Capri Holdings Ltd. (then Michael Kors Holdings Limited) — Q1 FY2018 Form 10-Q
Reporting period: 13 weeks ended July 1, 2017; comparative period ended July 2, 2016. The interim financial statements are unaudited. The company operated retail, wholesale and licensing businesses under the Michael Kors brand.
Financial performance
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Total revenue | $952.4 million | $987.9 million | Down 3.6% reported; down 2.6% constant currency |
| Gross profit / margin | $574.7 million / 60.3% | $591.3 million / 59.9% | Profit down 2.8%; margin up 40 bps |
| Operating income / margin | $149.4 million / 15.7% | $186.9 million / 18.9% | Down 20.1% |
| Net income attributable to MKHL | $125.5 million | $147.1 million | Down 14.7% |
| Diluted earnings per share | $0.80 | $0.83 | Down $0.03 |
| Operating cash flow | $194.3 million | $323.3 million | Down $129.0 million |
Revenue fell $35.5 million, including approximately $9.4 million of unfavorable foreign-exchange effects. Retail sales rose 10.1% to $619.9 million, while wholesale sales fell 23.0% to $303.6 million; licensing revenue declined 5.6% to $28.9 million. Retail comparable sales decreased 5.9% (4.9% constant currency). Retail growth included stores added since the prior year and the acquired Greater China business.
Gross margin improved mainly because retail represented a greater share of sales and retail margin rose. This was partly offset by a 490-basis-point decline in wholesale gross margin. SG&A rose 6.7% to $377.7 million, and increased to 39.7% of revenue from 35.8%, contributing to operating-margin compression. Operating income from wholesale fell 58.6% to $43.5 million; retail operating income increased 38.4% to $92.2 million.
Balance sheet, cash flow and capital
- At July 1, 2017, cash was $273.7 million, working capital was $604.0 million and total assets were $2.413 billion.
- Short-term debt was $155.8 million, versus $133.1 million at April 1, 2017. This included $150.0 million under the senior revolving facility and approximately $5.8 million under the Hong Kong facility. Total remaining credit availability was reported as $844.8 million; the company said it was in covenant compliance.
- Operating cash flow was $194.3 million; capital expenditures were $14.8 million. Investing cash use was $16.2 million, compared with $527.7 million in the prior period, which included the Greater China acquisition. Financing cash use was $137.7 million, including $160.3 million of treasury-share purchases.
- The board authorized a new $1.0 billion share-repurchase program in May 2017. The company repurchased 4.54 million shares for $157.8 million under the program during the quarter; $842.2 million remained available at quarter-end.
Changes, outlook and notable items
- Management attributed the wholesale decline mainly to lower sales of women’s accessories, apparel and footwear, alongside a deliberate effort begun in FY2017 to reduce wholesale shipments and promotional activity. The company also cited lower consumer traffic, channel shifts toward online shopping and spending shifts from luxury goods to experiences.
- On May 31, 2017, the company announced plans to close 100–125 full-price stores over two years. It expected $100–$125 million in one-time closure costs and approximately $60 million in ongoing annual savings, including savings associated with lower depreciation. Charges for the ten stores planned during this quarter were not material.
- Management expected to spend approximately $185 million on capital expenditures during the remainder of FY2018 and stated that cash, operating cash flow and available borrowing capacity should cover needs for the next 12 months.
- After quarter-end, on July 25, 2017, the company agreed to acquire Jimmy Choo for 230 pence per share, with an estimated total purchase price of approximately $1.35 billion including refinancing existing debt. Closing was expected in Q3 FY2018, subject to customary conditions. A £1.115 billion bridge facility was arranged to fund the transaction, with permanent financing expected to reduce or refinance it. Completion, financing costs, integration and expected benefits remain uncertain.
- Foreign-exchange movements reduced reported results; management noted weaker sterling, euro and Canadian-dollar rates versus the U.S. dollar. The company uses currency forwards and reported $7.8 million of derivative liabilities at quarter-end.
- The effective tax rate declined to 16.4% from 21.2%, primarily due to global financing activities and a greater share of earnings in lower-tax jurisdictions. Adoption of share-based compensation guidance also resulted in a $4.9 million tax deficit being recognized in income-tax expense.
- The company said routine legal proceedings were not expected, in aggregate, to materially affect its financial position or results. It identified acquisition integration, execution, impairment and joint-venture risks, among others. Disclosure controls were assessed as effective, with no material change in internal control reported.
Important facts for investors to verify
- Whether the planned store closures achieve the stated savings and how much of the expected one-time costs are ultimately incurred.
- Whether wholesale demand, margins and comparable retail sales stabilize, and whether promotional activity and inventory remain controlled.
- The final Jimmy Choo purchase price, closing status, permanent financing terms, resulting debt and integration performance.
- Cash conversion and working-capital trends: operating cash flow fell sharply year over year, while inventory increased to $616.1 million from $549.3 million at the prior fiscal year-end.
- Foreign-exchange exposure and the earnings impact of currency hedges, as well as changes in the tax rate and share repurchases.