Takeaways from the 2017 Michael Kors Investor Day - Deborah Weinswig

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Takeaways from the 2017 Michael Kors Investor Day - Deborah Weinswig
June 21, 2017

                                 Takeaways from the 2017 Michael Kors Investor Day

                                 Source: Michael Kors Investor Day presentation

                                 At the 2017 Michael Kors Investor Day event, management outlined Runway 2020, the
                                 company’s strategic plan for driving future growth through product innovation, fleet
                                 modernization and expansion of its global digital innovation efforts. Highlights from the
                                 day’s presentations include:
                                    1) Michael Kors is modernizing and rightsizing its fleet and renovating 100 stores
                                       globally. Over the next 24 months, the company will close 100–125 stores, which
                                       will allow it to increase profitability and see annualized savings of $60 million.
                                    2) Michael Kors is diversifying and expanding its product mix beyond its largest
                                       category, handbags, into men’s, footwear and women’s ready to wear. The
                                       company has committed to delivering 40% less product with 65%–70% more
                                       newness. The company is also reducing promotional days by 40%.
                                    3) The company believes that China represents a $1 billion opportunity. It plans to
                                       expand its footprint in Asia from 228 stores currently to 335 stores in 2020, with
                                       more than half of the new stores located in China.
                                    4) The company projects that it will return to growth by 2020. Fiscal year 2018 is
                                       expected to be a reset year to shrink revenue to a healthy base. The company
                                       expects low-single-digit revenue growth and low- to mid-single-digit EPS growth in
                                       fiscal year 2019. For fiscal year 2020, Michael Kors projects that all areas will begin
                                       to work together, and that the company will see positive revenue growth, positive
                                       comp sales, improving margins and mid- to high-single-digit EPS growth.

Deborah Weinswig, Managing Director, Fung Global Retail & Technology
deborahweinswig@fung1937.com US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016                                         1
Copyright © 2017 The Fung Group. All rights reserved.
Takeaways from the 2017 Michael Kors Investor Day - Deborah Weinswig
June 21, 2017

                                 Michael Kors Investor Day: Key Points
                                 The Fung Global Retail & Technology team attended the 2017 Michael Kors Investor Day
                                 event in New York City. Presenting from the company were:
                                 John Idol, Chairman and CEO
                                 Jaryn Bloom, Group President, Retail
                                 Scott Zalaznik, SVP of Digital and E-Commerce
                                 Cedric Wilmotte, President, EMEA
                                 Patrick Lee, President, Greater China and Southeast Asia
                                 Don Witkowski, President, Men’s
                                 Philippa Newman, President, Collection and MMK Accessories/Footwear
                                 Jill Fishman, SVP, Global Licensing
                                 Dinesh Kandiah, VP, Global Communications
                                 Tom Edwards, CFO, COO
                                 Management kicked off the first annual Michael Kors Investor Day by discussing the
                                 company’s history and providing an overview of its Runway 2020 strategic plan.
                                 Michael Kors is a global fashion luxury brand with 10 global flagship stores and a
                                 presence in more than 100 countries and has 3,747 shops. Launched more than 35 years
                                 ago, it is now a $4.5 billion company. Since 2012, when it went public, the company has
                                 grown revenues at a 28% compound annual growth rate (CAGR), from $1,302 million to
                                 $4,494 million. Revenues declined from $4,712 million in fiscal 2016 to $4,494 million in
                                 fiscal 2017.

                                 Source: Michael Kors Investor Day presentation

Deborah Weinswig, Managing Director, Fung Global Retail & Technology
deborahweinswig@fung1937.com US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016                                    2
Copyright © 2017 The Fung Group. All rights reserved.
Takeaways from the 2017 Michael Kors Investor Day - Deborah Weinswig
June 21, 2017

                                 Chairman and CEO John Idol described Runway 2020 as a vision and plan for setting the
                                 company up for future growth. Runway 2020 centers on product innovation, novelty
                                 and elevating the product image. Management expects fiscal year 2018 to be a
                                 transition year and said that it anticipates that product innovation and fleet
                                 modernization initiatives will have taken hold by 2020.
                                 The company has three brands: Michael Kors Collection, Michael Michael Kors and
                                 Michael Kors Mens.
                                  • Michael Kors Collection is described as a “glamorous sophisticated collection”
                                    geared toward a luxury jet-setter customer.

                                 Source: Michael Kors Investor Day presentation

                                  • Michael Michael Kors is positioned to appeal to millennials, a key demographic for
                                    the company. Management reported that Michael Kors is a favorite brand among
                                    millennials and teens, according to a Goldman Sachs study, and the company sees
                                    these younger shoppers as key to its future growth.
                                  • Michael Kors Mens is positioned to appeal to men who are confident, connected
                                    and adventurous, with a modern edge. The collection ranges from sportswear to
                                    leather goods to accessories for the man on the go.
                                 As the global brand ambassador, Michael Kors himself continues to garner brand
                                 attention and social media recognition around the world. For example, he attended
                                 three brand events, in London, Seoul and Singapore, in 2015 and 2016, and those events
                                 generated 28.2 billion total global press impressions.

Deborah Weinswig, Managing Director, Fung Global Retail & Technology
deborahweinswig@fung1937.com US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016                                     3
Copyright © 2017 The Fung Group. All rights reserved.
Takeaways from the 2017 Michael Kors Investor Day - Deborah Weinswig
June 21, 2017

                                 Source: Michael Kors Investor Day presentation

                                 Diversify the Product Mix
                                 Management said that, under the Runway 2020 plan, the company is looking to
                                 rebalance its product mix and expand its opportunity beyond accessories. Today,
                                 handbags represent 70% of the company’s overall sales, but that share is expected to
                                 fall to 62% by 2020. Part of this decrease will result from the company reducing
                                 inventory in its wholesale distribution channels. The company projects that the handbag
                                 business will see flat to low-single-digit growth through 2020, and that most of the
                                 growth in handbags will come from Asia. Additionally, management projects that the
                                 North American handbag market will see flat to slightly negative growth over the same
                                 period, whereas Europe will see low- to single-digit growth.
                                 Management expects the men’s, footwear and women’s ready-to-wear categories to
                                 grow. The biggest increase is expected in men’s: the company expects the category to
                                 grow from 3% of sales in fiscal year 2017 to 8% in fiscal year 2020, in both the retail and
                                 wholesale channels. Footwear is expected to increase from 11% to 13% of sales over the
                                 same period, and women’s ready to wear is expected to increase from 10% to 12% of
                                 sales. Each of these categories has a lower margin than the handbag business, but the
                                 company reported that its strategy is the right approach, as it provides multiple avenues
                                 to reach the customer. The company projects revenue growth in all three categories to
                                 be in the low-single digits through fiscal 2020, and said that women’s apparel is the
                                 most price-sensitive of the three categories.

Deborah Weinswig, Managing Director, Fung Global Retail & Technology
deborahweinswig@fung1937.com US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016                                      4
Copyright © 2017 The Fung Group. All rights reserved.
Takeaways from the 2017 Michael Kors Investor Day - Deborah Weinswig
June 21, 2017

                                                            FY17                                   FY20

                                                    Other
                                                     2%     Watches     Men’s                              Watches
                                                                                                  Other
                                                              5%         3%                                  4%
                                                                                                   1%

                                                                                                          Men’s
                                                                    Footwear                               8%
                                                                      11%
                                                                                                             Footwear
                                                                        Women’s                                13%
                                                                         RTW
                                                                         10%           Handbags
                                                 Handbags                                                    Women’s
                                                                                        & SLG’s
                                                  & SLG’s                                                     RTW
                                                                                         62%
                                                   70%                                                        12%

                                 Source: Michael Kors Investor Day presentation

                                 Innovate in Menswear: “Polished Sportswear”
                                 Michael Kors is focused on growing its men’s business, and management described the
                                 company’s style offering as “polished sportswear,” which is an update to officewear,
                                 where function meets fashion. For example, all men’s pants and woven shirts contain
                                 stretchable fabric. Management reported that customer feedback on its men’s line has
                                 been very positive. Michael Kors’ biggest competitors in menswear are Hugo Boss and
                                 Calvin Klein.
                                 The men’s business is small and new, and management said that it is an area of
                                 opportunity. Michael Kors has seen strong growth in sportswear and a better-than-
                                 expected response to small leather goods within the men’s category. In the long term,
                                 the company believes that it can build its men’s retail business into a $1 billion segment.

                                 Innovate in Smartwatches and Wearable Technology
                                 Management reported that it is focusing on smartwatches and wearable technology,
                                 given that the traditional watch category is in decline. The company launched Access, a
                                 smartwatch that combines fashion and functionality with customizable faces,
                                 interchangeable straps and social connectivity, and the Michael Kors Bradshaw watch
                                 was the best-selling Android smartwatch over the 2016 holiday season. The company
                                 recently introduced the Grayson men’s smartwatch, which features customization and
                                 apps with hundreds of options. Through a strategic partnership with Google, Michael
                                 Kors has created an app called My Social that is available to owners of certain Michael
                                 Kors smartwatches. The app allows users to upload photos from Instagram to use as
                                 their watch faces.

Deborah Weinswig, Managing Director, Fung Global Retail & Technology
deborahweinswig@fung1937.com US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016                                       5
Copyright © 2017 The Fung Group. All rights reserved.
Takeaways from the 2017 Michael Kors Investor Day - Deborah Weinswig
June 21, 2017

                                 Deliver 40% Less Product
                                 Under the Runway 2020 strategic plan, Michael Kors plans to deliver 40% less product
                                 overall with 65%–70% more newness across women’s ready to wear and handbags. By
                                 focusing on a narrower range, the company aims to have more focused, elevated
                                 product designs. Management noted that a main focus for the team is elevating the
                                 iconic Michael Kors handbag components (texture, hardware and logo) to new levels.
                                 The design team is also looking at personalization and customization in order to offer
                                 customers handbag options for monograms, reversible colors, straps, keychains, charms
                                 and scarves. For example, the company introduced reversible jackets for its signature
                                 Selma handbag, shown below.

                                 The Selma 3-in-1 handbag
                                 Source: Michael Kors Investor Day presentation;

                                 The penetration rates of new collections increased from 20% for the spring 2017
                                 collection to 37% for the fall 2017 collection. The company estimates that the
                                 penetration rate of new collections in accessories will grow to 65%–75% by spring of
                                 2018.

                                 Reduce Promotional Activity, Increase Average Unit Retail (AUR)
                                 The company has committed to having 40% fewer promotional days in its North
                                 America Michael Kors lifestyle stores and in its partner/wholesale channels, and
                                 management said that it is seeing AUR rising as a result of the change. The company has
                                 also identified three items that will never be promotional, its best-selling Mercer bag, its
                                 Hamilton bag and the Access watches, which, combined, account for 25% of business.
                                 The company has set four windows of time throughout the year for brandwide
                                 promotions for itself and its wholesale partners, and management believes that this
                                 new strategy will lead to flat to positive comp growth.

Deborah Weinswig, Managing Director, Fung Global Retail & Technology
deborahweinswig@fung1937.com US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016                                        6
Copyright © 2017 The Fung Group. All rights reserved.
Takeaways from the 2017 Michael Kors Investor Day - Deborah Weinswig
June 21, 2017

                                 Modernize the Fleet
                                 Michael Kors is modernizing its stores and renovating 100 stores globally. The company
                                 is using an elevated flagship model as the prototype, highlighting lifestyle curation. Each
                                 new store concept emphasizes Michael Kors as a fashion luxury leader. Cedric Wilmotte,
                                 President of EMEA, said that the company has selected 20–25 stores in the EMEA region
                                 as part of the modernization process, and that it is diversifying the product mix with
                                 women’s ready to wear, footwear and menswear, as those are underpenetrated
                                 categories.
                                 Over the next 24 months, the company plans to close 100–125 stores globally, which
                                 will allow it to increase profitability and result in annualized savings of $60 million.
                                 Michael Kors is also modernizing its wholesale fleet. As part of this strategy, the
                                 company is looking to enhance the customer experience through a more elevated shop
                                 design. The company is renovating its shops with a “Selfridges Regent Street” concept
                                 and optimizing its network of shops-in-shops in Europe.

                                 China Represents a $1 Billion Opportunity
                                 Patrick Lee, President of Greater China and Southeast Asia, spoke about Michael Kors’
                                 store footprint in Asia, with a focus on China. The company has 111 stores in 30 cities in
                                 the Greater China region. Lee said that China is a great opportunity for growth, with 88
                                 cities with populations of more than 5 million people. In the long run, the company
                                 would like to reach 200 stores in China, where the number of middle-class consumers is
                                 expected to rise to 40–50 million, and potentially climb to 100 million, giving the country
                                 the largest middle-class population in the world.
                                 China is a big strategic market for Michael Kors. Management projects that, within three
                                 years, the brand will have a presence in 335 Asian cities, including 180 Chinese cities.
                                 The company has strategically been building its brand name in Asia over the past five
                                 years, with flagship stores in key cities such as Shanghai, Beijing, Chengdu, Hong Kong,
                                 Taipei, Singapore, Tokyo and Kobe.

                                 Source: Michael Kors Investor Day presentation

Deborah Weinswig, Managing Director, Fung Global Retail & Technology
deborahweinswig@fung1937.com US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016                                        7
Copyright © 2017 The Fung Group. All rights reserved.
Takeaways from the 2017 Michael Kors Investor Day - Deborah Weinswig
June 21, 2017

                                 Management said that China represents a $1 billion opportunity for the company.
                                 Revenue in the Asia-Pacific region grew at a 110% CAGR from 2012 to 2017, from $10
                                 million to $409 million. The company is trying to build its brand awareness among the
                                 growing middle class across Asia and is also working to expand its men’s business into
                                 Asia.

                                 Source: Michael Kors Investor Day presentation

                                 Create Engagement and Loyalty Through Social Media
                                 Michael Kors has almost 36 million engaged social media fans, up 25% from last year.
                                 The company is one of the top luxury brands on Instagram, with 10 million followers,
                                 and it is continuing to build experiences across all major social media platforms,
                                 including WeChat, Weibo, Kakao, Line, Facebook and Twitter.

                                 Source: Michael Kors Investor Day presentation

Deborah Weinswig, Managing Director, Fung Global Retail & Technology
deborahweinswig@fung1937.com US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016                                      8
Copyright © 2017 The Fung Group. All rights reserved.
Takeaways from the 2017 Michael Kors Investor Day - Deborah Weinswig
June 21, 2017

                                 In October 2017, the company will launch KorsVIP, a loyalty styling, fashion and luxury
                                 service app. Customers who download the app will be able to chat one on one with a
                                 stylist trained by the company. Users can also get “Michael’s” advice and
                                 recommendations, and book luxury appointments with a stylist via the app. KorsVIP will
                                 also offer special customer loyalty rewards.
                                 Globally, the company has rolled out digital innovations in China, Japan and South
                                 Korea. In China, the company is integrating its loyalty program with its international
                                 platforms through WeChat and Weibo.

                                 Source: Michael Kors Investor Day presentation

                                 The company says that its Asian customers skew younger (ages 25–35) than in other
                                 regions, and that it is working with social influencers in China, Japan and South Korea to
                                 engage millennials. In China, Yang Mi, who has 72 million followers on Weibo and
                                 WeChat, is Michael Kors’ spokesperson for the Mercer bag.

                                 Source: Michael Kors Investor Day presentation

Deborah Weinswig, Managing Director, Fung Global Retail & Technology
deborahweinswig@fung1937.com US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016                                      9
Copyright © 2017 The Fung Group. All rights reserved.
June 21, 2017

                                 Challenges and Opportunities
                                 Management discussed the macroeconomic conditions that are impacting the retail
                                 environment and the opportunities associated with those conditions:
                                    1. Shift in shopping patterns. Mall traffic is declining in North America, as consumers
                                       shift more of their shopping to digital channels. Consumers are able to resell
                                       products online on sites such as The RealReal, and large marketplaces such as
                                       Amazon continue to grow their share of all retail sales. Management said that
                                       these channels are taking revenue away from Michael Kors. In response, the
                                       company plans to increase its online presence and capabilities, and optimize its
                                       store footprint.
                                    2. The watch market is in a secular decline. Michael Kors is moving further into the
                                       smartwatch category and is partnering with Google and Fossil.
                                    3. The global handbag market is maturing. The global handbag market has seen
                                       single-digit growth recently. In response, the company plans to rebalance its
                                       product mix.
                                    4. There is increased competition in luxury handbags. Michael Kors is facing new
                                       competition in the luxury handbag space. At least six of its competitors have
                                       expanded revenues from $100–$200 million to more than $1 billion. Management
                                       said that the opportunity for Michael Kors is to lead in fashion innovation in the
                                       category.
                                    5. A promotional retail environment has negatively impacted sales. In the past, the
                                       company’s retail partners have taken a more promotional stance in order to drive
                                       traffic, which has had a negative impact on Michael Kors’ revenue. The company
                                       has adopted a new promotional cadence in response.
                                    6. The shifting geopolitical landscape has had a negative impact. The US dollar has
                                       strengthened considerably, which has cost the company millions due to currency
                                       exchange impacts. Government changes and acts of terror have also impacted the
                                       company’s sales. In response, the company plans to increase its global presence in
                                       both digital and physical channels.

                                 Source: Michael Kors Investor Day presentation

Deborah Weinswig, Managing Director, Fung Global Retail & Technology
deborahweinswig@fung1937.com US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016                                       10
Copyright © 2017 The Fung Group. All rights reserved.
June 21, 2017

                                 Financial Outlook
                                 Michael Kors projects that it will return to growth by 2020 through its Runway 2020
                                 plan. The company’s plan for improving its operating margin includes improving its
                                 segment mix between the wholesale and retail channels and expanding its geographic
                                 mix in Asia.
                                 FY 2018: The company has maintained the fiscal year 2018 guidance stated in its fourth-
                                 quarter earnings call. Management sees fiscal year 2018 as a reset year to shrink
                                 company revenues to a healthy base from which to grow in the future. It also plans to
                                 reduce the number of promotional days by 40% across the business.
                                 FY 2019: The company characterizes fiscal year 2019 as a year of stabilizing and building
                                 momentum and the top line. The company anticipates that its plan for continued
                                 product innovation will help its growth in fiscal year 2019. Management projects that e-
                                 commerce will continue to grow across all geographies and segments and that it will
                                 experience flat comps in fiscal year 2019 due to the reduction in promotional activities
                                 and more consistent promotions. The company expects low-single-digit revenue growth,
                                 low- to mid-single-digit EPS growth and a stable gross margin in fiscal year 2019. Capital
                                 expenditures are expected to be $200–$250 million in both fiscal year 2019 and 2020,
                                 compared with $200 million in fiscal year 2018. The capital expenditures will be used to
                                 modernize the fleet, open new stores and invest in IT infrastructure.
                                 FY 2020: For fiscal year 2020, Michael Kors projects that all areas will begin to work
                                 together, and that the company will see positive revenue growth, positive comp sales,
                                 improving operating and gross margins, and mid- to high-single-digit EPS growth. The
                                 table below summarizes the company’s financial outlook for fiscal years 2018 through
                                 2020.

                                 Source: Michael Kors Investor Day presentation

Deborah Weinswig, Managing Director, Fung Global Retail & Technology
deborahweinswig@fung1937.com US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016                                      11
Copyright © 2017 The Fung Group. All rights reserved.
June 21, 2017

                                 Deborah Weinswig, CPA
                                 Managing Director
                                 Fung Global Retail & Technology
                                 New York: 917.655.6790
                                 Hong Kong: 852.6119.1779
                                 China: 86.186.1420.3016
                                 deborahweinswig@fung1937.com

                                 Erin Schmidt
                                 Research Associate

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                                 Tel: 646 839 7017
                                 FungGlobalRetailTech.com

Deborah Weinswig, Managing Director, Fung Global Retail & Technology
deborahweinswig@fung1937.com US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016               12
Copyright © 2017 The Fung Group. All rights reserved.
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