Business context and reporting period
This is Michael Kors Holdings Limited’s unaudited Form 10-Q for the 13 weeks ended June 28, 2014, compared with the 13 weeks ended June 29, 2013. The filing does not identify Capri Holdings Ltd as the registrant; investors should verify the company and period against the intended filing.
The company designs, markets, distributes and retails Michael Kors branded products through retail, wholesale and licensing segments. At quarter-end, it operated 443 stores, including concessions, and sold through 3,862 full-price wholesale doors.
Financial performance and liquidity
| Metric | Q1 2014 | Prior-year quarter | Change |
|---|---|---|---|
| Total revenue | $919.2 million | $640.9 million | +43.4% |
| Net sales | $887.0 million | $616.2 million | +43.9% |
| Gross profit / margin | $571.6 million / 62.2% | $397.3 million / 62.0% | +43.9% profit |
| Operating income / margin | $276.8 million / 30.1% | $197.6 million / 30.8% | +40.1% income |
| Net income | $187.7 million | $125.0 million | +50.2% |
| Diluted earnings per share | $0.91 | $0.61 | +$0.30 |
| Operating cash flow | $221.7 million | $182.7 million | +$39.1 million |
| Capital expenditures | $73.2 million | $33.3 million | +$39.9 million |
Retail revenue rose 47.5% to $480.2 million; wholesale revenue rose 40.0% to $406.8 million; licensing revenue rose 30.5% to $32.1 million. Comparable-store sales increased 18.7% in North America, 54.2% in Europe and 48.8% in Japan.
Gross margin edged up 0.2 percentage points, while operating margin fell 0.7 points as operating expenses grew faster than revenue. The effective income tax rate declined to 32.0% from 36.6%; management attributed the decrease chiefly to a greater share of earnings from lower-tax non-U.S. subsidiaries.
Cash and cash equivalents were $1.125 billion at June 28, versus $955.1 million at March 29, 2014; working capital was $1.642 billion. Total liabilities were $433.0 million. No revolving credit borrowings were outstanding; $188.3 million was available under the facility, with $11.7 million in standby letters of credit. The company reported compliance with its credit covenants.
Operating cash flow increased year over year, supported by higher net income and collections, partly offset by inventory investment. Investing cash outflow was $77.7 million, compared with $39.2 million. Financing cash flow was $22.8 million, mainly from employee option exercises and related tax benefits, partly offset by treasury-share purchases.
Material changes, outlook and risks
- Growth reflected higher comparable and non-comparable retail sales, expansion of the store network, increased wholesale sales and higher licensing revenue. Management cited accessories as a key sales driver and growth in European wholesale as a contributor to wholesale margins.
- Management expected approximately $325 million of additional capital expenditures and $45.5 million of intangible-asset spending for European retail expansion during the remainder of Fiscal 2015. It stated that cash, operating cash flow and available credit should meet expected needs for the remainder of the fiscal year.
- Distribution inefficiencies from implementation of material-handling equipment continued to affect shipping capacity, although to a lesser extent than previously. Distribution costs increased approximately $9.9 million year over year.
- Other identified exposures include retail expansion and execution, consumer demand and luxury-market trends, raw-material and labor costs, foreign-exchange movements, and interest-rate risk. The company hedged certain foreign-currency purchases; a hypothetical 10% U.S. dollar move was estimated to change the fair value of outstanding forward contracts by approximately $8.0 million.
- Operating lease commitments totaled $1.286 billion. The filing excluded $20.4 million of long-term uncertain-tax-position liabilities from its contractual-obligations table because timing and resolution were uncertain.
- Management said pending legal proceedings were not expected, in aggregate, to have a material adverse effect; the filing reports no legal proceedings under Part II. No material changes to previously disclosed risk factors were reported. The company was evaluating the impact of the new revenue-recognition standard scheduled to take effect in 2017.
Important facts for investors to verify
- Confirm that this Michael Kors Holdings Limited filing, rather than a Capri Holdings Ltd filing, is the intended company and reporting period.
- Assess whether rapid store and wholesale-door expansion can sustain comparable sales and profitability, particularly as operating margin declined.
- Monitor the expected capital and intangible-asset spending against cash generation, inventory needs and the stated liquidity outlook.
- Track the resolution of distribution-system inefficiencies and their effect on fulfillment costs and capacity.
- Review foreign-exchange exposure, lease commitments, uncertain tax positions and related-party arrangements disclosed in the filing.