Capri Holdings Limited (CPRI) Q2 2022 Earnings Call Transcript

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Capri Holdings Limited (CPRI 1.62%)
Q2 2022 Earnings Call
Nov 3, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the Capri Holdings Limited Second Quarter 2012 to Earnings Conference Call. [Operator Instructions]

It is now my pleasure to introduce your host, Jennifer Davis, Vice President of Investor Relations. Thank you, Mrs. Davis, you may begin.

Jennifer Davis -- Vice President

Good morning everyone and thank you for joining us on Capri Holding Limited, Second Quarter Fiscal 2022 Conference Call. With me this morning are Chairman and Chief Executive Officer, John Idol and Chief Financial and Chief Operating Officer, Tom Edwards. Before we begin, let me remind you that certain statements made on today's call may constitute forward-looking statements, which are subject to risks and uncertainties that could cause actual results to differ from those we expect. Those risks and uncertainties are described in today's press release and in the company's SEC filings which are available on the company's website. Investors should not assume that the statements made during this call will remain operative at a later time and the company undertakes no obligation to update any information discussed on the call.

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 impairment, 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 there earnings release posted on our website earlier today at capriholdings.com. Now I would like to turn the call over to Mr. John Idol Chairman and Chief Executive Officer.

John D. Idol -- Chairman and Chief Executive Officer

Thank you, Jennifer, and good morning everyone. Looking at Capri Holdings momentum, as the world continues to recover from the pandemic, we are encouraged by the progress of all three of our luxury houses. Versace, Jimmy and Michael Kors are all resonating with consumers, as evidenced by the 11 million new customers added across our databases over the last year. During this time, we have continued to see revenue growth and margin expansion above our expectations, reflecting the successful execution of our strategic growth initiatives. We are extremely optimistic about our future growth potential and believe the company is emerging from the pandemic stronger than ever. Capri Holdings success is a testament to the strength of our brands as well as the dedication, resilience and agility of our entire team across the globe.

Now turning to second quarter results. Capri Holdings revenue, gross margin, operating margin and earnings per share all exceeded our expectations. Total revenue in the quarter increased 17%, reflecting better than anticipated results at all three brands. E-commerce increased double digits, building upon significant gains achieved last year. Additionally, gross margin expanded 440 basis points reflecting increases across all three of our luxury houses. Operating margin of 18.5% was significantly above our expectation. As a result, earnings per share of $1.53 was better than anticipated. Looking at Group revenue trends by geography. Revenue growth continued to exceed our expectations in the Americas and would have been even stronger if not for inventory constraints. Consumer demand for our brands was healthy and benefited from an increase in social gatherings. In EMEA, revenue trends were also above our expectations with growth across all houses.

We saw a strong momentum driven by robust domestic consumer demand as stores in the region reopened and vaccination rates increased significantly. In Asia, revenue was flat due to COVID 19 related restrictions, in Japan, Southeast Asia and Australia as well as an increase in COVID cases in China, which resulted in new travel and other regional restrictions. However, revenue in Mainland China increased during the quarter even with greater restrictions. Now turning to second quarter performance by brand. Starting with Versace results, significantly exceeded our expectations once again. Revenue increased 45%, demonstrating the strength of the brand and the success of our strategic growth plan. At the core of these strategies is the bold and fearless design vision of Donatella Versace. Vision is based on Versace iconic Italian heritage and unapologetic glamour. Versace has created three very powerful iconic pillars with, Virtus, La Medusa and the launch of our new La Greca Signature pattern in September.

La Greca is Donatella's modern interpretation of Versace classic Greek key motif which Gene first introduced in 1988. The signature pattern illustrates Versace's rich history and the brand's ability to draw from the past, to create innovative designs for the future. La Greca is off to a very strong start and is reflected across all product categories including accessories, footwear, ready to wear and jewelry. We continue to believe the signature pattern will accelerate the trajectory of Versace's revenue growth as our third iconic pillar. Women's accessories continued to perform well as retail sales increased strong double digits. With our three iconic pillars, we are confident in our ability to position Versace as a leading luxury leather house. We are making significant progress in our goal to expand accessories revenue to $1 billion over time. Looking at footwear. We are gaining authority as a women's footwear brand and have begun to build out our core offerings focused on our iconic codes.

In the second quarter, women's footwear sales at retail increased double digits. Additionally, we saw strength in men's and women's ready to wear with retail sales up double digits. Versace's bold and fearless designs were positively received by consumers and we saw an especially strong response to the new La Greca signature pattern when it launched in September. We also continue to expand our core lines, which incorporate iconic house codes to increase sales and broaden Versace's reach. Moving to brand awareness and consumer engagement. Versace's fall campaign featured global superstar Dua Lipa as she introduced the new La Greca collection. The pop icon [inaudible] the Versace brand with her impeccable style, fearless attitude and universal appeal. Dua Lipa has over 125 million followers on her social media accounts. Additionally, Versace generated widespread acclaim and media coverage during Milan Fashion Week. First, Dua Lipa opened and closed the Versace luxury spring-summer 2022 show in her runway debut. The show generated over 41 million views globally. Then, in a Momenta's conclusion to Milan Fashion Week, Versace and Fendi, two iconic Italian fashion, luxury houses came together with a joint Fendace show.

The houses debuted a Versace collection designed by Fendi's artistic director Kim Jones followed by Fendi's collection designed by Donatella Versace. The swapping of design roles presented a unique moment in fashion. The Fendace show generated over 17 [inaudible] globally. We believe this collection will generate significant revenue and increase brand awareness for both Fendi and Versace. As a result, Versace was the top engaged Italian fashion brand on social media during Milan Fashion Week. During the quarter, Versace continued to adone the world's most famous celebrities. The axialite presence at the Met Gala it was extensive with Donatello dressing celebrities including Lil Nas X, Stephen Curry, Maluma and Channing Tatum. These powerful initiatives among others help to drive a 26% increase year-over-year and Versace's global database. Overall, Versace's second quarter results. Speak to the strength of the brand and reinforce our confidence in the luxury houses long-term growth potential.

Versace's revenue and margin are outpacing our expectations as the brand's momentum remains incredibly strong. We now have the key building blocks in place to realize the full potential of this amazing brand and our more optimistic than ever about Versace's future. Moving to Jimmy Choo. Results were ahead of our expectations with revenues increasing 12% as we continue to execute against our strategic initiatives. At the core of these initiatives, is the design vision of Sandra Choi. Sandra's vision is inspired by Jimmy Choo inherent glamor, confidence and bearing attitude. We are successfully translating these brand codes into the foundation of Jimmy Choo's key product strategies focused on expanding the accessories and growing both formal and casual footwear. In accessories, we were pleased with the progress as second quarter revenue increased double digits. Accessory sales were driven by continued focus on our three key hero handbag families of [inaudible] which were updated for fall with rich seasonal colors and lavish textiles. We have been seeing a return to glamor with evening bags performing very well. Footwear sales also increased double digits in the quarter, driven by a recovery in the formal footwear style as people are returning to work, attending events and enjoying special occasions.

Within foot and casual footwear we have been seeing a shift to more embellished styles. In terms of brand awareness and consumer engagement. We are excited to feature Hailey Bieber as the face of Jimmy Choo's new bold autumn 2021 campaign, Time to Dare. [inaudible] daring and confidence [inaudible] spirit that is the core of the brand's DNA. Hailey has over 40 million followers on her social media accounts. [inaudible] in person events, Jimmy Choo's presence on the red carpet was extensive. A few of the many [inaudible] Lopez, Dua Lipa, Hailey Bieber, [inaudible] and Nick Cannon. Our engaging marketing combined with glamorous product help contribute to a 17% year-over year increase in Jimmy Choo's [inaudible]. Overall, Jimmy Choo's double-digit revenue growth in the second quarter reinforces our confidence in the luxury houses future growth potential. Now turning to Michael Kors. Results were also ahead of our expectations with revenue increasing 11% as we continued to execute against our strategic initiatives. These initiatives are centered on Michael's optimistic design vision, which is based on timeless fashion and just glamor. Looking at Michael Kors key product strategies, we are focused on three growth pillars.

First, capitalizing on Signature, second, growing MKGO our active collection and third, expanding our men's business. We believe both MKGO and men's represent incremental revenue opportunities that will bring new customers to the brand. Now let me discuss the continued progress we have been making with our initiatives. First, Signature is a core growth strategy and we plan to increase this classification to 50% across all product categories. Signature has become an important foundation and driving force behind revenue growth in every region globally. As we have been building out the signature classification, it has been generating a higher AURs and gross margin expansion. In the quarter, overall Signature presented 39% of the assortment, compared to 32% last year and drove sales across all categories. In accessories, Signature penetration was even greater. Accessories retail sales increased double digits globally as consumers responded to our iconic Signature styles energized by flashes of color and fresh updates [inaudible]. Turning to MKGO. Consumers reaction to the newest launch of MKGO has exceeded our expectations across all product categories. For the fall, the MKGO line features our Signature MK-print with parts of orange and logo taping. We are attracting new and younger consumers with the innovative product amplified by a powerful 360 degree communication strategy.

We continue to believe that MKGO has an incremental $250 million revenue opportunity. That is a true product extension not cannibalizing our existing businesses. Looking at men's second quarter retail sales increased double digits globally as we focus on timeless essentials with a modern edge. Accessory sales were strong, driven by Signature. We continue to believe that men's represents an increment billion dollar revenue opportunity. Now turning to brand awareness and consumer engagement. Before, we continued our highly successful, The eye Must Travel campaign featuring Bella Hadid. The campaign returned to New York with a speed, energy and optimism of the city is always an inspiration for Michael. During New York Fashion Week, Michael Kors was one of the top engaged brands on social media. Following Michael's highly successful 40th anniversary show, the spring-summer 2022 fashion show was his first live runway show since the pandemic began. [inaudible] in New York City's landmark covered on the green in Central Park the show highlighted Michael's fashion innovation, which reflected urban enrollments.

The show generated over 23 million views across social media platforms. The brand's presence at the Met Gala was also extensive with Michael addressing celebrities including Shawn Mendes, Camila Cabello, Kate Hudson and Regina King. In [inaudible] we continued our extensive marketing initiatives, including the launch of Club KORS an interactive brand experience that fuses fashion and music. Unfilled, high energy event was held at the Chengdu open-air music park and featured festival attractions and live musical performances. The star-studded lineup included performances by several of China's top artist and Michael KORS brand ambassador Wang [inaudible]. To extend the experience across China Michael Kors hosted the Club KORS takeovers at nightclubs in Shanghai and Downtown Chengdu where guests, were able to watch the concert live stream. Club Kors live stream reached over 75 million viewers. In addition, Club Kors took over Michael Kors Tmall flagship store with the interactive experience to tour the venue virtually. We believe this help fuel Michael Kors most successful Tmall Super Brand Day. These marketing initiatives continue to highlight our brand pillars of speed energy and optimism.

This helped contribute to a 21% year-over-year increase in Michael Kors global database demonstrating the continued strength and desirability of the brand. Overall, we are thrilled with Michael KORS brand momentum and strong margin performance in the second quarter. The strategies we put in place over the past two years have been generating higher consumer engagement as well as attracting new and younger consumers. Our jet set vision focused on speed energy and optimism across product innovation, brand engagement and customer experience, is clearly exciting consumers. Additionally, we are continuing to elevate the brand positioning at Michael Kors which is driving higher profitability. The strong consumer demand for the brand supports our tremendous enthusiasm for Michael Kors future growth opportunity. In total, Capri Holdings second quarter results exceeded our expectations. Demonstrating the power of our three luxury houses and the execution of our strategic initiatives. Consumer desire for Versace, Jimmy Choo and Michael Kors remains strong and we continue to grow revenue as well as expand gross margins. Given this momentum, we are raising full year revenue and earnings guidance even with the ongoing supply chain and COVID 19 related challenges.

Looking forward, based on the strength of our brands and the success of our strategic growth initiatives. We remain confident in the company's ability to deliver multiple years of revenue and earnings growth. Now, before turning the call over to Tom, I would like to take a moment to welcome Josh Schulman to Capri Holdings. I have had the pleasure of knowing Josh for many years. He is an outstanding leader with broad industry experience and proven track record of successfully operating and growing global fashion, luxury brands. We do not believe we could have found a better leader and are thrilled to have him join our team. Importantly, Josh's appointment as part of a thoughtful leadership succession plan. Over the next year, Josh will serve as CEO of the Michael Kors brand positioning to CEO of Capri Holdings in September 2022. At that time I will assume the role of Executive Chairman. My focus will be on our company's long-term strategy, future potential luxury acquisitions and providing overall leadership to the Board of Directors.

The Board and I are confident in George's unique abilities to guide Capri Holdings through our next phase of growth. In the two months since joining Capri Holdings, Josh has begun to engage with the Michael Kors teams across the globe. He is rapidly immersing himself in the business and learning all facets of the brand. We look forward to his participation on our next earnings call when he can share his thoughts on Michael Kors future growth opportunities. Now, let me turn the call over to Tom.

Tom Edwards -- Chief Financial and Chief Operating Officer

Thank you, John and good morning everyone. Starting with second quarter results. Revenue of $1.3 billion increased 17% versus prior year exceeding our expectation. Performance was driven by better than anticipated results across all three of our luxury houses. Michael Kors revenue growth would have been even stronger if not for inventory constraint which were driven by greater than anticipated, supply chain delays and extended factory closures. Net income was $235 million, resulting in diluted earnings per share of $1.53. This was above our expectation, [inaudible] better than anticipated revenue, gross margin and operating margin as well as a lower tax rate. Looking at revenue by channel, total company retail sales increased approximately 20%. These results were driven by robust e-commerce and store sales both of which increased double-digits. Wholesale also grew but at a lower rate. By geography, revenue remained strong and above our expectation in the Americas and EMEA, increasing 20% and 25% respectively versus prior year. In Asia, revenue was approximately flat with the continued restrictions in Japan, Southeast Asia and [inaudible] as well as new travel and other regional restrictions in China.

However, revenue in Mainland and China increased during the quarter even with the greater restriction. Turning to revenue performance by brand. Versace revenue was $282 million, a 45% increase to prior year and above our expectations. Global sales in our retail channel increased over 30% with strong double-digit increases in both e-commerce and store sales. By geography, total revenue in the Americas increased approximately 80%. Revenue in EMEA increased approximately 50% and revenue in Asia increased 4%. Versace ended September with a global luxury fleet of 211 retail stores, a net increase of 5 from prior year. For Jimmy Choo revenue was $137 million, a 12% increase to prior year and above our expectations. 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 20%, revenue in EMEA increased 15% and revenue in Asia was approximately flat. Jimmy Choo ended the quarter with a global fleet of 237 retail stores a net increase of 10 from prior year. At Michael Kors, total revenue was $881 million an 11% increase to last year and above our expectations. Revenue growth would have been even greater if we had more product available to meet consumer demand.

We estimate inventory constraints at a mid-single digit impact on Michael Kors second 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 also increased over prior year, but at a lower rate. By geography, total Michael Kors revenue in the Americas increased 13% and revenue in EMEA increased 16%. Revenue in Asia decreased 3% reflecting the more extensive regional restrictions. Michael Kors ended the quarter with a global fleet of 823 retail stores, a net decrease of 5 from prior year. Now, looking at total company margin performance. Gross margin expanded 440 basis points to 67.6%, 390 basis points above our expectations. We were pleased to achieve gross margin expansion across all three of our luxury houses. This improvement primarily reflected increased full price sell-throughs and select price increases at Jimmy Choo and Michael Kors.

Operating expense as a percent of revenue was 49.1% compared to 46.8% last year. On an absolute basis, operating expense increased approximately 23% or $119 million versus prior year. This increase primarily reflected higher variable expenses, reinvestments in our business and the unfavorable impact of foreign currency exchange rates, as well as lapping prior year COVID related savings. Total company operating margin of 18.5% was 550 basis points above our expectations. Primarily driven by better than expected gross margin expansion, as well as expense leverage on higher than anticipated revenue. All brand operating margins exceeded our expectations. At Versace operating margin expanded 920 basis points to 19.5%. At Jimmy Choo, operating margin was 0.7% and then Michael Kors, operating margin was 25%. Our tax rate for the quarter was 3.7% compared to 20% last year. The lower rate primarily reflected a discrete item associated with the COVID related tax change in Italy.

As a result, we were able to release a portion of our deferred tax liabilities in the country. Now turning to our balance sheet and cash flow. We ended the quarter with cash of $234 million and debt of $1.1 billion, resulting in net debt of approximately $900 million. Total liquidity at the end of the quarter was $1.3 billion. During the quarter, we repaid approximately $200 million of debt as well as repurchased approximately $100 million of shares. Additionally, our Board has authorized a new $1 billion share repurchase program. This demonstrates the strength of our free cash flow generation and balance sheet providing additional capacity to return cash to shareholders over the longer term. Looking at inventory, we ended the quarter with $866 million, down 7% compared to prior year. This is lower than we had expected giving greater than anticipated supply chain delays and extended factory closures, which constrained our ability to deliver higher revenue. Compared to our initial expectations, transit times increase even more during the quarter.

In addition, factory closures in Vietnam extended significantly longer than anticipated, further impacting our inventory position. Well, factories have reopened and it will take some time before they return to full capacity. Going forward, we expect to build inventory to support sales growth over the remainder of the year. Now turning to guidance. Looking at the full year fiscal 2022, we are pleased to be raising guidance based on the underlying strength of our business. This updated guidance incorporates the greater than expected industry wide supply chain challenges including factory closures and extended transportation delays. These headwinds constrained revenue growth in the second quarter and are expected to continue for the near future. In addition to delays, we now expect the supply chain situation to result in nearly 200 basis points of higher expenses, relative to our prior forecast in the back half of the year. However, the success of our strategic initiatives is currently offsetting these headwinds, therefore, enabling us to raise our revenue margin and earnings outlook. For fiscal '22, we now forecast Capri Holdings of approximately $5.4 billion, above our prior guidance of approximately $5.3 billion reflecting the better-than-anticipated second quarter performance, as well as an increase in our 3rd-quarter outlook.

Full year, our guidance assumes Versace revenue of approximately $1.06 billion, Jimmy Choo revenue of approximately $575 million and Michael Kors revenue of approximately $3.765 billion. For the year, we now expect approximately 250 basis points of gross margin expansion. This reflects greater than anticipate benefits from our ongoing strategic initiatives including stronger full price sell-throughs and select price increases, which more than offset the higher than previously expected supply chain costs as well as the removal of remaining GSP savings. Given the delay in approval of GSP, we have removed it from our Fiscal 2022 forecast. Turning to operating expenses, we've continued to forecast operating expenses of approximately 2.6 billion. As a result, we now expect the full-year operating margin of approximately 18% above our prior guidance of 16%. For Versace, we now anticipate an operating margin in the mid-teens range. For Jimmy Choo, we now expect a slightly negative operating margin and for Michael Kors, we continue to anticipate an operating margin in the mid 20% range. Turning to our expectations around certain non-operating items.

We now anticipate net interest income of approximately $10 million, an effective tax rate of approximately 17% and weighted average shares outstanding of $154 million. As a result, we now expect to generate diluted earnings per share of approximately $5.30 for fiscal '22. Turning to our 3rd quarter guidance, we anticipate total company revenue of approximately $1.46 billion. We forecast Versace revenue of approximately $235 million, Jimmy Choo revenue of approximately $145 million and Michael Kors revenue of approximately $1.08 billion. We now anticipate our 3rd quarter operating margin will be approximately 20%. This reflects gross margin expansion with the benefits of our ongoing strategic initiatives, more than offsetting approximately 200 basis points of higher supply chain costs relative to our prior forecast in the quarter. Operating margin also includes, incremental investments in marketing, e-commerce and regional growth initiatives to support revenue growth.

For Versace, we anticipate an operating margin in the low double-digit range. As a reminder Versace reports on a one-month lag and the 3rd quarter does not include December the single most profitable month in the year. For Jimmy Choo, we expect an operating margin in the negative mid single digit range and for Michael Kors we anticipate an operating margin in the high 20% range. Turning to our expectations around certain non-operating items, we forecast net interest income of approximately $4 million, an effective tax rate of approximately 14% and weighted average shares outstanding of $154 million. As a result, we expect diluted earnings per share of approximately a $1.65. In conclusion, we are pleased with our second quarter results and the strong momentum of the business. Particularly in the phase of greater supply chain challenges. This performance reflects the strength of our fashion, luxury houses in the execution of our strategic initiatives. As the world emerges from the pandemic, we remain confident that our three brands, Versace, Jimmy Choo and Michael Kors, positions Capri Holdings to achieve meaningful long-term revenue and earnings growth. Now, we will open up the line for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Kimberly Greenberger with Morgan Stanley. Please proceed with your question.

Kimberly Greenberger -- Morgan Stanley

Okay, great. Thank you so much. Congratulations on the great momentum in your business. And obviously as you indicated, John and Tom, the inventory constraints, particularly at the Michael Kors brand presented, I think even greater sales momentum. I'm wondering if you can just talk to us about the ability to get back in stock and when do you think you'll have an opportunity to get sort of into an inventory position at the Michael Kors brand that you feel is a really good inventory in-stock position and any worries or concerns as we head into the holiday season about any particular categories or areas where you feel like you wish you had a little bit more inventory?

John D. Idol -- Chairman and Chief Executive Officer

Good morning Kimberly and thank you for joining us in that question. I'm going to apologize to everyone on this call. Unfortunately, there is some construction going on on the floor above us, so we're going to have a little bit of a COVID situation where we can't control some hammering, I apologize. As it relates to inventory, are divided into two. I'll talk about kind of the current situation holiday and then I'll let Tom take on the longer-term perspective. First off, we are extremely pleased with how our results turned out for the quarter across all three of the luxury houses and obviously in particular Versace was really extraordinary. And we continue to believe that the strategic initiatives that we put in place at Versace, Jimmy Choo and Michael Kors, if you recall when the pandemic broke, one of the first things we said is we weren't going to change what are our strategic initiatives were. In fact, we were going to continue to really focus on those as our guiding lights. So I think that's proving to be a smart decision on our part and our executive teams around the world and I want to applaud them because they are all really implementing the great results that we're having.

As it relates to inventory, the biggest inventory issue is at Michael Kors, and it is global because the supply chain issue is one that is quite challenging predominantly, with shipping product around the globe. So it is not just a North America issue, it's impacting us in all regions of the world, and let's just first start with the timing piece of that. That has clearly added somewhere between 45 and 60 days onto our deliveries on a global basis. Sometimes a little bit more than that. And then of course we had the issue with Vietnam shutting down, which we did not anticipate in our planning which we couldn't have and that has, [inaudible] reopened, it's going to take time for these factories to reach full capacity and then get back into a cadence that will really feel our supply chain needs. So, I would say that we go into the 3rd fiscal, 3rd quarter calendar 4th quarter with lighter inventory than we would have liked to have had.

And that being said, you can see by our forecasts, we've raised our guidance, and what we're seeing is, we're just selling through the products that we have, the customer demand is absolutely outpacing what our inventory is. One of the, if you can call it saving and I talked about this last two calls, is we took a position some time ago to reduce our promotional cadence regardless of what our competitors are doing around us and stuck to that and EURs were higher and our conversions are higher and all of that is turning into higher revenues at higher gross margins, which is flowing right through to the bottom line. So, I think we feel that we will meet our expectations for the holiday season. I would say the consumer is quite strong, not just in North America, but in Europe and even in Asia. In Asia, the bigger issue is just, that kind of the starts with COVID that are continuing to happen in that region. Although it does seem to be in Japan, which is one of our largest regions in Asia starting to kind of mitigate itself and hopefully we'll see a more normalized return over the balance of this quarter and certainly into our fourth quarter and so we're encouraged by what we think will begin to happen in Asia, as we've seen in America and in EMEA.

So as it relates to holiday, we will not be in the inventory position that we would have wanted to be in. That being said, we do have inventory that we believe is going to really generate the revenues that we forecasted and meet the consumer demand that we're going to be able to service given the inventory levels we have. Additionally, we've flown merchandise here, knowing that there was a delay. As I said, between 45 and 60 days and so we've got inventory here in the right places, in the right holiday gifting categories in particular. So I think we feel good about that. And Of course, Versace and Jimmy Choo have been less affected by this for a variety of reasons. So we feel that we're in a very good inventory position with both of those brands. So we're looking forward to a very robust holiday season really with the backdrop of the consumer is healthy, that the consumer is out and engaging in social activities and we think that they're going to be looking forward to really strong gift giving and enjoying parties with their families. Let me now turn it over to Tom to talk about that a little bit longer-term question, as it relates to supply chain.

Tom Edwards -- Chief Financial and Chief Operating Officer

Sure. So as we look at the longer term, Kimberly, we do expect these delays to continue into fiscal 2023. We don't believe very short-term issue, but longer term, we do believe the situation will begin to normalize. In the meantime, we are working on a number of initiatives, and John mentioned some around holiday and hearing some product over but also other initiatives to help mitigate the situation in terms of how and where we produce ocean shipping methods and strategic contracting with our carriers. As we look at the rest of this year, we do expect to be building inventory for Michael Kors and the group overall as we work through this situation. So we don't believe the factories will continue to be the immediate issue, they have reopened and are building capacity, but we do believe the extended delays will continue. Turning the prepared remarks. This is a 200 basis point impact versus our prior expectations in the back half, and it's really the power of our three brands that is allowing us to offset this. So, it's great consumer desire and we have the continued ability to offset these costs with pricing increases.

John D. Idol -- Chairman and Chief Executive Officer

Yes, on the last note. Kimberly, as you know, we started to raise prices about two years ago, in particular in Michael Kors and just recently started at Jimmy Choo. And that was something we were doing regardless of the supply chain situation. So we've been able to mitigate cost just because that was a strategy that we had and I've said in previous calls, we're going to continue to do that. Michael Kors is going to become more expensive and we think that's the right positioning for our brand and that will be a strategy regardless of whether there was a supply chain issue or not. Okay, thank you very much, Kimberly.

Kimberly Greenberger -- Morgan Stanley

Thank you so much.

Operator

Thank you. Our next question comes from the line of Ike Boruchow with Wells Fargo. Please proceed with your question.

Ike Boruchow -- Wells Fargo

Hey, John and Tom, congrats. And, Josh, if you are there, welcome. I guess, John, it's a good question to ask, but I think, four months ago you gave us some building blocks for next year, I believe it was $5.9 billion and a 16.5 margin. You're already well above that, the 16.5 on a much lower base of revenue. So I know you're probably not going to want to get into specifics on next year. But can you kind of walk us through how do we think about the business from here or should there be a step down in margin or are you kind of creating a new base for the overall business as you guys continue to outperform?

John D. Idol -- Chairman and Chief Executive Officer

Good morning and thanks for the question, Ike. I think it's too early for us to really be talking about our fiscal 2023 projections. Obviously, we are exceeding our 2022 projections and forecasts, which gives us obviously, again, a real foundation to continue to build upon where we are today. I think the one area we feel comfortable in talking about, we've said it on previous calls, is we do believe our gross margins will expand approximately 100% over what Tom gave for our annual guidance. So we feel confident in saying that that is the objective that this company feels that we will achieve. Again, I just think it's early to be talking about where we will land in revenues and even more importantly operating margin because, as I said in the last two calls, we're going to continue to invest in particular in marketing and other initiatives in the company, which will drive revenues and if we drive revenues and we have substantial operating process that will drive EPS and we think that in particular Versace and Jimmy Choo have a long, long way to go in terms of their growth.

So we don't want to under-fund those businesses. And then additionally, Michael Kors, clearly the consumer is engaging with our brand. When you look at the database growth of 21%, it's really showing that we are attracting a new customer, a younger customer, and we are engaging with existing large customers at a rate that we've never seen before. So we want to invest with Michael Kors as well. So I think again, it's a little early for us to be discussing that, but clearly we are doing better than we had. We think that that bodes well for a setup, for our fiscal 2023. Thank you, Ike. Thanks. I'm sorry, I was going to make sure I was clear, it was gross margin of 100 basis points increase. I apologize, I might have said the wrong thing. The gross margin, 100 basis point increase. Thank you, Ike.

Operator

Thank you. Our next question comes from the line of Omar Saad with Evercore. proceed with your question.

Omar Saad -- Evercome

Thanks, good morning. I'll add my congratulations to great results. Maybe you guys could talk a little bit more detail about how the e-com and digital business is trying to some of your key priorities there and initiatives and how you expect that to progress as the stores continue to reopen and the role that digital and e-commerce play for your brands. And then also maybe if you could give us an update on watches, I'd appreciate it, thanks.

Tom Edwards -- Chief Financial and Chief Operating Officer

Certainly. Thank you, Omar. What's been quite interesting is even as we've opened our stores, our e-com business continues to grow and it's shown sequential improvement, which is really not exactly what we thought would have happened which is exciting. And again, I think this is just coming from us really building our database and acquiring new consumers who are new to the brand. Many of those are younger consumers and they're more digitally native. That being said, we're seeing store traffic sequentially improve, it's getting better every single week as people are returning to shopping as a way to have fun and a way to be social. As matter of fact, Josh and I were in Roosevelt Field shopping mall yesterday at 12 o'clock in the afternoon and we couldn't believe how many people were in the mall, which is quite exciting to see. And I think we feel confident that stores will continue to return as a very important core part of our business and with our digital tactics, our marketing tactics, our ability to communicate with our existing customers and our large customers. I think we feel very strongly that the day that the e-commerce business will continue to grow at a very, very fast rate.

And again, you've seen that across all three of our brands and we're absolutely focused on that. We believe it's not only a revenue opportunity for the company but we think it's one of the single most important parts of our marketing is how we're communicating to our consumers digitally. Both of those are consumers. We want to acquire, as well as consumers that we have with us today. As it relates to watches, again, we're very pleased the watch business continues to grow. It's not growing at the same exact rate, it was when we saw that huge kind of jump during COVID but it's still growing very nicely and we see again many new customers coming into the store, they have never owned a Michael Kors watch before. Our business has gotten also very strong in our department store channels with watches as well. So it's a category that we're pleased is returning to growth.

John D. Idol -- Chairman and Chief Executive Officer

And in terms of investments in digital and e-commerce, Omar. We're making significant investments in digital analytics and expanding our capabilities across our brands company as well and looking at the e-commerce platforms. Also looking at common state of the art platforms and new tools and capabilities across all three of our brands. Of course this extends into omni where we'd spoken about clienteling before and the expansion of Versace's omni capabilities for instance. So this is a very, very key focus area for the company. Thank you, Omar.

Omar Saad -- Evercome

Thanks, Tom. Thanks, John.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Oliver Chen with Cowen Company. Please proceed with your question.

Oliver Chen -- Cowen

Hi. The Michael Kors signature print execution has been very innovative. What do you see happening there? And as you think about price increases, how would you balance offering the consumer strong value against where you see opportunity and I would also love a quick update on Versace amends and hand back penetration, you've made a lot of good strides there as well. Thank you.

John D. Idol -- Chairman and Chief Executive Officer

Thank you, Oliver. As it relates to our price increases at Michael Kors, as I've said to you our previous calls we were underpriced as it relates to our brand on a global basis. So we are rectifying that situation and we may end up being higher than competitors over time because we think that Michael Kors is led by the demand, he's a luxury runway designer. We are carried in the finest stores in the world, we are located in the finest locations in the world and we think that our brand needs to move more into the luxury space. So for us, value is created not only just in the price product relationship, but also in how the brand is perceived and how we create the brand engagement with consumers. So again, I think you will continue to see us move in that direction and I've said that we will raise prices all through the balance of next calendar year and we'll see how the consumer responds to that. And if we see good response, then we'll carry on with that philosophy on a go-forward basis. So, Michael Kors is clearly going to continue to move into the luxury category.

Signature, as we've said we want it to be about 50% of the total business inside of the company. Were on a perfect trajectory to get there. That gives us an opportunity to create higher EURs, because we take less markdowns in those areas, it's reduced the amount of fashion below that we've had into the stores, we still create fashion around Signature but it's just not at the same pace that we were doing previously. We obviously shrunk the line sizes during COVID and that seems to have been no issue as it relates to the consumers desirability for our product. And so we see that going on very steadily going forward. And then, in terms of Versace men's, obviously it's a huge part of the Versace business and in fact the largest part of the Versace business when we bought the company. I think we've done an amazing job and I thank the entire team there for their initiatives, of course led by Donatella. We are, starting to become a larger women's business, than we are a men's business and that's only natural, that's where the company should be versus where it was historically. In terms of leather goods, we are much further along in terms of our development, we now have three very strong pillars with La Greca, Virtus and La Medusa.

We did not think that we would be sitting here at this moment in time, saying that we have three very strong accessories offerings for the consumer and that they would be responding in the way that they are. In fact, in some of the cases of Versace we also ran low on merchandise and that was just sell out being much quicker than we had anticipated. So we think that that really bodes well for our ability over the long term to have Versace lead as a leather good house and reach $1 billion of its revenues in leather goods. Thank you, Oliver.

Oliver Chen -- Cowen

Best regards.

Operator

Thank you. Another question comes from the line of Matthew Boss with JPMorgan. Please proceed with your question.

Matthew Boss -- JPMorgan

Great. Congrats on a nice print. Maybe John, as we can [inaudible] a potential structural changes post pandemic. A couple of things I guess any change you're expecting in the overall growth for term, for handbags and accessories. Do you see any constraints to a full recovery of your travel business over time? And then Tom if we tried our best to isolate the higher penetration of e-commerce, which I know is higher margin, is there any way to think about this piece alone. What you think this structurally adds to the company's margin profile post pandemic?

John D. Idol -- Chairman and Chief Executive Officer

Matt, first off, and thank you for your compliment under the nice print. What is your question about handbag and accessory, we couldn't really hear you.

Matthew Boss -- JPMorgan

Yes. So a couple of things, that I was focused on, is there any change you're expecting for the growth rate of handbags and accessories or the overall term exiting the pandemic? And then the second part was, is there anything preventing a full recovery in your opinion of the travel business over time?

John D. Idol -- Chairman and Chief Executive Officer

Right, OK. So in handbags and accessories. I think we saw right through the pandemic, in particular the luxury goods, part of handbag and accessories, which I believe all three of our brands are in, it has grown. I mean that market continues to grow. Yes, there was a small setback when all stores were closed, etc. But this category continues to be a representation, I think for the consumer of their fashion style and the way that they want to express themselves. So we saw that that did not really change, except during the real hard lockdown periods. So we don't-- Is that there is going to be a change in trajectory, we think on a global basis, again accessories will grow somewhere in the 6% to 7% range change by marketplace. So we feel very comfortable with the handbag and accessories luxury market growth. And I would add, I think we're all surprised at how strong the growth has been in North America and it's not just us, all of our competitors, European and America have shown those same types of results. So really bodes where we think for the future.

As it relates to travel, I would say there's two parts to the answered to that question. First, there is the tourists coming to markets, we are beginning to annualize in the sense that they did not really, there was some small return to Europe this year, where it's a very high penetration. There has been no return to Japan and Korea, which were typically higher penetration markets. So that in the sense is behind us and we are not forecasting for any type of a strong return in that tourist market. We do have some tourists that we believe will be returning to the US market shortly when the borders are open and we think that will be a positive for us. So in our forecast, we don't see tremendous movement, in our trajectory at least in next fiscal year. The second answer to that question is, as I think I told you previously very substantial business in travel retail that would be airports and duty-free shopping, etc. And again, while there has been a very strong resurgence in that business inside of China, which was unfortunately slowed during July and August, during some of the issues that China faced.

We also, are not forecasting for that business to recover in our fiscal '23. We think that's going to be further out more into our fiscal '24, we would look for a strong recovery in global travel and tourist travel and how that would impact not only our own stores but travel retail and then of course big key department stores in Europe where those are substantial businesses for us which will be a very uptick for us in that period of time. Tom.

Tom Edwards -- Chief Financial and Chief Operating Officer

With regard to the e-commerce question, Matt, if you look at history, we've now doubled our e-commerce penetration is about 13% pre-COVID and it's now in the mid '20s expected for this year and as we noted at Investor Day, we expect that to continue to grow into the 30% range as a percent of our retail sales. So when we look at it, Jimmy Choo and Versace's margins have always been very positive and strong compared to retail stores and e-commerce, just as a function of their luxury pricing, and positioning. Michael Kors has seen really a sea change over this last couple of years as the penetration has increased and revenue has increased, e-commerce margins have moved to above store level margins. And we would [inaudible] this to be one of the supports for our gross margin expansion over time. As John mentioned, we would expect continued expansion 100 basis points next year. And when we look at the components, it's continued full price sell-throughs building out our accessories businesses that you need to Versace, growing in Asia, which is structurally higher margin and of course this e-commerce piece. So I view it in that context of supporting the overall corporate goal.

Matthew Boss -- JPMorgan

Thank you, both.

Operator

Thank you. Our next question comes from the line of Paul Burroughs with Citi. Please proceed with your question.

Paul Burroughs -- Citi

Hey, thanks guys. Curious if you can talk about that gross margin upside which brands are the largest increase and what were the biggest surprises to you and the drivers of that upside. And then just second curious how your wholesale partners are thinking about the spring season from a unit perspective and what you can be able to deliver to them, just given the supply chain constraints, relative to what they would like to order and are you seeing cancellations, given the 45 to 60-day delay? Thanks guys.

John D. Idol -- Chairman and Chief Executive Officer

Why don't I take the wholesale part first and then I'll turn the gross margin over to Tom. Our wholesale partners around the globe are experiencing very strong sell-throughs that date back, I'd say 7 or 8 years ago, so really strong sell-throughs and it's been accessories and footwear and women's ready to wear. So we cannot get enough merchandise to our partners, unfortunately at this moment. There has been no cancellations, everyone understands what the situation is and basically is taking any of the merchandise as it arrives. We did fly, as I said earlier, most of our seasonal holiday gifting businesses here. So anything that was very seasonal oriented, we wanted to make sure it was here for the stores because it obviously becomes more obsolete if it's not here during the holiday period of time. So we feel good about that. We are going to be in a better position in Q3, Q4. Our Q4 as an inventory release as Tom said, you will start to see inventory build. So we have kind of tactically mapped out what is happening with this delay and it's really more of a transit delay than anything. There was a peace in Vietnam but most of this is a transit delay. And so we've got a lot of that put into our projections. And I would say that like ourselves, our wholesale partners are planning the businesses up.

We've had a great-- We're having a great fall season. And therefore, people are a bit super optimistic about what is in front of us, in particular for next year. And again, I think that first and foremost comes to incredible product that Michael and that Donatello and Sandra are really putting together with the design teams. I think our marketing campaigns have been extraordinary. If you look at Versace or Hailey Bieber at Jimmy Choo, at Bella Hadid, at Michael Kors and look at powerful influencers who are associated with our brands, who want to be part of our family and are really helping us communicate that message around the globe and you look at the incredible events that we're doing with all of our brands in China and how our brands are resonating there and the growth opportunity. I want to remind everyone on this call, we need to double our business in China with all of our brands, we are under-penetrated by 50% to all of our competitors. So we have huge upside for ourselves there. So I think the way we look at the situation it's quite optimistic and I believe our partners are looking at it in the same thing.

Tom Edwards -- Chief Financial and Chief Operating Officer

And with regard to the second quarter gross margin, all three brands exceeded our expectations. All and they exceeded them in a meaningful way. So we were really pleased to see every house perform quite well. And if you look at the themes across, the first and foremost is full price sell through across all businesses is driving great results. Michael Kors and Jimmy Choo, we have the pricing benefit. And then Versace, we're seeing continued traction in accessories that category, which is quite important for the future continues to [inaudible] they're doing a great job there. John mentioned Signature, Michael Kors, which also expanded and that's also supporting the full price sell-through for that brand. So in general, all three were well ahead of expectations. Thank you, Paul.

Paul Burroughs -- Citi

Thank you, guys. Good luck.

Operator

Thank you. Our next question comes from the line of Simeon Siegel with BMO Capital. Please proceed with your question.

Paul Burroughs -- Citi

Great, thanks guys, congrats on really, on those great results. John. Congrats on the succession planning and honestly, all that you've built here. And if you're listening congrats Josh. Looking forward to have in the party, I'm sure you missed us all. John, so you as we've spoken about it on past calls, but just curious to hear if you've any updated views on what you think the industry level, promotional cadence will look like into next year and I know we have all the constraints right now. But just to kind of echo your thoughts around holding price points if and when others start promoting again, I would be curious to hear your view of the broader industry level and then Tom if I could just ask, any thoughts on the timing of the new share repurchase, just given what seems to be achieved valuation and ongoing clear path visibility for you guys. Thanks a lot.

John D. Idol -- Chairman and Chief Executive Officer

Thank you, Stephen. I appreciate those kind remarks about the Company. So, I mean the promotional, I continue to say that is not a topic we spent a lot of time on in this company any longer and maybe that's naive. But first off, Versace and Jimmy Choo, that's not a conversation, we are pretty strict around what we do there and as it relates to Michael Kors, we are a substantial part of the Michael Kors business has done outside of the United States, both in Europe and in Asia. Again, those are not conversations that are really relevant. As it relates to North America, it is relevant. And we've just made the decision that we're just not going to be as promotional and that means that we want to make more money and we've shown that. We've shown that we can make more money on lower sales than we did on having higher sales and to chase our own selves or other competitors whichever when you want to call it. So we've made the decision, prices are going higher.

We're going to have less promotional activities, and we're going to let the consumer respond to that. We're also operating a much lower inventory levels. You will see inventories rise over the next two quarters and more of that. This is a preview is going to be in some of our core products, where if we get them here earlier, we don't have to worry about this delay issue and it will substantially reduce our cost over time. So we might hold a little more inventory in particular on basic product, where we're just running reorder businesses and what that flow through as this supply chain issue kind of works itself out for what we think will be a 6 to 12-month period of time. When I say that really starting from January 1st. So we think it's going to take most of next year for that to work itself out. And we've got some ideas on how to mitigate those cost, some of that will be holding a little higher inventory but really on core replenishment items.

So in our mind, we are going to stick to our guns on what we said and we've already seen other people starting to promote much more aggressively than we are, and that's OK. And if they do, that's going to be their strategy and we wish them well. But we're not going to start to go down that path, we know where that leads and that leads to typically lower gross margins and trying to sell too many units and we're trying to chase too much business and that usually is something that long term, doesn't the way that you wanted to. So our perspective [inaudible] stay focused on the path that we have been going down that we think we'll get rewards from that with the consumer

Tom Edwards -- Chief Financial and Chief Operating Officer

And with regard to timing of share repurchase, I just like put a little context of our overall capital allocation policy and the strength of our balance sheet and free cash flow, which is the reason that we put in the new $1 billion share repurchase program. As a matter of fact, year-to-date generating free cash flow about $350 million. So our first priority remains paying down debt. In the quarter, we paid down $200 million and we'll continue to do so to further strengthen our balance sheet. We do plan to return cash to shareholders in the form of share repurchase, we think that's important. We now have the broader capacity to do that over the longer term, but we'll also be active in the near term. And finally, luxury acquisitions are the least priority where as things come up for luxury or European acquisitions, we will look at these and that would be another use of cash in the future and another reason to strengthen our balance sheet. So Q2 is a great example of this balance where we paid down $1 million of debt and also repurchased $100 million of shares. Thank you, Simeon

Simeon Siegel -- BMO Capital

That was it, guys. Thanks a lot. Congrats again and best of luck for holiday.

John D. Idol -- Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. Our final question for today will come from the line of Erinn Murphy with Piper Sandler. Please proceed with your question.

Erinn Murphy -- Piper Sandler

Great, thank you. Good morning and thanks for stake in the end. My question, John is around Versace. I have a 2-part question. First, I mean you put your long-term margin target for Versace just in the first half of this year, but if I pencil out the guidance, it implies that the back half EBITDA margins go down to low teens. So just curious what's driving that forecast. Maybe that's for both you as well as Tom. And then secondly, any update to the search process around Jonathan's replacement for Versace? Thank you so much.

John D. Idol -- Chairman and Chief Executive Officer

I will take that's cap-and-half. I'll take the the Johnson piece. First off, we want to thank Jonathan for all of his efforts. Prior to us acquiring the company, he's been an outstanding job trying to really reset the company. And then, the great thing about us acquiring Versace is we clean the house and I think we told you, we walked away from $150 million worth of multiple other lines that were in the company, just shut them down. We have spent hundreds of millions of dollars in refitting, rebuilding, opening new stores. We believe in luxury, I told everyone when we bought Versace this takes time, but if you invest properly and you believe in the future of luxury the returns are really spectacular. Look at some of our competitors and how those returns have turned out, and how the revenues are working over time. So I think we've really positioned Versace to be set up for at minimum hitting our $2 billion goals and to hit our long-term margin targets and we will absolutely find a new leader. It is going to be one of the most sought-after positions in the luxury industry. So I have no concerns about.

It will probably take us north of 6 months so we have someone into that role. Jonathan's with us until March and in the meantime, I'll be working closely with Jonathan and the management team to continue to achieve our strategic objectives. And by the way, we have an outstanding management team at Versace, so I'm really proud of the teams that are-- At Versace, at Jimmy Choo and Michael KORS, I think in all three companies. We have some of the best executives, not only in our corporate offices but in our store locations and just really great people and dedicated and super enthusiastic. In terms of the margin targets and I will let Tom speak to that but just know we're super pleased gross margins are coming in a little higher than we had anticipated some of that mix between how we're driving the accessories business versus ready to wear and even though it may not have a higher initial markup. When you get through the sell-through after markdowns, etc. It's a terrific business and so we're doing better than we had anticipated and as well as our e-commerce business is really outstanding at Versace. So some of those things are really helping us drive the business. But we're going to continue to invest.

We're not going to step back and and think that we have completed our mission, our mission is still a long road in front of us to get to $2 billion and you have to spend money to do that and you have to believe in the development of marketing product and retail stores in your e-commerce platforms to be able to reach those types of targets, so we will continue to invest in Versace. But let me let Tom talk too specifically about the 3rd and 4th quarter.

Tom Edwards -- Chief Financial and Chief Operating Officer

Sure. When we look at the back half in 3rd and 4th quarter. First, I just want to point out we expect margin expansion in both Q3 and Q4 versus prior year. So Versace is still building and expanding margin. And for the year we've raised our forecast and now expect a mid-teens operating margin. So, as John mentioned, we're very pleased with the progress of Versace. When you look at the quarter, just kind of walking through it. Q3 is a seasonally lower operating margin quarter for Versace. It does not include December, which is the most profitable month of the year for the brand because of our lagged reportings and it's also the lowest absolute sales quarter. So we're seeing deleverage for both Q3 and Q4 we're also increasing our investments in brand growth. We're ramping up of stores to be fully open versus the prior year. So we have full store cost and we're also lapping some COVID related savings that we were able to achieve and garner here on both the payroll and rent. So those are some of the puts and takes. But really, we're still growing versus prior year. I'm very pleased with that trajectory and pace and in a very pleased with the overall brand position.

John D. Idol -- Chairman and Chief Executive Officer

Thank you very much. Aaron. I'd like to thank everyone for joining us today. I'm sorry, we ran over a little bit, but hopefully you heard some interesting information about Capri Holdings and how we intend on continuing our growth trajectory. And again, very excited about having Josh join the team, and he will be with us on our next call. And we're talking about the continued success of the Michael Kors brand. Thank you everyone and have a great day.

Operator

[Operator Closing Remarks]

Duration: 79 minutes

Call participants:

Jennifer Davis -- Vice President

John D. Idol -- Chairman and Chief Executive Officer

Tom Edwards -- Chief Financial and Chief Operating Officer

Kimberly Greenberger -- Morgan Stanley

Ike Boruchow -- Wells Fargo

Omar Saad -- Evercome

Oliver Chen -- Cowen

Matthew Boss -- JPMorgan

Paul Burroughs -- Citi

Simeon Siegel -- BMO Capital

Erinn Murphy -- Piper Sandler

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