Capri Holdings Ltd. — Form 10-Q Summary
Reporting period: 13 weeks ended July 2, 2022, the first quarter of Fiscal 2023 (fiscal year ends April 1, 2023). Comparatives are the 13 weeks ended June 26, 2021. Figures are in U.S. dollars unless stated otherwise. Capri operates Versace, Jimmy Choo and Michael Kors.
Financial performance
| Metric | Q1 FY2023 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $1.360 billion | $1.253 billion | +8.5% reported; +15.2% constant currency |
| Gross profit / margin | $901 million / 66.3% | $856 million / 68.3% | Margin down 2.0 percentage points |
| Operating income / margin | $231 million / 17.0% | $258 million / 20.6% | Income down 10.5% |
| Net income attributable to Capri | $201 million | $219 million | Down 8.2% |
| Diluted earnings per share | $1.40 | $1.41 | Down $0.01 |
| Operating cash flow | $137 million | $204 million | Down $67 million |
Revenue growth reflected stronger retail and wholesale activity in the Americas and EMEA, partly offset by COVID-related disruption in Greater China. Unfavorable foreign exchange reduced reported revenue by approximately $83 million. Gross margin pressure reflected higher supply-chain costs and unfavorable regional sales mix; higher retail, e-commerce, marketing and corporate costs also weighed on operating margin.
Segments: Versace revenue was $275 million (+14.6% reported; +29.6% constant currency) and operating income was $52 million. Jimmy Choo revenue was $172 million (+21.1%; +30.3% constant currency) and operating income was $19 million. Michael Kors revenue was $913 million (+4.8%; +8.7% constant currency) and operating income was $222 million, down from $240 million. Michael Kors remained the largest segment by revenue.
Cash, debt and liquidity
- Cash and cash equivalents were $221 million at July 2, 2022, up from $169 million at April 2, 2022. Working capital was $467 million.
- Total debt carrying value was $1.419 billion, compared with $1.160 billion at fiscal year-end; this implies approximately $1.198 billion of debt net of reported cash. The company repaid its term loan and had $922 million outstanding under its new revolving facility.
- The new $1.5 billion revolving credit facility had $557 million available at quarter-end. Capri reported compliance with its covenants, including the maximum 4.0-to-1.0 net leverage covenant.
- Operating cash flow was reduced in part by a $209 million increase in inventory. Investing cash flow was positive $30 million, including $66 million received from settling net investment hedges; capital expenditures were $36 million. Financing cash outflow was $50 million and included $312 million of share repurchases.
- Management said 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.
Outlook, risks and notable items
- The filing provides no specific revenue, earnings or margin guidance. Management expects logistics disruptions, higher freight costs and supply-chain challenges to continue through Fiscal 2023.
- Management cited inflation in labor, raw-material and freight costs, a weaker euro, reduced discretionary spending risk and macroeconomic uncertainty related to the war in Ukraine. Capri paused wholesale shipments to Russia and Ukraine; those markets represented less than 1% of Fiscal 2022 sales.
- COVID-related restrictions in Greater China affected current-quarter sales. The company also identifies foreign-exchange, interest-rate, sourcing, shipping, cybersecurity, competition, consumer-demand and credit-covenant risks.
- Capri repurchased approximately 6.12 million shares for about $300 million under a new $1.0 billion authorization; $700 million remained available at quarter-end. Repurchases may be suspended or discontinued.
- Foreign-currency translation reduced comprehensive income; the quarter included a $107 million translation adjustment. The company received $66 million from hedge settlements during the quarter and disclosed a further $237 million received from hedge modifications in the subsequent quarter.
- Routine legal proceedings were not expected by management to have a material adverse effect. The company is implementing a multi-year ERP system; its Michael Kors North America finance functionality launched in the quarter, and management expects related process and control changes as implementation continues.
Important facts for investors to verify
- Whether constant-currency growth translates into sustained reported growth as foreign exchange and China conditions evolve.
- Whether gross margin recovers as supply-chain, freight and regional-mix pressures change.
- Inventory levels, operating cash conversion and the impact of continued share repurchases on debt and liquidity.
- Revolver utilization, floating-rate exposure and ongoing compliance with the 4.0-to-1.0 leverage covenant.
- Progress and control implications of the ERP rollout, and any material changes in legal, geopolitical or supply-chain risks.