Business context and reporting period
Capri Holdings Limited’s Form 10-K covers fiscal 2022, the 53 weeks ended April 2, 2022; the comparable fiscal 2021 was 52 weeks. The company operates Versace, Jimmy Choo and Michael Kors. Michael Kors generated about 70% of fiscal 2022 revenue, Versace 19% and Jimmy Choo 11%.
Results reflect a recovery from pandemic-related store closures and weak traffic in fiscal 2021. Fiscal 2022 revenue also included about $70 million from the extra week. Unless otherwise stated, amounts below are in U.S. dollars.
Key financial results
| Metric | Fiscal 2022 | Fiscal 2021 |
|---|---|---|
| Revenue | $5.654 billion | $4.060 billion |
| Gross profit / gross margin | $3.744 billion / 66.2% | $2.597 billion / 64.0% |
| Operating income / margin | $903 million / 16.0% | $19 million / 0.5% |
| Net income (loss) attributable to Capri | $822 million | ($62 million) |
| Diluted earnings (loss) per share | $5.39 | ($0.41) |
| Operating cash flow | $704 million | $624 million |
| Capital expenditures | $131 million | $111 million |
Revenue rose 39.3% reported (38.6% constant currency). By brand, Versace revenue increased 51.5% to $1.088 billion, Jimmy Choo increased 46.7% to $613 million, and Michael Kors increased 35.2% to $3.953 billion. Each brand’s operating results improved; Michael Kors delivered $1.005 billion operating income, Versace $185 million and Jimmy Choo $13 million.
Gross margin expanded 220 basis points, primarily on higher average selling prices and lower promotional activity, partly offset by higher supply-chain costs and unfavorable channel mix. SG&A increased to $2.533 billion, but declined as a share of revenue to 44.8% from 49.7%, reflecting revenue growth and expense leverage.
Cash, debt and liquidity
- Cash and cash equivalents were $169 million at year-end, versus $232 million. Cash, cash equivalents and restricted cash totaled $172 million in the cash-flow statement.
- Working capital was $325 million, compared with negative $75 million. Inventories rose to $1.096 billion from $736 million, a $386 million operating cash use; management cited inventory buildup and supply-chain timing.
- Debt carrying value was $1.160 billion, versus $1.342 billion, including $495 million on the term loan, $450 million principal amount of 2024 notes and $175 million drawn on the revolving facility. The revolver had $804 million remaining availability; total stated remaining availability across facilities was $881 million.
- The company reported compliance with debt covenants at April 2, 2022. The 2018 Credit Facility requires a quarterly maximum net leverage ratio of 4.0 to 1.0.
- Operating cash flow was $704 million; investing activities provided $58 million, including $189 million received from net-investment-hedge settlements; financing activities used $800 million, including $661 million of share repurchases.
Material changes, outlook and unusual items
- Operating income improved substantially from the pandemic-affected prior year, when the company recorded $316 million in asset impairment charges. Fiscal 2022 impairment expense in the income statement was $73 million; the $83 million of long-lived-asset impairment disclosed elsewhere includes $10 million classified in restructuring and other charges.
- The company completed its retail optimization plan, closing 167 stores across fiscal 2021 and fiscal 2022 and recording $14 million in related net restructuring charges. Management expects continuing savings and lower depreciation from the closures.
- Management expected fiscal 2023 capital expenditures of approximately $300 million, mainly for retail and e-commerce, ERP implementation and transformation initiatives. It said operating cash, cash on hand and borrowing availability should meet working-capital needs and planned requirements for the next 12 months and beyond.
- Strategic goals include growing Versace to at least $2 billion in revenue and Jimmy Choo to $1 billion over time; expanding each brand’s retail footprint toward 300 stores; increasing accessories penetration at both brands; and doubling Michael Kors revenue in Asia over time. These are long-term goals, not precise fiscal 2023 guidance.
- Management cited continuing logistics delays, port and container constraints, factory disruptions, labor shortages and elevated freight costs as risks for fiscal 2023. Inflation, raw-material costs, tariffs and pricing acceptance could also affect margins and demand. The company recorded $9 million of charges related to the war in Ukraine, primarily for incremental credit losses and inventory reserves.
- Income-tax expense was $92 million on $915 million of pretax income. Fiscal 2022 included an additional $43 million tax benefit after finalizing a CARES Act net-operating-loss carryback claim, as well as tax valuation allowance and other discrete tax effects. Unrecognized tax benefits, including accrued interest, were $221 million at year-end.
- CEO succession plans changed: Joshua Schulman left in March 2022, and John Idol remained Chairman and CEO. Subsequent to year-end, the company reported a credit-rating upgrade and a reduction in the notes’ coupon to 4.25% effective May 1, 2022. On June 1, 2022, it announced a new $1 billion share-repurchase authorization after terminating the prior plan with $500 million unused.
- Auditors issued unqualified opinions on the financial statements and internal controls. Critical audit matters included valuation of goodwill and indefinite-lived brand assets, and impairment of retail-store long-lived assets. No impairment was recorded for Versace or Jimmy Choo goodwill or brand assets in fiscal 2022.
Important facts for investors to verify
- How much of the revenue and profit recovery reflects sustainable demand, versus the extra fiscal week, reopening comparisons, higher prices and reduced promotions?
- Whether inventory growth, supply constraints and freight costs normalize, and whether gross margin holds as product availability and consumer demand evolve.
- Progress and costs against the $300 million fiscal 2023 capital-spending expectation, including ERP rollout and e-commerce projects.
- Debt covenant headroom, variable-rate exposure, refinancing needs for 2024 notes and the effects of the company’s cross-currency hedges.
- Whether store-closure savings and the long-term brand growth goals are achieved without additional impairments or material execution costs.
- The outcome and timing of tax audits and uncertain tax positions, including the $221 million year-end balance.