strong initial consumer response to the modern yet timeless styles and the new strategic pricing architecture. Over time, we expect this initiative to drive significant growth in our accessories business. Turning to footwear. Our autumn collection has performed well with versatile styling fusing timeless silhouettes with cultural forms and opulent textures. Key styles, including our iconic Drop Heel families, Scarlett and Ixia performed exceptionally well, underscoring our ability to deliver both innovation and timeless design. Jimmy Choo's strategy to expand day and casual footwear continued to gain traction in the second quarter with an increase in full price sales. Flats and low heels grew in our full price channel, driven by the strong response to new styles, including our Scarlett kitten heels and Jelly ballerina flats. The Diamond Flex sneaker also continued to perform well. We see significant opportunity to further scale casual footwear, not only to deepen engagement with existing consumers, but also to attract new clients. Looking forward, we believe we are on the right path to unlock Jimmy Choo's unique potential to expand its position within the world of fashion luxury. In conclusion, we are pleased to see early indications that our strategic initiatives are beginning to work. Looking ahead, we continue to expect retail trends to improve in the back half of fiscal '26, positioning us to return to growth in fiscal '27. Long term, we remain optimistic about the sustainable growth potential of both Michael Kors and Jimmy Choo. Now Raj will review our second quarter results and guidance in more detail.

Rajal Mehta, Interim CFO

Thank you, John, and good morning, everyone. Before we begin, I would like to remind you that today's financial results exclude Versace, which was reclassified as a discontinued operation. My discussion today will reflect results from continuing operations, and our financial statements have been adjusted for prior periods to exclude Versace. Now looking at our second quarter results. Revenue, gross margin and operating income exceeded our expectations, driven by better-than-anticipated performance at Michael Kors as our strategic initiatives begin to take hold as well as a wholesale timing shift. However, a higher-than-anticipated effective tax rate versus our original guidance due to our valuation allowance position impacted net income by $24 million and earnings per share by $0.20. Turning to our second quarter results in more detail. Total company revenue of $856 million decreased 2.5% versus prior year on a reported basis and 4.2% in constant currency, representing a sequential year-over-year improvement relative to the first quarter. Looking at revenue by channel. Total company retail sales declined mid-single digits. In the wholesale channel, revenue increased high single digits, primarily due to shipment timing. Turning to revenue performance by geography. In the Americas, revenue decreased 7%. Revenue in EMEA increased 1% and revenue in Asia increased 12%. Looking at revenue performance by brand. At Michael Kors, revenue decreased 1.8% compared to prior year on a reported basis and 3.3% in constant currency. Global retail sales declined at a similar rate to the first quarter. Similar to prior quarters, store closures negatively impacted retail sales in the low single-digit range. Wholesale sales increased low double digits due primarily to shipment timing. By geography, sales in the Americas decreased 7%, revenue in EMEA increased 4% and revenue in Asia increased 25% due to higher wholesale shipments. At Jimmy Choo, revenue decreased 6.4% compared to prior year on a reported basis and 9.3% in constant currency. Global retail sales trends improved sequentially, declining low single digits. Wholesale revenue decreased mid-teens, negatively impacted by the timing of shipments out of the second quarter and into the third quarter. By geography, total Jimmy Choo revenue in the Americas decreased 3%. Revenue in EMEA declined 6% and revenue in Asia decreased 12%. Now looking at total company margin performance. Gross margin of 61% declined 130 basis points. Higher tariff rates negatively impacted gross margin by approximately 120 basis points. By brand, Michael Kors gross margin of 59.3% compared to 61.1% last year. The decline versus prior year was predominantly driven by the impact of tariffs. Jimmy Choo gross margin of 70.2% compared to 68.6% last year. The increase versus prior year was primarily driven by channel mix and higher full price sell-throughs. Operating expense decreased $8 million. The decline versus prior year was primarily attributable to our cost reduction program. As a percentage of revenue, operating expense was 58.6% compared to 58.1% last year, primarily reflecting expense deleverage on lower revenue. Total company operating margin was 2.3% compared to 4.2% last year. By brand, Michael Kors operating margin of 10.1% compared to 11.8% last year and Jimmy Choo operating margin of negative 6.9% compared to negative 3.6% last year. Our tax rate for the quarter was 112%. As a result of being in a valuation allowance position, we are revising our global tax structure. The implementation of this change took longer than anticipated, resulting in a higher-than-expected tax rate during the second quarter. Importantly, we continue to forecast a full year tax rate in the mid-teens range. Now turning to our balance sheet. Looking at inventory. At quarter end, inventory totaled $766 million, a 2.8% decline versus prior year. Looking ahead, we continue to expect year-end inventory levels to be up slightly, primarily due to higher tariff rates and foreign currency exchange rates. We ended the quarter with cash of $120 million and debt of $1.8 billion, resulting in net debt of approximately $1.6 billion. Now turning to guidance. We are reiterating our prior full year guidance of revenue between $3.375 billion and $3.45 billion, with Michael Kors revenue between $2.8 billion and $2.875 billion and Jimmy Choo revenue between $565 million and $575 million. We continue to anticipate full year gross margin of approximately 60.5% to 61%. Excluding the impact of tariffs, full year gross margins would have expanded, driven by the benefits of our strategic initiatives. We expect year-over-year gross margin declines to moderate through the remainder of the year, reflecting continued traction from our strategic initiatives, ongoing sourcing cost efficiencies and targeted price increases. We continue to expect full year operating expense of approximately $2 billion and operating income of approximately $100 million, with Michael Kors operating margin in the high single-digit range and Jimmy Choo operating margin in the negative mid-single-digit range. In terms of non-operating items, we anticipate full year net interest income between $85 million and $95 million, an effective tax rate in the mid-teens range and weighted average shares outstanding of approximately 120 million, resulting in diluted earnings per share between $1.20 and $1.40. Turning to capital allocation. Our priorities remain the same. Our first priority is to invest in our brands through store renovations, technology and digital enhancements as well as other brand-building initiatives. As previously stated, we plan to invest approximately $350 million over the next three years to execute our store renovation plan. Our second priority is to strengthen our balance sheet. Upon the anticipated completion of the Versace sale, we plan to use the proceeds to significantly reduce debt. And our third priority is to return cash to shareholders via a share repurchase program in the future. Given the encouraging signs of stabilization across our business and our planned reduction in debt levels, our Board of Directors has authorized a new $1 billion share repurchase program, which the company expects to begin implementing in fiscal '27. Now turning to third quarter guidance. We expect total company revenue to be between $975 million and $1 billion, with Michael Kors revenue between $825 million and $845 million, impacted by an approximate $20 million shift in wholesale shipments out of the third quarter and into the second quarter, and Jimmy Choo revenue between $150 million and $155 million. Looking at gross margin, we expect the third quarter gross margin rate to decline approximately 200 to 250 basis points versus 63.2% last year, impacted by greater tariff headwinds. In terms of operating margin, we expect third quarter operating margin to be approximately 7% to 8%. By brand, we anticipate Michael Kors operating margin in the low teens range and Jimmy Choo operating margin in the negative low to mid-single-digit range. Turning to our expectations around certain non-operating items. We anticipate third quarter net interest income of approximately $20 million. We forecast an effective tax rate in the low to mid-single-digit range in the third quarter due to the expected shifts in the geographic mix of earnings and the related valuation allowance impacts. We anticipate weighted average shares outstanding of approximately 120 million. As a result, we expect to generate diluted earnings per share of approximately $0.70 to $0.80. In closing, we are encouraged by the early signs that our strategic initiatives are working. We anticipate retail trends will improve in the back half of fiscal 2026 as our strategic initiatives gain traction. Looking ahead to fiscal '27, we expect to return to revenue and earnings growth. We anticipate gross margin expansion as we mitigate the majority of the impact from higher tariffs, and we continue to benefit from our strategic initiatives. Additionally, we anticipate operating expense leverage on higher revenue as we diligently manage expenses. Longer term, we remain confident that Capri Holdings is well positioned to deliver sustainable growth while increasing shareholder value. Now we will open up the line for questions.

Operator, Operator

Our first question comes from Matthew Boss with JPMorgan Chase.

Matthew Boss, Analyst

So John, could you speak to global reception that you're seeing to the Michael Kors full price retail repositioning, elaborate on drivers of full price channel comps turning positive in the second quarter? And then just any change in momentum in October or opportunity you see for the brand versus a year ago during holiday?

John Idol, Chairman and CEO

Thank you, Matt. First, we are happy to see stabilization in the Michael Kors business. Our full price comparable sales turned positive during the quarter, which we attribute to the consumer response to our strategic initiatives, starting with branding. Our modern jet set marketing, centered around travel and storytelling through our Hotel Stories with influencers, is helping consumers connect with our brand. This is a very positive sign. Additionally, we're witnessing an increase in consumer sentiment and brand awareness. The second area of focus is our product. We aim for standout styles that are on trend, and Michael's strong viewpoint on style greatly influences our approach. As we've modernized our designs, consumer engagement has risen. We are particularly pleased with the results of our full price initiatives, as we believe that’s where consumers will first notice us, and we observed solid global increases. Notably, our accessories business was a key driver, showing positive growth during the quarter. This is largely attributed to three iconic groups: Leila, introduced last spring; Nolita, launched at the end of last year; and our new Hamilton Moderne, which is surpassing expectations as a modern take on our original 2009 "it bag." Consumers have responded positively to all three, with strong full price sell-throughs, some of which are not even included in our sales events. Customers are also engaging well with our strategic price architecture, boosting our full price sell-throughs. Furthermore, we are seeing increased interaction with millennials and Gen Zs regarding styling and pricing strategies. We are also witnessing improvements in watches and a strong performance in our ready-to-wear segment. We’ve renovated a limited number of stores, such as our flagship in New York at Rockefeller Center and our London store on Regent Street, with more openings planned. The new store design reflects the brand's direction and enhances communication with consumers. We're particularly excited about our new Jet Set Lounge, where customers can enjoy coffee, tea, and small bites, which is encouraging longer visits to the stores. Our focus is firmly on the full price strategy, while we still have a lot to accomplish in the outlet segment. We expect to roll out new products in the outlets during Q3, along with renovations, including one at Jersey Gardens. In the fourth quarter, we anticipate significant product improvements stemming from our initiatives. Overall, we feel optimistic about the upcoming holiday season and Q3, with product availability and positive consumer responses. However, we are reducing promotional activities, especially in the outlet stores, as we aim for higher quality sales and improving average unit retail prices. Sequential gains in these areas have been noted in the outlet stores. While we don't want to be overly confident, we are encouraged by the performance in the past two quarters and, most importantly, how consumers are responding to us. Thank you for your question, Matt.

Operator, Operator

Our next question comes from Brooke Roach with Goldman Sachs.

Brooke Roach, Analyst

John, I wanted to dive a little bit deeper into the outlet business as you reposition promotionality and product. What's the profile of the consumer that's engaging with you in North America today? Are you seeing any signs of price sensitivity or stronger or weaker engagement in any particular income or age cohort as you execute the outlet repositioning? And how should we be thinking about the time line and path to improvement for total North America given the green shoots that you're seeing in the full price channel today?

John Idol, Chairman and CEO

Thank you, Brooke. We expect to see improvement in our retail channel for both Michael Kors and Jimmy Choo in the latter half of the year. We're feeling optimistic about our full-price performance, and we have seen similar success with Jimmy Choo. Regarding the outlet business, it is clear that Gen Z consumers are more price sensitive, which we have observed. Our strategic pricing adjustments, which we initially underestimated, are effectively attracting more Gen Z customers. They are indeed more price sensitive compared to Millennials, Gen X, and Boomers. We believe that focusing on strategic price points across all product categories, not just accessories but also footwear and ready-to-wear, is essential. We have significantly reduced prices in ready-to-wear more than in handbags, and this strategy is paying off. Our wholesale partners are also beginning to reintroduce our ready-to-wear line after we adjusted pricing without compromising quality. In our outlets, we are strategically increasing prices through actual price hikes and reduced promotional activity, which has resulted in a rise in average unit retail (AUR). We anticipate some challenges as consumers need to be reeducated that Michael Kors can sell at slightly higher prices than they're accustomed to. This approach also helps offset tariff impacts. We plan to introduce a significant amount of new products in our outlet stores, starting in Q3 with more in Q4 and continuing throughout fiscal '27. Previously, we focused too much on core products, whereas consumers want fashion regardless of the shopping channel, be it e-commerce, full-price, or outlets. We were not adequately positioned in that respect within our outlets, but we expect improvements in the latter half of this year and into next year. Additionally, we are significantly reducing our daigou business, where products were bought in our outlet stores and sold online worldwide. Over 60% of our outlet business decline stems from shutting down this segment, which we believe will ultimately strengthen the company and improve AUR. In summary, we do not foresee a return to positive growth in North America for our retail channel under Michael Kors until next year, likely more towards the second quarter, after which we expect to be on a positive trajectory. Thank you for your question, Brooke.

Operator, Operator

Our next question comes from Ike Boruchow with Wells Fargo.

Irwin Boruchow, Analyst

Two from me. Just first on the tariffs. So I think you said 120 basis points headwind in the second quarter. Could you just let us know what's baked in on tariffs for both 3Q and 4Q? And then the follow-up is for John. Maybe just on the wholesale, up low double digits, but you mentioned there's a $20 million shift in there. Could you just comment roughly what's the growth rate for MK wholesale ex shift? I mean my math is flattish, but I'd love to get that clarified. And then, John, how are you viewing that channel just organically ex shifts into 3Q and 4Q from a revenue standpoint?

Rajal Mehta, Interim CFO

Thanks, Ike. Our expectations around the tariff headwinds for the full year remain largely unchanged. We still expect the unmitigated tariff impact to be approximately $85 million for the full year. And as you said, in the second quarter, our gross margin was down 130 basis points and 120 of that was related to the tariffs. We saw the tariff headwinds a little bit less than anticipated, and that's really due to the timing of sell-throughs of tariff impacted inventory. As we look at Q3, we're expecting gross margins to be down 200 to 250 basis points, and there's a greater weight of inventory that has the full amount of tariffs. So you're going to see a larger impact of that build in Q3 and then further into Q4. But more importantly, as we look forward, we expect to see continued benefits from our strategic initiatives and tariff mitigation efforts. So looking to fiscal '27, we anticipate to offset a majority of tariff impact. And that, coupled with our strategic initiatives around driving higher full price sell-throughs and higher AURs will lead to gross margin expansion next year.

John Idol, Chairman and CEO

Wholesale offset shipment-wise, and I'll take the retail part of it.

Rajal Mehta, Interim CFO

Yes. So we did see in the second quarter, there were $20 million of Michael Kors wholesale shipments that ended up going out in Q2 where we were forecasting them to go out in Q3, so that's really just a timing shift between the quarters. What we're really proud of, and John spoke to earlier, is the retail sequential improvement that we'll see in Q3 as well as Q4 coming out.

John Idol, Chairman and CEO

Yes, I mentioned in my prepared remarks that we've observed a significant shift in wholesale point-of-sale sales, and we're beginning to turn that business around. It's transitioned from a double-digit decline to a single-digit one. While we're not declaring victory just yet, it's clear that conditions are improving. Our partners, as I noted in the last call, are excited about collaborating on shop renovations, resulting in a substantial rollout program. I've been visiting our key partners, and I will conclude more visits next week in Europe. The sentiment surrounding our strategic initiatives and the brand is overwhelmingly positive. Many stores are increasingly leaning towards the higher end of the luxury sector, which has experienced a slowdown. However, there's renewed interest in entry-level luxury, particularly where Michael Kors and some competitors operate, as customers become more selective with their choices. They are definitely considering the price-value relationship. Notably, in all three of our brands—Michael Kors, Jimmy Choo, and Versace—our full-price businesses have shown remarkable improvement compared to last year and even two years ago. It's primarily in the off-price channels where customers are being particularly discerning about pricing. We believe our wholesale partners are eager to support this strategy, especially in the category of entry-level luxury. Looking ahead to next year, I am not anticipating an improvement in wholesale revenues. We will be focusing on addressing our off-price strategy, including cleaning up our daigou business in the outlet channel and undertaking significant corrective actions in other off-price areas within the company. This all ties back to the quality of sales, which we’re prioritizing. We aim to increase average unit retails and full-price sell-throughs. As Raj mentioned, we are excited about the gross margin expansion we expect to achieve next year, especially after we move past the current tariff situation. We are managing inventories both with and without tariffs, and we anticipate feeling the most significant impacts in the fourth quarter and the first quarter of next year. After that, our strategic initiatives should start to show their effects. Additionally, regarding our current gross margins, as Raj indicated, the primary impact has arisen from tariffs. Nonetheless, we have managed to maintain our gross margins, partly due to lowering prices in our full-price channel and clearing other products as discussed earlier. I’m pleased with this as it highlights our improving sell-throughs and the tight management of our inventories, placing us in a solid position to advance in both our retail and wholesale channels.

Operator, Operator

Our next question comes from Aneesha Sherman with Bernstein.

Aneesha Sherman, Analyst

John, last quarter, you commented that in the full price channel, you've kind of stabilized the assortment in terms of price points and selection. Are you still seeing AUR increases in full price? Can you comment a little bit on volume versus AUR that's driving that positive full price comp? And then in the guidance for the back half of kind of minus high single digits for Michael Kors, what's embedded in that? You said earlier that about 2% of it is from the timing shift. For the remainder, are you assuming continued positive full price comps with wholesale and outlet being negative? A little bit more color on that would be helpful.

John Idol, Chairman and CEO

Okay. I'll address the full price aspect. There may be some confusion regarding our guidance for the latter half of the year, which Raj will elaborate on. The full price average unit retails have actually declined slightly, mainly because we've reduced our price points. However, full price sell-throughs have increased significantly. While our average unit retail is down slightly, we anticipated this due to the considerable price adjustments made in our strategic pricing approach. Additionally, I want to highlight that by the end of the year, while our inventory will see a slight increase in dollar value due to foreign exchange rates and tariffs, our unit counts will decrease significantly. We are confident about the quality of our sales and believe this trend will continue. I'll hand it over to Raj for further guidance.

Rajal Mehta, Interim CFO

Yes. And as far as the guidance in the back half of the year, I think we were referring to it sequentially improving, not turning positive. So I think we're pleased with what we're currently seeing in the business and the trends. And as John mentioned, it's going to take time to inflect to positive in the retail channel and be positive, and we won't see that until next year in our overall retail channel. So we'll see sequential improvement continue into Q3 and Q4.

Operator, Operator

Our next question comes from Rick Patel with Raymond James.

Rakesh Patel, Analyst

Congrats on the progress. Can you help us with your expectations for revenue by geography as we think about the back half? What's the right way to think about the progress being made in the Americas and EMEA? And Asia did quite well in Q2 for Michael Kors. What would you attribute that to? And how sustainable do you think that growth is?

John Idol, Chairman and CEO

We don't provide geographic guidance going forward. However, I can say that for Michael Kors, Europe is clearly our strongest market, and we expect that to continue. Europe hasn't experienced the same declines as North America. Interestingly, even without renovations, the consumer response to our new product introductions has been very strong and quick. We're very pleased with that. The outlet business in Europe is also relatively stable compared to North America. If we look at Asia, Japan is fairly flat but has shown positive signs since last year, despite some currency challenges, so we remain optimistic about Japan. In China, we've observed a modest yet noticeable improvement, with significant consumer engagement. Our marketing efforts are resonating well, and our bestselling products in the U.S. and Europe are now also popular in Asia, which wasn't the case previously. We believe we are on track for continued growth in China and Southeast Asia. For Jimmy Choo, North America is performing very strongly and is improving. Our retail partners are increasingly supportive, and while some luxury competitors have raised their prices significantly, we have also increased ours but remain a favorable option for our core partners globally. Our new handbag strategy is off to a strong start in both our retail locations and at wholesale. North America presents an exciting opportunity for Jimmy Choo. Europe is stable and showing some growth, and we have work to do in Japan and China, which is a bigger concern than the overall trends in the regions.

Operator, Operator

Our next question comes from Bob Drbul with BTIG.

Robert Drbul, Analyst

Just two questions for me. The first one, John, in terms of your team, what team do you need in place as you continue to move the company forward from where we are? I know that Raj is still interim. And I guess the second question is for Raj, which is, can you expand a bit on sort of the net interest income, the currency hedging as you look into the future and how the company is positioned from that. Sometimes those numbers are a little confusing to us?

John Idol, Chairman and CEO

We have a great team in place. At Michael Kors, we have Michael Kors himself, who has been with us since the beginning for 44 years. He continues to be a visionary for the brand, and I believe the products he and our design tech teams are producing now are among the best I have ever seen in the company. I am really proud and happy with the developments there. We have strong teams worldwide helping us implement our strategies, as well as excellent teams managing logistics, production, and finance. Although Raj is currently the interim CFO, we have fantastic people working alongside him. I am very proud, and our teams are doing an impressive job. Furthermore, our previous situation was quite disruptive during an 18-month period when there was uncertainty, but clarity has returned, and our teams are committed to moving the company in a positive direction. We are looking forward to finishing fiscal '26 on a positive note, even if it means some decline, as we aim to stabilize the business. We are particularly excited about fiscal '27, anticipating a return to revenue growth and strong operating income growth, which is crucial for our shareholders and our internal teams.

Rajal Mehta, Interim CFO

Thanks, Bob. So we continue to receive income from our net investment hedges, as you mentioned and the hedges really related to intercompany investments in our European subsidiaries. We pay out interest rates in euros, and we received interest payments in USD. So that's sort of the pickup that you're seeing. And then on the other side, when we receive the proceeds from the sale of Versace, we expect to substantially reduce our debt levels, which will result in lower interest expense, and we'll have minimal debt on our balance sheet. So you'll see a lot of the interest expense go away and really the interest income continue with our net investment hedges.

John Idol, Chairman and CEO

I'd like to thank everyone for joining us today, and we look forward to continued exciting news about Capri and how we are moving forward. And we thank you for your opportunity to spend time with us today and look forward to updating you more in the future. Thank you all.

Operator, Operator

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.