Capri Holdings Limited — Q1 Fiscal 2022 Form 10-Q
Reporting period: 13 weeks ended June 26, 2021. Capri operates Versace, Jimmy Choo and Michael Kors. Comparatives are the 13 weeks ended June 27, 2020, when COVID-19 store closures and reduced traffic materially affected results. The company cautions that interim results are not necessarily indicative of full-year performance.
Financial performance and liquidity
| Metric | Q1 FY2022 | Q1 FY2021 |
|---|---|---|
| Revenue | $1.253 billion | $451 million |
| Gross profit / margin | $856 million / 68.3% | $302 million / 67.0% |
| Operating income (loss) / margin | $258 million / 20.6% | $(162) million / (35.9)% |
| Net income (loss) attributable to Capri | $219 million | $(180) million |
| Diluted earnings (loss) per share | $1.41 | $(1.21) |
| Cash provided by operating activities | $204 million | $67 million |
| Capital expenditures | $23 million | $32 million |
Revenue increased 177.8% as reported and 163.9% on a constant-currency basis. Management attributed the increase primarily to recovery from pandemic-related closures and weak store traffic in the prior-year quarter; favorable currency contributed approximately $63 million. Gross margin improved 130 basis points, primarily from higher average unit prices, partly offset by unfavorable channel mix.
Revenue and segment operating income were: Versace, $240 million and $48 million; Jimmy Choo, $142 million and $11 million; Michael Kors, $871 million and $240 million. Each segment moved from an operating loss in the prior-year quarter to operating profit.
At June 26, 2021, cash and cash equivalents were $356 million, working capital was $145 million (versus a $75 million deficit at March 27, 2021), and total debt carrying value was $1.333 billion, including $127 million short-term and $1.206 billion long-term. Cash, cash equivalents and restricted cash totaled $358 million for cash-flow reporting. The company reported $972 million available under its $1.0 billion revolving facility and compliance with debt covenants, including the reinstated 4.00-to-1.00 quarterly maximum net leverage test. It says available cash, operating cash flow and borrowing capacity should meet working-capital needs for the next 12 months and beyond.
Material changes and notable items
- SG&A was $545 million, up 35.6% year over year, but declined to 43.5% of revenue from 89.1%, reflecting substantially higher sales and operating leverage.
- Net interest expense fell to $1 million from $17 million, primarily due to lower average borrowings and income associated with net investment hedges. The effective tax rate was 14.5%; tax expense was $37 million.
- Operating cash flow rose to $204 million. Financing activities used $55 million, including $59 million for treasury-share purchases; investing activities used $23 million.
- Capri reinstated its $500 million share-repurchase program and bought 921,080 shares for approximately $50 million during the quarter. Remaining program capacity was $350 million.
- The company had closed 111 stores under its program to close approximately 170 stores over two fiscal years. It expects approximately $75 million of one-time program costs, mostly future cash expenditures, and anticipates savings and lower depreciation.
- Government assistance and subsidies recognized were $4 million, compared with $14 million in the prior-year quarter. The filing also reports a $20 million unconditional charitable pledge accrued to the Capri Holdings Foundation for the Advancement of Diversity in Fashion.
Outlook, risks and contingencies
No specific revenue, earnings or margin guidance is provided in this filing. Management identifies COVID-19 effects, consumer and store traffic trends, foreign-exchange volatility, shipping and distribution disruption, sourcing and manufacturing costs, tariffs and the expiration of the U.S. Generalized System of Preferences program as risks. Other cited exposures include competition, international-market conditions, interest rates, debt and covenant compliance, cybersecurity, litigation and regulatory matters.
The company uses currency and cross-currency hedges and does not use derivatives for trading or speculation. Its net-investment hedges had aggregate notionals of $4.0 billion for euro-denominated subsidiaries and $194 million for yen-denominated subsidiaries. A 10% U.S. dollar movement was estimated to change the fair value of these hedges by approximately $552 million upon settlement; this is a sensitivity estimate, not a forecasted earnings or cash impact. Routine legal proceedings are not expected by management to have a material aggregate adverse effect. Disclosure controls were assessed as effective, with no material change in internal control reported.
Important facts for investors to verify
- How much of the sharp year-over-year rebound reflects recovery from the unusually weak pandemic comparison, and how current sales, store traffic and channel mix are trending.
- Whether gross-margin gains and operating leverage persist as the business normalizes, including the effect of wholesale mix, currency, tariffs and sourcing costs.
- Debt and covenant headroom under the 4.00-to-1.00 leverage test, cash needs, and the impact of operating leases and the planned share repurchases on liquidity.
- Actual cash costs, closure progress and savings from the store-optimization program versus the approximately $75 million cost estimate.
- Potential effects of COVID-19, currency movements and hedge-related collateral provisions; the filing notes certain cross-currency swap collateral terms can take effect beginning May 2023.