Business context and reporting period
Filing identity: The supplied filing is Michael Kors Holdings Limited’s Form 20-F, not a Capri Holdings Ltd filing. It reports the 52-week fiscal year ended March 31, 2012, with fiscal 2011 ended April 2, 2011 as the principal comparison. Although the request says “2011 Q4,” the filing is an annual report; it also includes unaudited fourth-quarter results. The company designs, sells and licenses luxury apparel, accessories and footwear through retail, wholesale and licensing channels.
Financial performance and liquidity
| Metric | FY2012 | FY2011 |
|---|---|---|
| Total revenue | $1.302 billion | $803.3 million |
| Net sales | $1.237 billion | $757.8 million |
| Gross profit / margin | $753.1 million / 57.8% | $446.1 million / 55.5% |
| Operating income / margin | $247.7 million / 19.0% | $136.9 million / 17.0% |
| Net income | $147.4 million | $72.5 million |
| Basic / diluted earnings per share | $0.80 / $0.78 | $0.40 / $0.40 |
| Cash from operating activities | $115.3 million | $110.3 million |
| Cash and working capital at period end | $106.4 million / $299.1 million | $21.1 million / $117.7 million |
| Revolving credit borrowings at period end | $22.7 million | $12.8 million |
Investing cash outflow was $88.2 million, principally capital expenditures; financing cash inflow was $58.6 million. The company reported $43.9 million available for future borrowing under its revolving facility. Total liabilities were $218.2 million and shareholders’ equity was $456.2 million at year end. Operating lease commitments totaled approximately $538.4 million.
Material changes versus the prior comparable period
- Revenue rose 62.1%; retail sales increased 82.1%, wholesale sales 47.5%, and licensing revenue 43.1%. Retail comparable-store sales grew 39.2%.
- Gross margin expanded 2.3 percentage points, attributed mainly to retail’s increased share of revenue, fewer retail markdowns, and improved wholesale mix and foreign-exchange effects.
- Operating income increased 81.0% and net income more than doubled. Selling, general and administrative expenses rose 66.0%, including higher store and corporate costs and approximately $27.0 million of equity compensation expense.
- Cash from operations increased only modestly despite higher earnings, as receivables and inventory absorbed cash; inventory-related operating cash outflow was $71.2 million.
- The company expanded to 237 retail stores, up from 166, and 2,677 wholesale doors, up from 2,032.
Outlook, commentary, risks and unusual items
- Management said cash, operating cash flow and available facility capacity should meet working-capital needs for the next 12 months. It expected fiscal 2013 capital expenditures to exceed $150 million, primarily for store openings, shop-in-shops, distribution facilities and information systems. No specific revenue or earnings guidance is provided.
- The company reported operational difficulties during the transition to its new Whittier, California distribution center in the fourth quarter, which delayed deliveries to wholesale customers and stores; further delays were possible during the transition.
- The $100 million secured revolving credit facility matures in September 2015 and has financial and operating covenants, including a $110 million annual capital-expenditure limit (subject to permitted additional amounts) and a minimum fixed-charge coverage ratio. The company reported compliance at year end.
- Principal risks include discretionary consumer demand and international economic weakness, fashion and competitive pressures, rapid expansion and execution, reliance on major wholesale customers and concentrated sourcing, foreign exchange and raw-material costs, and significant lease obligations. The five largest wholesale customers represented 27.9% of revenue; the largest represented 13.3%.
- Notable items include $3.3 million of long-lived-asset impairment, a $10.7 million employee-option redemption charge, and the reorganization, preference-share conversion and IPO-related changes in capital structure. The IPO and March 2012 secondary offering were sales by existing shareholders; the company received no proceeds from either offering.
- Management identified no material pending legal proceedings and reported no goodwill impairment. It expected to retain earnings and did not anticipate cash dividends in the foreseeable future.
Most important facts an investor should verify
- Confirm the issuer and reporting period: this is Michael Kors Holdings Limited FY2012, not Capri Holdings Ltd or a standalone 2011 fourth-quarter filing.
- Review audited statements and notes for the drivers and sustainability of 62.1% revenue growth, margin expansion and earnings growth, including the impact of store additions and equity compensation.
- Track inventory, receivables and operating cash conversion alongside earnings, and verify planned fiscal 2013 capital spending and the distribution-center transition.
- Assess wholesale-customer and supplier concentration, lease commitments, credit-facility availability and covenant headroom.
- Review related-party arrangements, including the long-term Far East licensing agreements with an entity owned by certain shareholders and directors, and the associated services and governance disclosures.