Capri Holdings Ltd. — Form 10-Q Summary
Business context and reporting period
Capri Holdings operates Versace, Jimmy Choo and Michael Kors. This unaudited filing covers the 13 weeks ended December 31, 2022 (fiscal third quarter of FY2023) and the 39 weeks ended that date. Comparatives are the periods ended December 25, 2021. FY2023 ends April 1, 2023.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2022 | Nine months ended Dec. 31, 2022 |
|---|---|---|
| Revenue | $1.512 billion | $4.284 billion |
| Gross profit / gross margin | $1.005 billion / 66.5% | $2.857 billion / 66.7% |
| Operating income / margin | $236 million / 15.6% | $719 million / 16.8% |
| Net income attributable to Capri | $225 million | $650 million |
| Diluted earnings per share | $1.72 | $4.74 |
For the quarter, revenue declined 6.0% year over year as reported, but 0.5% at constant currency; unfavorable foreign-exchange effects were approximately $89 million. Operating income fell 28.7% and net income attributable to Capri fell 30.1%. For the nine months, reported revenue rose 2.9% (9.9% constant currency), while operating income declined 8.3% and net income attributable to Capri declined 12.3%.
Quarterly revenue by segment was Michael Kors $1.095 billion, Versace $249 million and Jimmy Choo $168 million. At constant currency, revenue changed by -3.6%, +11.2% and +3.4%, respectively. For the nine months, segment revenue was $2.970 billion, $832 million and $482 million, respectively; constant-currency growth was 5.6%, 22.9% and 15.1%.
Quarterly gross margin improved from 65.1% to 66.5%, primarily due to lower supply-chain costs. SG&A rose 9.8% to $720 million, driven by higher marketing and corporate costs, including ERP and transformation expenses; operating margin fell from 20.6% to 15.6%. For the nine months, gross margin eased from 67.0% to 66.7%, while SG&A increased 10.2% to $1.984 billion and operating margin declined from 18.8% to 16.8%.
Operating cash flow for the nine months was $616 million, compared with $713 million a year earlier. Capital expenditures were $168 million. Investing cash flow was positive $241 million, including $409 million of net-investment-hedge settlements; financing cash flow was negative $651 million, including $964 million of share repurchases. Cash and cash equivalents were $281 million at December 31, 2022, versus $169 million at April 2, 2022; working capital was $525 million.
Total debt carrying value was $1.540 billion, up from $1.160 billion at April 2, 2022. It included $580 million drawn on the revolving facility, a $481 million Versace term loan, and $448 million of senior notes due 2024. The company reported $905 million of remaining revolver availability and $980 million of total remaining availability across listed facilities. It was in compliance with debt covenants, including a maximum net leverage ratio of 4.0 to 1.0. Operating lease liabilities totaled $1.804 billion. Inventory was $1.188 billion, compared with $1.096 billion at April 2, 2022.
Material changes and management commentary
- Quarterly reported revenue decreased across all three brands, with foreign exchange and Greater China COVID-related disruptions affecting results; lower wholesale revenues in the Americas and EMEA also weighed on the quarter.
- For the nine months, constant-currency growth in the Americas and EMEA was partly offset by weaker Greater China revenue. Asia revenue was $201 million for the quarter, down from $250 million, and $609 million for the nine months, down from $697 million.
- Management attributed the nine-month decline in operating margin to higher SG&A, marketing investment, supply-chain costs and unfavorable channel or regional mix. Jimmy Choo’s nine-month operating margin improved; Versace and Michael Kors margins declined.
- The company repurchased approximately $950 million of shares during the nine months and had $800 million remaining under its then-current $1 billion repurchase plan at December 31. Repurchases may be suspended or discontinued.
- Management stated that cash from operations, available cash and borrowing capacity should be sufficient for working-capital needs and planned investments for the next 12 months and beyond. The filing gives no specific earnings or revenue guidance.
Risks, contingencies and unusual items
- Management cited inflation, recession and consumer-spending uncertainty, foreign-exchange volatility, supply-chain and shipping constraints, and the war in Ukraine. It had stopped wholesale shipments to Russia and said partners were winding down Russian retail operations.
- COVID-related lockdowns in Greater China adversely affected stores and demand; management said conditions remained volatile. Luxury discretionary demand may weaken amid economic uncertainty.
- Higher interest rates and borrowings increased net interest expense. The Versace term loan and revolving borrowings carry variable rates, exposing the company to further rate changes.
- The nine-month results include $12 million of asset impairment and $11 million of restructuring and other charges. The company also recorded a 1.3% quarterly effective tax rate and a 9.2% nine-month rate, reflecting, among other items, global financing activities and release of a U.K. deferred-tax valuation allowance.
- The company reported routine legal proceedings and believes their aggregate outcome will not materially adversely affect it. Disclosure controls were assessed as effective; the ongoing multi-year ERP implementation may change processes and internal controls as it proceeds.
Important facts for investors to verify
- Whether Greater China demand and wholesale trends recover, and how much reported performance continues to be affected by currency movements.
- Whether SG&A, marketing and transformation costs moderate enough to support operating-margin recovery.
- Debt, variable-rate exposure, covenant headroom and the effect of future borrowing needs, alongside the scale and pace of share repurchases.
- Inventory levels, cash conversion and the sustainability of operating cash flow, excluding hedge-settlement proceeds.
- Potential impacts of inflation, supply-chain disruptions, geopolitical events and the ERP implementation on costs, controls and results.