Capri Holdings Ltd. — Form 10-Q Summary
Reporting period: Fiscal 2020 third quarter, the 13 weeks ended December 28, 2019; year-to-date (YTD) covers 39 weeks. Unaudited results are compared with the periods ended December 29, 2018. Unless noted, financial figures are USD millions. Capri operates Versace, Jimmy Choo and Michael Kors. Versace was acquired on December 31, 2018, so its revenue is included in the current period but not the prior-year comparison.
Financial performance
| Metric | Q3 2019 | Q3 2018 | YTD 2019 | YTD 2018 |
|---|---|---|---|---|
| Revenue | $1,571 | $1,438 | $4,359 | $3,894 |
| Gross profit | $932 | $873 | $2,640 | $2,387 |
| Gross margin | 59.3% | 60.7% | 60.6% | 61.3% |
| Operating income | $205 | $290 | $344 | $695 |
| Operating margin | 13.0% | 20.2% | 7.9% | 17.8% |
| Net income attributable to Capri | $210 | $200 | $328 | $524 |
| Diluted EPS | $1.38 | $1.33 | $2.15 | $3.46 |
| Operating cash flow | — | $752 | $776 |
Q3 revenue increased 9.2% (9.6% constant currency); YTD revenue increased 11.9% (13.0% constant currency). The Versace contribution was $195 million in Q3 and $630 million YTD. Growth was partly offset by lower Michael Kors revenue. Q3 operating income fell 29.3%, while YTD operating income declined 50.5%; reported net income rose in Q3 but fell 37.4% YTD. The prior-year periods included significant Versace acquisition-related foreign-exchange losses, and current-year tax benefits also affected net income comparisons.
Michael Kors revenue declined 5.1% in Q3 and 4.7% YTD as reported, with lower women’s accessories and watches and weaker comparable-store sales; e-commerce supported comparable sales. Jimmy Choo Q3 revenue rose 1.9%, but operating income fell 40.0%; YTD revenue declined 0.7% as reported and operating income fell 64.3%. Versace recorded operating losses of $12 million in Q3 and $6 million YTD, after non-cash purchase-accounting amortization.
Cash, debt and liquidity
- Cash and cash equivalents were $237 million at December 28, 2019, versus $172 million at March 30, 2019. YTD operating cash flow was $752 million; capital expenditures were $164 million.
- Cash used in investing activities was $133 million and cash used in financing activities was $554 million YTD. Prior-year ending cash included $1.922 billion of restricted cash placed in escrow for the Versace acquisition, limiting cash-flow comparability.
- Total debt carrying value was $2.116 billion, down from $2.566 billion at March 30, 2019. Short-term debt was $1.031 billion and long-term debt $1.085 billion. Remaining availability under the revolving facility was $481 million; total remaining availability across listed facilities was $529 million. The company reported compliance with its debt covenants.
- Working capital was negative $524 million, compared with positive $187 million at March 30, 2019. Current liabilities include $1.031 billion of short-term debt.
- Adoption of lease accounting materially increased reported assets and liabilities: operating lease right-of-use assets were $1.665 billion and operating lease liabilities totaled $2.157 billion. Future minimum lease payments were $2.400 billion before $243 million of interest.
Material changes and unusual items
- Gross margin fell 140 basis points in Q3 and 70 basis points YTD, primarily from increased Michael Kors markdowns; Versace partly offset the decline.
- YTD long-lived-asset impairment charges were $220 million, compared with $17 million in the prior-year period. They primarily reflected store-level impairment assessments, including $179 million for operating lease right-of-use assets, $33 million for property and equipment and $8 million for key money. Capri also recorded a $152 million, net-of-tax, opening retained-earnings reduction on adoption of lease accounting for impairments at certain underperforming locations.
- The Michael Kors Retail Fleet Optimization Plan targets 100–150 store closures. Capri had closed 129 stores at a cumulative cost of $100 million and expected to complete the remaining planned closures by the end of Fiscal 2020; estimated total one-time costs were $100–$125 million.
- Capri repurchased $100 million of shares YTD under a $500 million program authorized in August 2019; $400 million remained available at December 28, 2019.
Outlook, risks and contingencies
- No specific consolidated revenue or earnings guidance is provided in the filing. Management stated that cash, operating cash generation and available borrowing capacity should meet working-capital needs for the next 12 months, including planned investments.
- In a subsequent event disclosed in the filing, Capri said the coronavirus outbreak in China was expected to materially affect fourth-quarter results. As of February 5, 2020, approximately 150 Mainland China stores were closed; other open stores had reduced hours and significantly lower traffic. The financial impact could not be reasonably estimated, and disruption to Chinese sourcing could also materially affect Fiscal 2021.
- Management cited ongoing Hong Kong disruption, foreign-exchange volatility, tariffs and manufacturing costs, consumer and channel shifts, shipping disruption, acquisition integration, and global economic and political conditions as risks. The filing notes the U.K. left the EU on January 31, 2020, with future arrangements still uncertain.
- Capri was party to routine legal proceedings and did not believe their aggregate outcome would materially adversely affect its business or financial condition. The filing text does not provide a clear quantified estimate of potential losses.
Important facts for investors to verify
- Whether Michael Kors sales and margins stabilize, and whether markdown pressure persists.
- Whether Versace and Jimmy Choo improve operating performance and deliver expected acquisition benefits.
- The assumptions and cash-flow effects behind the $220 million YTD impairment charges and the remaining store-closure costs.
- The duration and financial impact of coronavirus-related store closures, reduced traffic and supply-chain disruption, including effects on Fiscal 2021.
- Debt maturity and covenant headroom, liquidity given negative working capital, and the effect of lease obligations on cash commitments.