Capri Holdings Ltd. — Form 10-Q Summary
Business context and reporting period
Capri Holdings operates Versace, Jimmy Choo and Michael Kors across retail, wholesale and licensing channels. This unaudited filing covers the 13 weeks ended December 25, 2021 (fiscal third quarter) and the 39 weeks ended that date; fiscal 2022 is a 53-week year ending April 2, 2022. The company notes that its third quarter is generally its strongest season because of holiday sales.
Financial performance and liquidity
- Quarter: Revenue was $1.609 billion, up 23.6% year over year (24.7% constant currency). Gross profit was $1.048 billion, with a 65.1% gross margin, unchanged year over year. Operating income was $331 million (20.6% margin), versus $167 million (12.8%); net income attributable to Capri was $322 million, or $2.11 diluted earnings per share.
- Nine months: Revenue was $4.162 billion, up 45.4% (42.9% constant currency). Gross margin improved to 67.0% from 65.0%; operating income rose to $784 million from $158 million, and net income attributable to Capri was $741 million versus $121 million.
- Quarterly segment revenue: Versace $251 million, Jimmy Choo $178 million and Michael Kors $1.180 billion. Each increased year over year. For the nine months, segment operating income was $135 million for Versace, $28 million for Jimmy Choo and $795 million for Michael Kors.
- Cash flow: Nine-month operating cash flow was $713 million, compared with $545 million; capital expenditures were $85 million. Investing cash use was $26 million and financing cash use was $663 million. Cash, cash equivalents and restricted cash ended at $264 million.
- Balance sheet and liquidity: Cash and cash equivalents were $261 million. Total debt carrying value was $1.002 billion, down from $1.342 billion at March 27, 2021. Working capital was $320 million, compared with negative $75 million. The company reported $951 million of remaining availability under its $1 billion revolving facility and $1.031 billion of total remaining borrowing availability. It was in compliance with debt covenants, including the 4.00-to-1.00 maximum net leverage test.
- Other notable items: Inventory increased to $978 million from $736 million at fiscal year-end. The company repurchased about $350 million of shares during the nine months; $800 million remained available under its new $1 billion, two-year repurchase program.
Changes versus prior comparable period
Management attributes much of the strong year-over-year revenue and earnings growth to recovery from pandemic-related store closures and reduced traffic in the prior year. In the quarter, operating expenses rose 5.3%, more slowly than revenue, and operating margin expanded. For the nine months, higher average selling prices and lower promotional activity supported gross margin, while increased supply-chain costs and unfavorable channel mix partly offset the benefit. The prior-year comparison also included substantially higher impairment charges: $90 million in the prior-year quarter and $110 million for the prior-year nine-month period, versus none in the current quarter and $33 million year to date.
Outlook, risks and unusual items
- Management said operating cash flow, available credit and cash should be sufficient to meet working-capital and other needs for the next 12 months and beyond. The filing provides no specific revenue or earnings guidance.
- Global logistics challenges—including port congestion, container shortages, vessel availability and temporary factory closures—were expected to continue through fiscal 2022 and into fiscal 2023. Higher freight costs and greater use of air freight may pressure results.
- COVID-19 disruptions, changing consumer demand and travel patterns, foreign-exchange movements, commodity and labor costs, tariffs and import restrictions remain risks. The company specifically noted that expiration of the U.S. Generalized System of Preferences could continue to increase duties if not renewed or made retroactive.
- The retail optimization plan targets approximately 170 store closures across fiscal 2021 and 2022. The company had closed 140 stores by December 25, 2021 and revised expected one-time program costs down from approximately $75 million to $25 million; most expected costs are future cash expenditures. The timing and amount of remaining charges are not yet determinable.
- The nine-month effective tax rate was 6.8%, reflecting benefits from a U.S. net operating loss carryback and Italian tax legislation, among other factors; these items may not recur. Routine legal proceedings were not expected by management to have a material adverse effect in aggregate.
Important facts for investors to verify
- Whether revenue and margin gains persist as comparisons normalize from pandemic-affected periods, and how each brand performs.
- Whether supply-chain constraints, freight costs, tariffs and inventory levels affect future margins, cash conversion or product availability.
- Progress on the approximately 170-store closure plan, actual remaining cash costs and realized savings against the revised $25 million estimate.
- Debt reduction, covenant headroom and liquidity, including the effect of share repurchases and any further changes in borrowing needs.
- How much of the unusually low tax rate reflects nonrecurring benefits, and the resulting future tax burden.