Capri Holdings Ltd. — Form 10-Q Summary
Business and reporting period. Capri Holdings operates Versace, Jimmy Choo and Michael Kors, selling luxury apparel, footwear and accessories through retail, wholesale and licensing. This unaudited report covers the 13 weeks ended September 25, 2021 (FY2022 second quarter) and the 26 weeks ended that date. Comparisons are with periods affected by widespread COVID-19 store closures and reduced traffic.
Financial performance
- Second-quarter revenue: $1.300 billion, up 17.1% year over year; constant-currency growth was 15.0%. Revenue increased across all three brands: Versace $282 million (+44.6%), Jimmy Choo $137 million (+12.3%) and Michael Kors $881 million (+11.1%).
- Second-quarter profit and margins: Gross profit was $884 million; gross margin was 68.0%, up from 64.0%. Operating income was $195 million, or 15.0% of revenue, versus $153 million and 13.8%. Net income attributable to Capri was $200 million versus $122 million; diluted EPS was $1.30 versus $0.81.
- Six-month results: Revenue was $2.553 billion, up 63.5% (58.0% constant currency). Operating income was $453 million versus an operating loss of $9 million; net income attributable to Capri was $419 million versus a loss of $58 million. Gross margin was 68.2%, compared with 64.8%; operating margin was 17.7%, compared with negative 0.6%.
- Segment operating income, quarter: Versace $55 million, Jimmy Choo $1 million and Michael Kors $220 million. For the six months, the respective figures were $103 million, $12 million and $460 million.
- Cash flow, six months: Operating activities provided $396 million versus $137 million. Capital expenditures were $48 million; investing activities used $48 million. Financing activities used $342 million, including $160 million for share repurchases and share withholding. Cash and cash equivalents were $234 million at September 25; cash, cash equivalents and restricted cash totaled $237 million in the cash-flow statement.
- Debt and liquidity: Carrying value of debt was $1.144 billion ($1.150 billion before unamortized costs and discount), down from $1.342 billion at March 27, 2021. Cash was $234 million; working capital was $152 million, versus negative $75 million at fiscal year-end. The company reported $972 million available under its $1.0 billion revolving facility and compliance with debt covenants.
Changes, outlook and notable items
- Management attributed growth primarily to recovery from pandemic-related closures and reduced store traffic in the prior-year period. Higher average unit prices and lower promotional activity lifted gross margins; increased supply-chain costs partly offset the benefit.
- Global logistics disruptions—including port congestion, container shortages and factory closures—and higher freight rates were expected to continue through FY2022. Management said these could increase costs and adversely affect results.
- The store optimization program targets approximately 170 closures over FY2021 and FY2022. Capri had closed 127 stores by September 25, 2021, and revised expected one-time program costs to approximately $25 million from $75 million; it anticipates ongoing savings.
- The quarter included $33 million of asset impairment charges, primarily for Michael Kors store lease assets, and $8 million of restructuring and other charges. The six-month period included $11 million of restructuring and other charges.
- Management stated that operating cash flow, available credit and cash should be sufficient for working-capital needs and planned investments for the next 12 months and beyond. The filing provides no specific revenue or earnings guidance.
- Risks highlighted include COVID-19 and possible renewed store closures, supply-chain and freight disruption, foreign-exchange and interest-rate movements, tariffs and import restrictions, consumer demand, and compliance with debt covenants. Routine legal proceedings were not expected to have a material adverse effect in aggregate.
- Subsequent event: On November 3, 2021, the board replaced the existing repurchase authorization, which had $250 million remaining, with a new program allowing up to $1.0 billion of repurchases over two years. Repurchases may be suspended or discontinued.
Most important facts for investors to verify
- Whether sales growth and improved margins persist against less pandemic-affected comparison periods, and how each brand performs.
- Whether freight, logistics and other supply-chain costs materially erode gross margin or delay product availability.
- Progress and actual costs and savings from the planned store closures and related impairments.
- Debt reduction, covenant headroom, liquidity and the effects of share repurchases on cash and leverage.
- The durability of tax benefits and the impact of foreign-exchange movements and hedging on reported earnings and cash flows.