Capri Holdings Ltd

NYSE:CPRI

Earnings Call Transcript 2022-Q3

[Operator]

Hello, and welcome to the Capri Holdings Third Quarter Fiscal 2022 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded.

It's now my pleasure to turn the call over to Jennifer Davis. Please go ahead.

[Jennifer Davis, VP, IR]

Good morning, everyone, and thank you for joining us on Capri Holdings Limited Third Quarter Fiscal 2022 Conference Call.

With me this morning are Chairman and Chief Executive Officer, John Idol; Chief Executive Officer of Michael Kors, Josh Schulman; 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 costs associated with COVID-19-related charges, long-lived asset impairments, ERP implementation costs, Capri transformation costs, restructuring and other charges. Unless otherwise noted, all financial information on today's call will be presented on a non-GAAP basis.

To view the corresponding GAAP measures and related reconciliation, please view the earnings release posted to our website earlier today at capriholdings.com.

Before we begin, we'd like to announce we will be holding an Investor Day after our fourth quarter fiscal 2022 earnings call to provide an update on our long-term outlook.

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

[John Idol, Chairman & CEO]

Thank you, Jennifer. Good morning, everyone. We continue to be encouraged by the ongoing momentum of Capri Holdings as we execute against our strategic growth initiatives. I'm extremely pleased with each of our fashion luxury houses' robust holiday results. Sales trends significantly exceeded our expectations as consumers responded to compelling product offerings from Donatella Versace, Sandra Choi and Michael Kors. Versace, Jimmy Choo and Michael Kors continue to resonate with consumers as evidenced by the 11.5 million new consumers added across our databases over the last year.

Capri Holdings' strong holiday results are a testament to the strength of our brands as well as the hard work and dedication of all our employees around the world. I am especially pleased that we were able to deliver these results, while navigating the ongoing headwinds associated with the pandemic, including regional restrictions and supply chain challenges. Looking forward, as the world continues to recover from the impact of the global pandemic, we remain confident in our future growth potential.

Now turning to third quarter results. We were pleased that revenue, operating margin and earnings per share all exceeded our expectations. Total revenue increased 24%, reflecting better-than-anticipated results at all 3 brands. This represents a sequential acceleration relative to the second quarter on both a 1- and 2-year basis.

Gross margin continued to expand even with greater-than-anticipated supply chain cost. Operating margin of 22.3% was above our expectations. As a result, earnings per share of $2.22 was better than anticipated.

Looking at group revenue trends by geography, [indiscernible] significantly exceed our expectations, increasing 26% and would have been even greater if not for inventory constraints. In the EMEA, revenue increased 35%, also above our expectations with growth across all houses, despite increased restrictions in certain countries. The strong momentum in the region was driven by robust domestic consumer demand as international tourism has not yet recovered.

In Asia, revenue increased 3%, reflecting improving trends in Japan, Korea and Southeast Asia. This was partially offset by trends in Mainland China, where revenue declined due to store closings, travel restrictions and select city lockdowns.

Now turning to third quarter performance by brand, starting with Versace. Results significantly exceeded our expectations once again. Revenue increased 29%, demonstrating the momentum of the brand and the success of our strategic growth initiatives. We saw strength across all product categories as the brand emphasized the very Versace look by pairing the latest runway styles with luxurious accessories, footwear and statement jewelry. Runway styles featured our new brand code, La Greca, which is off to a strong start. Our signature code anchored itself as a new pillar and accounted for 17% of sales across all product categories.

Turning to accessories, which are a key component of our growth strategy. Retail sales nearly doubled versus prior year. Importantly, we saw strength across all 3 of our pillars: La Medusa, La Greca and Virtus. With the 3 iconic pillars now in place, we are making significant progress in our goal to expand accessories revenue to $1 billion over time. We are more confident than ever in our ability to position Versace as a leading luxury leather house.

Footwear also performed well as we continued to build our core offering focused on our iconic brand codes. In the third quarter, women's footwear sales at retail increased strong double digits as we gain authority in women's luxury fashion footwear. Men's and women's sneakers also continued to perform well, with ongoing strength in Trigreca and La Greca styles as well as a positive response to the new men's Greca Labyrinth trainer featuring a chunky Greca pattern sole.

Additionally, we saw strength in men's and women's ready-to-wear, with retail sales up double digits. We were especially pleased with the positive response to the new La Greca signature pattern. We also continued to drive sales as we expand our core lines, which incorporate iconic house codes to broaden Versace's reach.

Now turning to brand awareness and consumer engagement. In October, Versace launched 2 localized campaigns in Asia as the brand increased its emphasis in the region. The first was in China, featuring our brand ambassador, Betty Wu. The Chinese singer and actress has over 25 million followers on her social media accounts. The second was in Japan, featuring Japanese model and actress, Nana Seino. The 360-degree communication is focused on the La Greca signature pattern with a vertical maze inspired by our iconic Greca motif as the backdrop.

Additionally, during the quarter, Versace opened pop-up shops in key cities throughout China. The immerse pop-ups were designed to portray the iconic Greca motif and featured the new season's signature products. For holiday in celebration of winter sports, the brand showcased bold styles with glamorous gift ideas. The campaign featured key house pillars La Medusa, La Greca and Virtus, in very Versace fashion. This was Versace's top-performing holiday campaign to date, generating tremendous engagement, new consumers and strong revenues.

These powerful initiatives, among others, helped to drive a 30% year-over-year increase in Versace's global database. Overall, Versace's third quarter results speak to the strength of the brand and reinforced our confidence in our ability to grow the house to at least $2 billion in revenue. With the launch of La Greca, we now have the key building blocks in place to realize the full potential of this powerful brand. We are more optimistic than ever about Versace's future growth opportunity.

Moving to Jimmy Choo. Results were significantly ahead of our expectations, with revenue increasing 47% as we continue to execute against our strategic initiatives. Our overarching strategy is grounded in reinforcing the brand's glamorous DNA across everything we do.

Jimmy Choo epitomizes glamor every day, anytime and anywhere from formal to casual across accessories and footwear. In accessories, we were pleased with our progress as third quarter revenue increased strong double digits. Accessories sales were driven by the continued focus on our 3 key hero handbag families: VARENNE, Madeline and Bon Bon. Evening bags with jeweled accents and standout embellishment also performed very well.

Footwear sales increased double digits in the quarter, driven by a recovery in dress footwear styles as people engaged in social activities, enjoyed special occasions and celebrated the holidays. Casual styles also performed well, from shearling slippers embellished with delicate pearls and crystals to combat boots with crystal embellishments. We continue to see growth in sneakers with positive consumer reaction to our new Memphis trainer.

Now turning to brand awareness and consumer engagement. In October, Jimmy Choo launched an incredibly successful limited edition Chasing Stars collection in collaboration with New York-based artist, Eric Haze and curated by Japanese fashion icon, Poggy. The collection fused East with West and high fashion with street culture, offering a modern interpretation of glamor.

In addition to [indiscernible] capsule, of accessories, footwear and apparel, the collaboration featured co-branded bare-brick collectible figures, pioneering the world of NFTs and collectibles, the capsule melded physical products with virtual. The NFTs and collectibles sold out within 1 hour of launching online.

To bring these items to life, Jimmy Choo held store takeover events and pop-up shops in Asia. Numerous Chinese celebrities, including brand ambassador, Victoria Song, attended events at the boutiques generating social media excitement. Post by celebrity influencers and fashion accounts helped the #jimmychoo/erichaze gained over 65 million views.

For holiday, our consumer communication campaign once again featured Hailey Bieber, who is the embodiment of the modern glamor that defines Jimmy Choo. A continuation of the Autumn Time to Dare campaign, Hailey Bieber is once again on top of the world living the life she dares. The campaign transitions from day to night, celebrating the return of glamour as Hailey shined in accessories and footwear that were created to make a statement. Our engaging marketing, combined with glamorous product helped contribute to a 23% year-over-year increase in Jimmy Choo's global consumer database.

Overall, Jimmy Choo's strong revenue growth and operating margin expansion in the third quarter reinforces our confidence in the luxury house's future growth potential. We are encouraged by the progress we are making towards our goal of growing revenue at Jimmy Choo to $1 billion over time.

Now turning to Michael Kors. Results were also ahead of our expectations, with revenues increasing 20% as we continue to elevate our product and our brand. During the quarter, global AURs increased in the high teens versus prior year. Signature remains a core growth strategy, and we continue to believe penetration will eventually grow to approximately 50% of our overall product assortments, which will drive higher AURs and margins.

In the quarter, overall Signature represented 41% of the assortment compared to 35% last year. In Accessories, Signature penetration was even greater. Accessories sales in our retail channel increased double digits globally, as consumers responded to fresh updates for holiday, including new novelty signature techniques, such as a pleated and color-pop diagonal logo, e-collections for the season is the Carley Satchel, Greenwich Crossbody, Soho Shoulder and Hamilton Legacy Satchel. Chain look details, logo taping and high-shine studs infused the collection with a modern-meets-classic Kors appeal.

Moving to footwear. We saw strong performance in boots and booties, featuring iconic branding elements and signature detail. Fashion active also continued to perform well, driven by seasonal updates featuring signature color combinations.

Similarly, in women's ready-to-wear, Signature logo styles were among the top performers. We also saw a strong consumer response to fashion outerwear. Men's remains one of the strongest performing categories in retail, and we remain enthusiastic about our opportunity to expand the accessories collection. Growth in the third quarter was led by signature product with gifting, backpacks, small leather goods and outerwear performing exceptionally well.

Now turning to brand awareness and consumer engagement. In October, Michael Kors partnered with the James Bond film franchise to launch the brand's first global collaboration in partnership with the film, No Time To Die. For the debut of the collaboration capsule collection, we hosted a series of global getaways in glamorous destinations around the world. Action-packed trips to Miami, Florida; Rakievich, Iceland; and Hainan Island in China each showcase their own Bond-inspired highlights.

Additionally, guests at each destination took part in a spirited TikTok challenge to emerge from the water in 007 style. Globally, the TikTok Bond hashtag challenge went viral, hosting 7.4 billion video views and 1.5 million new generated videos. The trip to Hainan Island for our Bond collaboration included prominent guests such as Chinese brand ambassador, Wang FeiFei and 15 other key influencers. Combined, these influencers had over 65 million followers across their social media platforms.

For holiday, our consumer communication embodied Michael Kors' Signature glamour and optimism infused with the joy of the season. The campaign captured the Jet Set sheet and easy glamour of Bella Hadid and friends as they journey to New York City to spend the holidays and ring in the New Year together.

Our marketing initiatives continue to underpin our Jet Set brand pillars of speed, energy and optimism. This helped contribute to a 20% year-over-year increase in Michael Kors' global database, demonstrating the continued strength and desirability of the Michael Kors brand.

Finally, I'd like to take a moment to congratulate Michael, for winning the In-style Designer of the Year Award, which celebrated the notable achievements he has had through the course of his impressive 30-year long career.

Overall, we are extremely optimistic about the future growth of Michael Kors. The strategies we put in place prior to the pandemic have been generating strong consumer demand as well as attracting new and younger consumers. Additionally, we are driving higher profitability as we continue to elevate the brand positioning.

In total, Capri Holdings' third quarter results exceeded our expectations with a sequential improvement in revenue trends despite the pandemic and further supply chain pressures. Our performance demonstrates the strength of our brands, the execution of our strategic initiatives and the hard work and dedication of our teams across the globe. The power of our 3 iconic founder-led fashion luxury houses position Capri Holdings to accelerate revenue and deliver multiple years of earnings growth.

Now I'd like to turn the call over to Josh Schulman, the CEO of Michael Kors and future CEO of Capri Holdings. I'm delighted to have Josh joining us on his first quarterly earnings call with Capri Holdings.

[Joshua Schulman, CEO, Michael Kors, Inc.]

Thank you, John. Good morning, everyone. I am thrilled to be here at Capri Holdings. In the 5 months since joining, I've had the opportunity to spend time with our amazing Michael Kors team across the globe and visit many of our beautiful stores. The level of energy across the entire organization is inspiring, and I'm extremely impressed with the level of the talent and the exceptional work the teams are doing to implement our strategic initiatives.

I would like to take a moment to congratulate and thank the entire Michael Kors team for their outstanding execution and performance over the holiday period. The better-than-expected revenue reflects the success of our strategic initiatives, including elevating the brand positioning and capitalizing on our recognizable signature styles. I look forward to building on this success as we continue to innovate and elevate the product and further increase AUR.

The time I have spent with the teams, combined with our strong holiday results further reinforce my belief in the future growth potential of the Michael Kors brand. Its tremendous success is in large part due to the fashion icon, Michael Kors himself, his design vision and his ability to create timeless fashion that embodies Jet Set glamor. I believe we have an incredible opportunity to capitalize on the strong foundation that John, Michael and the team have built over the years. I look forward to sharing my vision for the future direction of Michael Kors at our Investor Day.

Looking at Capri Holdings, I am impressed with the incredible portfolio of luxury houses, each with their own rich heritage, exclusive DNA, and strong consumer loyalty. Capri is unique, with 3 brands led by the design visions of Donatella Versace, Sandra Choi and Michael Kors. Each of these original founders are iconic figures and have powerful voices to communicate with their fans. I am confident in the strong growth potential for Capri Holdings and look forward to partnering with John and the Board in the future to lead the company through our next chapter of growth.

Now let me turn the call over to Tom.

[Thomas Edwards, EVP, CFO & COO]

Thank you, Josh, and good morning, everyone. Starting with third quarter results. Revenue of $1.6 billion increased 24% versus prior year, exceeding our expectations. Performance was driven by better-than-anticipated results across all 3 of our luxury houses. Net income was $339 million, resulting in diluted earnings per share of $2.22. This was above our expectations, reflecting better-than-anticipated revenue and operating margin as well as a lower tax rate.

Turning to revenue performance by brand. Versace revenue was $251 million, a 29% increase to prior year and above our expectation. Global sales in our retail channel increased over 20%, with double-digit increases in both e-commerce and store sales. By geography, total revenue in the Americas increased 56%. Revenue in EMEA increased 30% and revenue in Asia increased 2%. Versace ended December with a global luxury fleet of 212 retail stores, a net decrease of 5 from prior year.

For Jimmy Choo, revenue was $178 million, a 47% increase to prior year and above our expectations. Global sales in our retail channel increased over 40%, with strong double-digit increases in both e-commerce and store sales. By geography, total revenue in the Americas increased 59%, revenue in EMEA increased 73%, and revenue in Asia increased 18%. Jimmy Choo ended the quarter with a global fleet of 240 retail stores, a net increase of 9 from prior year.

At Michael Kors, revenue was $1.18 billion, a 20% increase to last year and above our expectations. Similar to last quarter, revenue growth would have been even greater if we had more product available to meet consumer demand. We estimate inventory constraints had a mid-single-digit impact on Michael Kors' third quarter growth rate. Global sales in our retail channel increased in the mid-teens, with double-digit increases in both e-commerce and store sales. Wholesale revenue increased over prior year, but remains well below historic levels, in line with our strategic intent to have a smaller wholesale business and improved profitability.

By geography, total Michael Kors revenue in the Americas increased 21% and revenue in EMEA increased 30%. Revenue in Asia decreased 2%, reflecting growth in Japan, Korea and Southeast Asia, offset by declines in Mainland China. During the quarter, our sales in China were impacted by COVID-related restrictions, including store closings, travel restriction and select city lockdowns. Michael Kors ended the quarter with a global fleet of 834 retail stores, a net increase of 3 from prior year.

Now looking at total company margin performance. Gross margin expanded 40 basis points to 65.1%. This improvement reflected the strong ongoing benefits of our strategic initiatives, offset by approximately 400 basis points of higher supply chain costs compared to prior year. Supply chain costs were approximately 100 basis points greater than the forecast we provided on our second quarter earnings call.

Operating expense as a percent of revenue was 42.8% compared to 45% last year. This reflects expense leverage on higher-than-anticipated revenue. On an absolute basis, operating expense increased approximately 17% or $100 million versus prior year. This increase primarily reflected higher variable expenses and reinvestments in our business. As a result, total company operating margin of 22.3% was more than 200 basis points above our expectations and 260 basis points greater than prior year.

By brand, Versace operating margin expanded 600 basis points to 12.7%. Jimmy Choo operating margin expanded from negative 6.6% to positive 9%. And Michael Kors operating margin was approximately flat at 28.4%. Our tax rate for the quarter was 8.1%, this was lower than our expectation, reflecting a discrete item associated with a COVID-related net operating loss carryback claim in the U.S. As a result, we were able to realize the benefit during the quarter.

Now turning to our balance sheet and cash flow. We ended the quarter with cash of $261 million and debt of $1 billion, resulting in net debt of approximately $740 million. Total liquidity at the end of the quarter was $1.3 billion. During the quarter, we repaid approximately $150 million of debt. As part of our ongoing commitment to return cash to shareholders, we repurchased $200 million worth of shares in the quarter. This also reflects our strong belief that Capri Holdings represents a compelling value, given the momentum and future growth potential of our 3 luxury brands.

Looking at inventory. We ended the quarter with $978 million, 24% above prior year, reflecting a significant increase of in-transit inventory. During the quarter, shipping delays were even greater than we anticipated. As a result, on-hand inventory levels were lower than expected, which constrained our ability to deliver higher revenue in the quarter.

Now let me take a moment to address our inventory outlook going forward. We expect inventory to increase relative to prior year for the following reasons: first, we will continue to tightly manage inventory, but levels need to increase to support revenue growth and ensure we meet consumer demand; second, we are initiating a new program where we expect to receive core product earlier. This will enable us to better meet consumer demand as well as reduce transportation costs. As a result, inventory growth is expected to outpace sales growth for the next 12 months.

Now turning to guidance. For fiscal 2022, we now forecast Capri Holdings' revenue of approximately $5.56 billion, reflecting the better-than-expected third quarter performance. Full year guidance assumes the Versace revenue of approximately $1.08 billion, Jimmy Choo revenue of approximately $600 million and Michael Kors revenue of approximately $3.88 billion. For the year, we now expect approximately 200 basis points of gross margin expansion.

Turning to operating expenses. We continue to forecast operating expenses of approximately $2.6 billion. Taken together, we now expect a full year operating margin of approximately 19%.

For Versace, we now anticipate an operating margin of approximately 17%. For Jimmy Choo, we now expect a positive operating margin of approximately 2%. And for Michael Kors, we anticipate an operating margin of approximately 25%. As a result, Versace and Jimmy Choo combined will generate approximately 20% of total company operating income. Both luxury houses are contributing to operating income well ahead of our anticipated timing.

Turning to our expectations around certain nonoperating items. We now anticipate net interest income of approximately $17 million, an effective tax rate of approximately 14% and weighted average shares outstanding of 153 million. As a result, we now expect to generate diluted earnings per share of approximately $6 for fiscal '22. I would like to note this represents the highest earnings per share in the company's history.

Turning to fourth quarter guidance. We anticipate total company revenue of approximately $1.4 billion, including approximately $75 million associated with the 53rd week at Jimmy Choo and Michael Kors. We forecast Versace revenue of approximately $310 million, Jimmy Choo revenue of approximately $140 million and Michael Kors revenue of approximately $950 million.

Now looking at operating margin. We expect fourth quarter operating margin will be approximately 13.5%. This includes 50 basis points of gross margin expansion, reflecting the benefits of our ongoing strategic initiatives more than offsetting higher supply chain costs. Operating margin also includes incremental investments in marketing, e-commerce and regional growth initiatives to support revenue growth as well as the additional expenses associated with 53rd week.

Looking at operating margin by brand. For Versace, we anticipate an operating margin of approximately 15%. For Jimmy Choo, we expect an operating margin of approximately negative 10%. And for Michael Kors, we anticipate an operating margin of approximately 20%.

Turning to our expectations around certain nonoperating items. We forecast net interest income of approximately $5 million, an effective tax rate of approximately 38% and weighted average shares outstanding of 151 million. As a result, we expect diluted earnings per share of approximately $0.80.

Now I would like to take a moment to discuss our preliminary expectations for fiscal 2023. We are sharing this outlook, given the impact of the pandemic and ongoing supply chain challenges. For full year fiscal '23, we forecast revenue of approximately $6.1 billion, an approximate 10% increase over fiscal '22, reflecting ongoing momentum across all 3 luxury houses. We anticipate full year operating margin of approximately 19%. This reflects gross margin expansion of approximately 50 basis points as the success of our strategic initiatives more than offset higher supply chain costs. Operating margin also includes an increase in strategic investments to support revenue growth. As a result, we expect fiscal year 2023 earnings per share to grow approximately 10% to $6.60.

Looking at full year guidance by brand. For Versace, we anticipate revenue growth of approximately 20% to $1.3 billion and operating margin of approximately 18%. For Jimmy Choo, we expect revenue growth of approximately 13% to approximately $675 million and significant margin expansion with operating margin of approximately 8%. For Michael Kors, we anticipate revenue growth of approximately 6% to approximately $4.125 billion. We assume operating margin of approximately 25%, reflecting the ongoing benefits of our strategic initiatives, elevated supply chain costs and increased investments to support growth.

Now to provide more color around the quarterly guidance outlined in our press release, I would like to discuss our expectations regarding the cadence of revenue, gross margin, operating margin and earnings per share through fiscal 2023. Starting with revenue, we anticipate strong growth each and every quarter of the year.

Turning to gross margin. we expect continued benefits from the execution of our strategic initiatives throughout the year. However, supply chain costs will be highest year-over-year in the first quarter, resulting in gross margin contraction. We anticipate trends will progressively improve as costs begin to normalize, and we realize the benefits of multiple supply chain initiatives designed to both mitigate costs and reduce delays. Therefore, we expect gross margin expansion in the third and fourth quarters.

Now moving to operating expenses. We plan to strategically invest in initiatives that will support long-term growth. This includes incremental investments in areas such as marketing, omnichannel initiatives and data analytics capability.

Now turning to operating margin. With higher supply chain costs and increased investments, we anticipate lower operating margin in the first quarter. We expect margins to improve in the second quarter and expand in the third and fourth quarters. Taken together, we still anticipate fiscal '23 earnings per share above the prior year every quarter, with an improving progression throughout the year.

In conclusion, we are pleased with our third quarter results, particularly in the face of the ongoing supply chain challenge. This performance reflects the strength of our fashion luxury houses and execution of our strategic initiatives. We are extremely optimistic about our future growth potential and believe the company is emerging from the pandemic stronger than ever. We remain confident that our 3 powerful luxury brands position Capri Holdings to achieve meaningful long-term revenue and earnings growth as well as increased shareholder value.

Now we will open up the line for questions.

Question-and-Answer Session

[Operator]

[Operator Instructions]. Our first question is coming from Omar Saad from Evercore.

[Omar Saad, Evercore ISI]

Another great quarter, guys, congrats. And welcome, Josh. I guess my opening question would be for you. I'd love to hear, coming in on your first call here, what -- how are you thinking about your -- the long-term vision for the Michael Kors brand? It's a big brand. It's already successful and profitable. What do you think is ahead for this brand? And the biggest opportunities? Is it digital? Is it international? Is it Asia? Is it the premiumization effort? Would love to kind of get your high-level thoughts on where you see this brand evolving over the long term.

[Joshua Schulman, CEO, Michael Kors, Inc.]

Thank you, Omar. It's great to talk to you again. And it's terrific to be on the call and terrific to be here with this team.

I have been so impressed with what I've seen in the last few months with the brand and the team. And I am particularly encouraged by seeing how this team has continued to elevate the brand. And as Tom mentioned, it's really emerging from the pandemic much stronger than ever. We can see that in the pricing power that the brand has.

And to your point about continued premiumization, clearly, continuing to elevate the brand, continuing to lean in to our authentic Jet Set DNA through a modern lens will be a big part of what we will be doing with Michael Kors.

Of course, I'll share a more fulsome view of the strategy for Michael Kors at Investor Day in a few months. But just to touch on a few areas where I see a significant growth. So first, digital. We have a database of nearly 60 million people that is growing, accelerating very fast.

As John mentioned, we picked up 20% to that database, nearly 10 million people in the last period. And there's an opportunity to harness the power of this database to drive the e-com business globally. And so that's something that I am passionate about.

Asia is another point. It's almost as if you articulated some of my thoughts in your list there. Asia, clearly, we are underpenetrated versus our luxury peers there. And there is the opportunity to at least double our revenue in Asia.

And then on a category basis, I think John mentioned in his remarks, the positive reception that we're having to our men's products, and that's an area where we are also very underpenetrated relative to our peers.

So those will all be areas of focus that you will continue to hear me talk about specifically at Investor Day and as we continue to elevate the Michael Kors brand.

[Operator]

[Operator Instructions]. Our next question is coming from Matthew Boss from JPMorgan.

[Matthew Boss, JPMorgan Chase & Co.]

Congrats on another nice print, guys, and welcome aboard, Josh.

[Joshua Schulman, CEO, Michael Kors, Inc.]

Thank you.

[Matthew Boss, JPMorgan Chase & Co.]

So maybe, John, as we potentially exit the pandemic, could you maybe speak to your confidence in the underlying growth prospects for handbags and accessories as a category? I guess, do you believe your initiatives have now set a foundation for continued full-price selling? Or is there any give back to think about? And then just last, on the double-digit top line for next year, does this a better return of travel and tourism? Or how best to think about timing for that opportunity?

[John Idol, Chairman & CEO]

Matt, and thank you for the nice comments about our quarterly results. The first thing I'd like to say is we were very pleased with the performance of all 3 of the luxury houses during the quarter. We saw traffic in our stores accelerate during the quarter, which -- that's not something we've seen in a long time. And that really speaks to the health of the consumer really across the globe.

And what we also saw was double-digit revenue growth at all 3 of the luxury houses and accessories. And as you know, at Michael Kors, it's obviously the biggest piece of the business. At Versace, it's the biggest opportunity for the business. And then at Jimmy Choo, that will be one of the key kind of inflections for that brand to get towards those mid-teens operating margins that we've talked about.

So I think all 3 houses are really positioned well as it relates to product. The marketing initiatives were, I thought, really incredibly well executed over the holiday season. And as we start out the spring, and we're dropping our new campaigns at all 3 of the houses. I think you saw the wonderful campaign about love and sisterhood and -- with Bella and Gigi. At Versace, I think you -- some of you may have seen the Maluma campaign, also very powerful. And at Jimmy Choo, this Time to Dare marketing is really creating brand heat for us. And so we're seeing some strong reaction from the consumers around that.

And then at Michael Kors, as Josh talked about, really focusing on our Jet Set heritage through a modern lens. You're going to see some very powerful marketing around that.

So I think when I look at the way that our brands have positioned themselves, the way that we are handling product and really not trying to introduce too much because that's when you get into the problem of leaning to clear product through the stores. And so I think that's one of the things that, coming through COVID, really helped us to reduced the SKUs across all the companies by over 30%. And some companies are going to go further, just to be more focused. And how the consumer is responding to that. So we find the consumer in North America to be extremely healthy. We're seeing that health already continue on so far in this quarter. We're finding a rebound of the consumer in Europe to again also be quite healthy.

And then Asia, in general, is healthy. There's some bumps in the road in China. You've all heard about it, certain travel restrictions that are going on right now and certain lockdowns in the city. But again -- cities, we think that's something we will get through. And I've said on multiple calls, you're going to see bumps in the road in certain territories as we have flare-ups with the pandemic. But the consumer is very strong from what we can see, especially around accessories and footwear.

And then lastly, our forecast for -- our outlook for 2023 does not include any return of tourist travel. So that would be upside or a tailwind for us, both in EMEA and in our travel retail locations.

[Operator]

Our next question today is coming from Kimberly Greenberger from Morgan Stanley.

[Kimberly Greenberger, Morgan Stanley]

Okay. Really fantastic results here. John, I just -- I wanted to start on Versace because I was wondering if you could just reflect on the last sort of 2 or 3 years. Versace has really delivered just incredibly. And as you reflect on the brand investments you made, the momentum the business has now, if you were to sort of categorize the top 2 or 3 drivers of just the long term, what is it that's underpinning the inflection in financial results and the nice growth there?

And then, Tom, I wanted to see if you could just unpack the inventory growth a little bit more. The core product growth that you're expecting in 2023 versus, let's say, core versus fashion and your inventory flow strategy in terms of receiving some of that core product earlier to say -- assuming air freight?

[John Idol, Chairman & CEO]

Thank you, Kimberly. So first and foremost, I have to take my hat off to the teams at Versace because they're the ones who are really executing on these initiatives. So when we bought the company, as you know, it had multiple lines. We had to reduce those, shaved $150 million in volume, then we were hit by the pandemic. And so we definitely had an uphill walk or trout to try to put our strategic initiatives in place. But we never wavered. During all this time period, we've never lost sight of what the goal is.

And I think I said it on a previous call, and I'm going to reiterate it again, we have $2 billion clearly in sight at this point. That is a milestone we feel very comfortable in achieving. The question now is not the $2 billion in my opinion, we'll talk more to you about that at Investor Day.

The real discussion is going to be around how much bigger is it going to be than that. And Versace belongs in the category of some of the most important luxury brands in the world. The brand recognition and the love for this brand is nowhere near the performance. And so that is -- that's -- we feel that we will now have products to be able to bring those 2 things together much more closely and fuel that.

I want to say one last thing before I get into the 2 or 3 drivers. We need to manage this carefully, though. What we don't want to do is to have something that explodes and then comes back down off that trend. So with luxury, you have to invest, you have to pace it and let the consumer really desire it. And not try to push too hard. So that's something we're going to be very cognizant of, but we will be making significant investments continue in this brand.

So the 2 are 3 things. First and foremost, we are turning this not into just a luxury house driven by runway and ready-to-wear, but this is now a luxury leather goods house. And we are going to, in the not-too-distant future, be delivering well over 50% of our volume from those 2 categories. Again, we'll talk more about that at our Investor Day. So leaning into that, that's also going to help us with margins and also really acquiring additional consumers.

Second thing is that we are renovating all of our stores. Unfortunately, there was very little investment put into these stores over the last 10 to 15 years. And so we've renovated approximately 50% of the fleet. We hope to get the balance of that done in the next 24 months. And again, if any of you have seen the new stores, they are quite stunning. And we are seeing increased productivity in these stores quite significant.

And as I've said to you before, we could grow this revenues by 4x in our stores and still not be at the productivity levels of some of our biggest competitors in the world. So we have lots of room to grow inside the footprint that we have. So that's really the second initiative.

And the third is the way that we are managing our digital consumer engagement and how we're handling them with an omnichannel experience. And I was very honest with you previously, told you that this company was significantly behind in all of those initiatives 2-plus years ago. They have caught up very quickly and again, take my hat off to the entire organization at Versace, everything from the way that we're communicating with our consumer, the database growth and the way that we're handling them from an omni standpoint. Again, we've only turned on omni in the past few months, both in Europe and in North America. So just the upside we're seeing from that alone is quite significant.

So this company is getting very, very close to being able to be poised for another leg up and significant growth. And again, I think you're going to be quite impressed by what Donatella does in the coming February show. I'll leave you for the surprise when you see it, but there's some really powerful things coming around accessories.

I'm going to tee up one last thing before turning it over to Tom. In terms of the inventory flow, this supply chain situation is going to continue on for at least the next 6 months. We don't see it actually improving. Many of the ports are quite backed up.

And so one of the strategies that we've used around the company is let's get some of our core products in earlier so that we can feed our stores. We missed a lot of demand, in particular, at Michael Kors during the holiday season. And again, when it's a core product, it's not going to be something we're concerned about, whether we have larger weeks of supply on that. It will help us feed our stores and it will not do anything except for, I think, increase our gross margins being able to support that core product.

So I'll let Tom go into more detail, but it's not just a Michael Kors initiative. We'll do this across all 3 brands where we think we will mitigate some of our -- we are still playing a significant catch-up in our own channel, and we're very far behind still in the wholesale channel. So as you saw the wholesale numbers picked up a little bit in Q3, but that's just because we have not been able to ship that channel to the degree that the demand has requiring. So there's still an imbalance between demand and supply. And it's going to take us the better part of 6 months to really get ourselves fully caught up and in a good position that we can support our own stores as well as our wholesale partners.

Tom, I'll turn it over to you.

[Thomas Edwards, EVP, CFO & COO]

Thanks, John, and thanks, Kimberly. When we look at Q3, delays, as I noted in my remarks, really increased during the quarter. So our delays on the water and getting product in were extended. And as John mentioned, we just didn't have enough product to fill our robust consumer demand.

Looking forward, Kimberly, we expect that to continue. So we've put in the program -- among other programs, but a key one is the core -- order core product earlier. And that smooths out our product flow and allows us to maneuver and manage around these extended and variable lead times.

Fashion is still key. We'll have more core. The fashion piece remains a critical component clearly of all 3 brands, and that will not change. As a result of this, we do expect over the next few quarters or spring time frame to have significantly higher inventory, but would expect that to normalize after. And again, it allows us to manage and satisfy consumer demand.

And I would mention that over the longer time frame of full year, say, we're looking at tightly managing and continuing to manage our inventory. This just gives us the flexibility short term to manage this variability.

[Operator]

Our next question is coming from Ike Boruchow from Wells Fargo.

[Irwin Boruchow, Wells Fargo Securities]

I guess I wanted to ask -- this is great detail, Tom, John and Josh, thank you, for next year. Just kind of curious on the balance sheet and the cash flows of the business, which are tremendously above '19 levels.

I guess is there a buyback that's embedded in next year's EPS that you guys are giving us? And then on the topic of M&A, how do you guys balance M&A versus buyback with the stock as cheap as it is right now versus the potential you've obviously proven the ability to acquire and scale an acquisition with Versace? I'm just kind of curious how that discussion goes internally.

[John Idol, Chairman & CEO]

So Tom, I'm going to take the M&A piece and just a tiny bit on next year, and then turn it over to you.

As it relates to M&A, we've stated it publicly, we're active in research. We don't see anything in the near term. If something becomes available, we will absolutely be involved in those dialogues and conversations. And again, we're interested in expanding our luxury portfolio. That will typically mean that it's basically only European brands that we'll be looking at. So nothing really to report there, except we will be active in that marketplace.

In terms of next year, I just want to point out something. We gave, I think, earlier-than-normal guidance or outlook because of the fact that it's hard for you all to see what we're seeing in terms of supply chain and costs that are impacting us. So I hope you appreciate that we're trying to be as transparent as possible to give you and all of the investment community a feeling for how we see next year flowing in particular, in light of these transportation and supply chain challenges.

So that's really the rationale around that. Let me turn it over to Tom to talk about the balance sheet.

[Thomas Edwards, EVP, CFO & COO]

Thanks, Ike. And I appreciate the comment on cash flow, because I love talking about the cash and the cash flow generation of this company and our 3 brands.

So that has been robust this year, and that allows us to both pay down debt, which we've been doing across all the quarters. And as you've seen, increase our share buybacks up to $200 million this quarter.

So for next year, with continued progress, we'd expect to continue to generate strong free cash flow. Our leverage even with the debt we have on our balance sheet is extremely low. So I feel we have a very strong position there. And buybacks, again, with the valuation, remain a very important component of our capital allocation priority.

In terms of the actual guidance, we haven't provided that level of detail at this point. While we don't normally include that in our guidance when we provide it at the end of the year, we'll be more specific on shares and how buybacks may incorporate into that. But I would say that's something that, overall, we would continue to do.

[Operator]

Our next question is coming from Oliver Chen from Cowen.

[Oliver Chen, Cowen and Company]

Josh, for Michael Kors brand, would love your thoughts on logo and Signature innovation and what may happen next. And also, as you think about lifestyle and multi-category, I mean, Kors has a very attractive footwear business. Where do you see the biggest opportunities and priorities there as you continue to generate and amplify and simplify the portfolio as well?

[Joshua Schulman, CEO, Michael Kors, Inc.]

Oliver. Nice to speak with you. So I think the team here has done a terrific job of amplifying Signature across categories. And I think signature is something really interesting because it's a very clear reflection of brand equity and brand heat. And when people are buying Signature products, they're literally walking around advertising the brand. And so the fact that it is some of our most profitable product that sells at premium prices at full price also is such a good indication of the brand. And so I think you'll see more and more innovation within our Signature using the Signature pattern in surprising ways.

Certainly, one of the highlights that John mentioned was the Bond collaboration that the team did in October, which was a -- which was based in a metallic Signature iteration. And then how that was marketed as part of this collaboration and how it was broadcast really across channels globally and built the social following and also drove sales, it's almost a virtuous cycle of how that works to help embed Signature in the culture. And I think you'll see more of that.

I think one of the interesting things, as you touch about with the Michael Kors brand, is that this is a unique brand with its own narrative. And that really starts with Michael Kors himself, as the preeminent living New York designer, helming a fashion house.

And so it really starts with the categories that he's always believed in and how those reflect the Jet Set DNA of the company. So you mentioned footwear. So there are certain classifications in footwear, whether it's our trainers, our dress classification or boot classification, where we have real product authority there.

And I think as I'm getting to know the business and getting to know the brand, spending time with the teams to understand how we can hero our most iconic products in new and refreshing ways across categories is certainly a priority.

[Operator]

Our next question is coming from Erinn Murphy from Piper Sandler.

[Erinn Murphy, Piper Sandler & Co.]

Congratulations on a great quarter. My question is around the 11.5 million new consumers you referenced, John, that you guys attracted over the last year. Could you talk a little bit more about the age versus the income profile of these new customers versus what you've seen historically in your base? And then just a clarification, Tom, for you. How are you thinking about the potential impact from lapping stimulus in your fourth quarter and first quarter guide?

[John Idol, Chairman & CEO]

So Erinn, a couple of things. Number one, I have to take off my hat again to the teams around our company. The Michael Kors team did a spectacular job. And you listened to Josh's comments before, we added 20% to our consumer database. Almost 10 million people in the quarter. I mean that's really incredible.

And that's why, quite frankly, we didn't lap promotional activities of last year. Our full price selling is up dramatically. And so what we're seeing is -- and the AURs are up double digit. The health of the consumer entering our brand, both new and existing is really quite strong. And at all 3 brands, we not only grew new customers, but we also had the largest reactivation of lapsed customers that we've had in the company's history. So I think that says -- it speaks volumes to what we're seeing across -- quite frankly, it was all 3 brands.

But Michael Kors, again, while hopefully our teams are listening to this call, I want to really tip my hat to all of you for what an extraordinary job you did. And I think it speaks volume to the messaging that Michael and our creative teams are putting together as well as what you see at Versace and Jimmy Choo.

So we're seeing definitely a younger consumer come to all 3 brands, which is, in many ways, not unusual to Michael Kors because we've had that over the years. We've always had a younger customer. But it's a bit more unusual for Versace and Jimmy Choo, which tended to have slightly older customers, mainly due to the pricing of the product.

But accessories, in particular, handbags and small leather goods, really are a way to engage with consumers that someone want to buy something as small as a little coin purse or they might want to have something like a cross-body or they might want to step up to a more expensive handbag itself.

So we really have many more entry points for the consumer to really engage with the 3 different brands. And I think we've got incredible people, whether it's the main fixes of our brand campaigns or the influencers that we're using to engage with us.

So I think it was probably the best -- most healthy quarter for us in terms of how we saw the consumer coming in across age and income across all 3 brands. And again, I just want to congratulate all of our teams at Versace, Jimmy Choo and Michael Kors for their extraordinary effort.

And also one other thing to remember, that's all not digital, many of these consumers are engaging with us at the store. So the way that we are also looking at our clienteling platforms, and that's been a huge success for the company. So when we talk about omni, getting recruitment from people at the store level, local level, is as important for us and sometimes even more than at the digital level.

So again, really, really happy about that. I'll turn it over to Tom.

[Thomas Edwards, EVP, CFO & COO]

Sure. Erinn, regarding the impact of the stimulus and what's included in our expectations, in the past, the stimulus has come on. And then there have been gaps in it. We've seen momentum only improve with our brands.

So if you look across the quarter sequentially compared to the pre-pandemic levels, we've seen great sequential improvement even when there was or wasn't a stimulus impact. What we're seeing now is the consumer, we believe, is fundamentally healthy and the demand for our brands remains very, very strong and robust.

So as we enter into Q4, our trends are in line with Q3. We're bringing in new consumers, and that's an important fact as well that will help shore uplift the demand and the continued success of our brands. And all of this is incorporated in our expectations. So it is incorporated in the guidance that you've seen for both Q4 and the quarters next year.

[Operator]

Our final question today is coming from Simeon Siegel from BMO Capital Markets.

[Simeon Siegel, BMO Capital Markets]

Congrats on the ongoing strength. It's a really nice job, and welcome to the call, Josh. Great to have you here. So just 2 quick ones for me.

Really fantastic AUR growth. We've been seeing that. Your comments about ongoing opportunity are also really encouraging. So just any view on the order of magnitude opportunity there?

And then, Tom, I know we talked about the go-forward inventory. Can you just quantify what the in-transit inventory was within the embedded balance now? Maybe thoughts on the timing of that product? And just so we know what is the in-transit inventory, so just whether we should think about whether there are concerns over any late received seasonal goods or just anything along those lines?

[John Idol, Chairman & CEO]

I'm going to grab Versace and Jimmy Choo, and then turn it over to Josh for Michael Kors. We're seeing very strong AUR growth at Versace, and that's really driven by the accessories business and the full price selling and sell-throughs that are happening in that business.

So AUR growth quite significant at Versace, and it's really driven by those 2 things. Accessories and much, much better full price sell-throughs because we're not over relying on ready-to-wear, which always has higher markdown rates. Number one.

Number two, Jimmy Choo, we talked about price increases. We're putting those -- have been putting those in place and more to come. The brand has been underpriced, if I can say that, versus what the consumer perception is. And we've seen absolutely no consumer resistance to any of the price increases that we take -- have taken, and there will be more as well. So we feel really good about what's happening at the AUR level at both of these companies.

I will also say to you that Versace will begin to take price increases. We had certain target levels that we wanted to be at with Versace, which were competitive with certain luxury competitors. All the luxury industry is raising prices. And we will talk to you more about this at Investor Day, but we'll be positioning Versace at a higher price point than where it is today, which should long term bode well for the gross margin of the company.

I'll turn it over to Josh for Michael Kors.

[Joshua Schulman, CEO, Michael Kors, Inc.]

So in terms of AUR for Michael Kors, as we noted, we've seen consistent AUR growth in the high teens, specifically in the holiday quarter. And I think it's important to note that, that was led by North America, which typically has been a more promotional environment.

And as Tom said, we're not lapping those promotions. And so that has translated into very robust AUR growth. And it has -- my hats off really to the North America team because it's giving everybody confidence, understanding that the consumer is willing to pay for the brand. And the brand is demonstrating pricing power. So you'll continue to see more emphasis on price increases and a specific focus on the best category as we think about the good, better and best opportunities within each classification.

[John Idol, Chairman & CEO]

And to add on to what Josh just said, I want to be clear about one thing. We're not just taking price increases, we're improving quality. We're adding more to design. And truthfully, as we go back and look historically, we used to sell much higher handbags, in particular, in the company over the years.

And so we're just going back to where we were before. And wherever we were over the past few years, we don't think that's the right positioning for this company long term. So not only will prices go up, but it's really going to be the positioning of the product itself, which I think is really important for everyone to understand.

Tom, do you want to just finish up on the inventory? And I'll give some closing remarks.

[Thomas Edwards, EVP, CFO & COO]

Sure. Happy to. So Simeon, with regard to in-transit, it significantly increased. It was over 2.5x the prior year level. And what that resulted in was our on-hand inventory overall for the company was around the same level it was in the prior year even though sales were increasing. And that is even more challenging in certain areas, like Michael Kors in North America, which, of course, as John mentioned, that we were not meeting our consumer demand.

So as it regards to receipts, we want to make sure we're getting the product in, and that's -- a result of that is the higher cost and supply chain that we noted over the next few quarters. And we believe that will help us meet consumer demand. At the same time, we do expect in-transits to be higher. Inventory, over the next few quarters, as I mentioned, would be significantly higher through spring. A portion of that will be in-transit, and that will be in the normalized past that time.

[John Idol, Chairman & CEO]

Thank you, Simeon, and thank you, Tom and Josh. So first and foremost, again, I'd like to welcome Josh to the team. He's been here for 5 months. And I think the future is bright under his leadership at Michael Kors and ultimately for Capri. So again, Josh, welcome to the team.

And lastly, I'd like to conclude by saying we were very pleased with our third quarter results. We believe that fourth quarter is also starting off on similar trends. So we see the health of the consumer continuing. And we are -- as we had indicated in our outlook, this will be the highest level of revenues in the company's history this year. As well as at $6 a share, the highest level of earnings per share growth significantly from where we have been historically.

So I think this company is really positioned for significant future growth, and we look forward to sharing more about that at our Investor Day in June. Thank you very much for joining us today.

[Operator]

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.