Business context and reporting period
The filing is Michael Kors Holdings Limited’s unaudited Form 10-Q for the 13 weeks and 26 weeks ended September 26, 2015, its second quarter and first half of Fiscal 2016. The registrant named in the filing is Michael Kors Holdings Limited, not Capri Holdings Ltd.
The company operates retail, wholesale and licensing businesses. It reported 589 retail stores, including concessions, at quarter-end. Results are in U.S. dollars; amounts below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Three months ended September 26, 2015 | Prior-year quarter | Six months ended September 26, 2015 | Prior-year six months |
|---|---|---|---|---|
| Total revenue | $1,130.0 (+6.9%) | $1,056.6 | $2,116.0 (+7.1%) | $1,975.8 |
| Gross profit | $664.4 | $645.0 | $1,268.1 | $1,216.7 |
| Gross margin | 58.8% | 61.0% | 59.9% | 61.6% |
| Operating income | $273.1 | $305.6 | $521.7 | $582.3 |
| Net income attributable to MKHL | $193.1 | $207.0 | $367.5 | $394.7 |
| Diluted earnings per share | $1.01 | $1.00 | $1.88 | $1.90 |
Revenue growth was stronger excluding currency movements: management reported constant-currency increases of 12.3% for the quarter and 12.8% for the first half. Foreign exchange reduced reported revenue by $56.7 million and $112.7 million, respectively.
- Margins and expenses: Quarterly operating margin fell to 24.2% from 28.9%; first-half operating margin fell to 24.7% from 29.5%. SG&A rose 13.0% in the quarter and 15.3% in the first half, while depreciation and amortization rose 35.5% and 39.1%, respectively.
- Cash flow: First-half operating cash flow was $392.9 million, versus $198.9 million a year earlier. Investing used $202.5 million, including $193.5 million of capital expenditures. Financing used $736.0 million, principally due to $750.0 million of share repurchases. Cash declined by $547.4 million to $431.5 million.
- Balance sheet and debt: At September 26, cash was $431.5 million, working capital was $1,237.1 million, and total liabilities were $531.2 million. Consolidated debt was $9.5 million, associated with MK Panama. The company had no borrowings under its then-existing $200 million revolving facility, with $189 million available after letters of credit.
- Segments: Quarterly retail operating income declined 21.5% to $100.0 million; wholesale operating income was essentially flat at $156.9 million; licensing operating income declined 24.6% to $16.2 million.
Material changes versus the prior comparable period
- Comparable-store sales declined 8.5% in the quarter and 9.0% in the first half; on a constant-currency basis, declines were 3.4% and 4.2%. Management cited weaker Americas comparable sales, particularly watches and apparel.
- Revenue gains came mainly from new retail locations and wholesale growth. The company had 116 more retail stores than a year earlier; reported retail sales also benefited from e-commerce growth.
- Gross margin contracted, which management attributed primarily to increased retail promotions in the Americas and higher wholesale allowances. Operating costs grew faster than revenue, reflecting store expansion, corporate staffing, and higher depreciation.
- During the second quarter, the company increased its ownership of MK Panama to 75% and began consolidating it. The acquisition added a noncontrolling interest and preliminary goodwill of $12.2 million; purchase accounting was not final.
- The company repurchased 16.4 million shares for approximately $750 million in the first half. The board later approved an additional $500 million authorization, subsequent to quarter-end.
Outlook, risks and unusual items
- Management said operating cash generation, available cash and credit availability should be sufficient for working-capital needs over the next 12 months. It expected approximately $206.5 million of additional capital expenditures for the remainder of Fiscal 2016.
- No specific revenue or earnings guidance is provided in the supplied filing text. Management expected recent currency trends, including U.S. dollar strength, to continue for the remainder of Fiscal 2016.
- Management cited lower consumer traffic, reduced tourist travel, restrained spending, currency changes, shipping and distribution disruptions, and volatility in raw-material and labor costs as business risks. Port delays and prior e-commerce fulfillment disruption had affected inventory delivery and shipping.
- The company planned to assume direct control of its South Korean business when the licensing agreement expired on January 1, 2016. International expansion and integration could involve added costs and execution risks.
- On October 29, 2015, after quarter-end, the company replaced its existing facility with a $1.0 billion revolving credit facility expiring in 2020, with potential capacity expansion of up to $500 million. The filing reports no material pending legal proceedings and states management did not expect pending claims in aggregate to materially harm financial condition, cash flow or results.
Most important facts for investors to verify
- Confirm the filing’s registrant and period: Michael Kors Holdings Limited, quarter ended September 26, 2015—not a filing identifying Capri Holdings Ltd as registrant.
- Assess whether store expansion can offset falling comparable-store sales without further margin erosion.
- Track gross margin, SG&A, depreciation, and segment operating income against revenue growth.
- Review the effects of currency translation and hedging, including the company’s expectation that substantially all derivative-related accumulated losses would be reclassified to earnings within 12 months.
- Monitor capital spending, cash levels, ongoing buybacks, and the terms and covenant headroom of the post-quarter $1.0 billion credit facility.
- Follow final purchase accounting and operating performance for MK Panama, and the planned transition of the South Korean business.