Capri Holdings Limited — Form 10-Q Summary
Reporting period: 13 and 39 weeks ended December 29, 2018, compared with the periods ended December 30, 2017. Amounts are in U.S. dollars. The company changed its name from Michael Kors Holdings Limited to Capri Holdings Limited on December 31, 2018.
Business context
At quarter-end, the company reported four segments: Michael Kors Retail, Wholesale and Licensing, and Jimmy Choo. It completed its acquisition of Versace on December 31, 2018, after the reporting date; Versace is therefore not included in the period’s operating results or balance sheet. The company described the acquisition as expanding its luxury group to three brands.
Key financial metrics
| Metric | Three months ended Dec. 29, 2018 | Three months ended Dec. 30, 2017 | Nine months ended Dec. 29, 2018 | Nine months ended Dec. 30, 2017 |
|---|---|---|---|---|
| Revenue | $1,438.0 million | $1,440.1 million | $3,894.3 million | $3,539.1 million |
| Gross profit / margin | $873.2 million / 60.7% | $884.0 million / 61.4% | $2,387.1 million / 61.3% | $2,149.5 million / 60.7% |
| Operating income / margin | $290.0 million / 20.2% | $313.5 million / 21.8% | $694.6 million / 17.8% | $662.0 million / 18.7% |
| Net income attributable to Capri | $199.6 million | $219.4 million | $523.6 million | $547.8 million |
| Diluted earnings per share | $1.33 | $1.42 | $3.46 | $3.53 |
- Cash flow: Nine-month operating cash flow was $775.7 million, down from $873.3 million. Investing used $215.6 million, including $134.7 million in capital expenditures; financing provided $1,471.7 million.
- Debt and liquidity: At December 29, total debt was $2,550.9 million ($2,534.1 million carrying value), including $579.4 million short-term and $1,954.7 million long-term debt. Cash and cash equivalents were $264.5 million. The company had $483.0 million available under its revolving facility and reported compliance with debt covenants.
- Restricted cash: The balance sheet included $1,921.6 million of restricted cash, primarily held in escrow for Versace and paid on December 31. Reported working capital of $2,052.1 million includes this escrow amount and should not be read as freely available liquidity.
Changes versus prior comparable periods
- Third-quarter revenue was nearly flat year over year. Michael Kors revenue declined 3.7%, while Jimmy Choo revenue rose to $161.6 million from $114.7 million, including $39.3 million from having Jimmy Choo consolidated for the full quarter. Michael Kors comparable sales fell 2.4% (1.0% on a constant-currency basis).
- Quarterly operating income declined 7.5% and Capri-attributable net income declined 9.0%. Gross margin fell 70 basis points, principally due to increased Michael Kors retail markdowns; SG&A rose 4.2% and as a share of revenue increased to 35.2% from 33.7%.
- Nine-month revenue increased 10.0%, substantially reflecting $328.7 million of incremental Jimmy Choo revenue from the longer consolidation period. Michael Kors revenue rose 0.6%. Operating income increased 4.9%, but operating margin fell 90 basis points and Capri-attributable net income decreased 4.4%.
- Nine-month cash from operations decreased $97.6 million, primarily due to working-capital movements, including increased inventory and in-transit goods. Capital expenditures were $50.9 million higher than in the prior-year period.
Outlook, commentary, risks and unusual items
- Management plans: The company expected to spend approximately $90 million on capital expenditures during the remainder of Fiscal 2019. Its Michael Kors retail fleet plan targeted 100–125 store closures; 71 had closed by quarter-end, with remaining planned closures expected by the end of Fiscal 2020. Management continued to estimate one-time costs of $100–$125 million and ongoing annual savings of approximately $60 million.
- Versace acquisition: The acquisition’s enterprise value was approximately €1.753 billion (about $2.005 billion). It was funded with debt and cash. The company had not completed purchase accounting and said further business-combination disclosures would be provided in its annual report. A related currency hedge generated a $77.4 million realized loss during the nine-month period; the loss contributed to foreign-currency loss of $78.5 million.
- Debt and currency exposure: Borrowings increased materially to fund the Versace transaction. Most term-loan and revolving borrowings bear variable interest rates. Management identified foreign-exchange volatility as a continuing risk; a 10% currency move would change the fair value of outstanding forward contracts by approximately $15.9 million and net-investment hedges by approximately $45.3 million, based on the filing’s sensitivity analysis.
- Other unusual costs: Nine-month restructuring and other charges were $49.2 million, including $35.3 million of transaction and transition costs and $9.5 million related to the Michael Kors store plan. Nine-month impairment charges were $17.2 million. The quarter’s foreign-currency loss was $42.6 million.
- Other risks and contingencies: Management cited online-channel shifts, tariffs and duties, manufacturing costs, shipping disruptions, acquisition integration and brand execution as risks. It reported $126.6 million of liabilities related to uncertain tax positions, including interest, and anticipated a possible $37.8 million reduction in gross unrecognized tax benefits over the next 12 months, while noting uncertainty in outcome and timing. Routine legal proceedings were not expected to have a material adverse effect in aggregate.
- Guidance: The filing provides no clear full-year revenue or earnings guidance. It states that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Post-closing Versace purchase accounting, contribution to earnings and cash flows, and integration costs in subsequent filings.
- Debt, interest expense, covenant headroom and usable cash after the Versace escrow payment and acquisition funding.
- Whether Michael Kors comparable-sales trends, retail markdowns and planned store-closure savings develop as management expects.
- Working-capital and inventory trends, given the significant inventory cash use and the decline in operating cash flow.
- Effects of foreign-exchange movements and the uncertain tax positions on future earnings and cash flow.