Capri Holdings Limited — Q3 Fiscal 2021 Form 10-Q
Reporting period: 13 weeks and 39 weeks ended December 26, 2020; comparable periods ended December 28, 2019. Capri owns Versace, Jimmy Choo and Michael Kors. Results were materially affected by COVID-19.
Financial performance
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Revenue | $1.302bn | $1.571bn | $2.863bn | $4.359bn |
| Gross profit / margin | $848m / 65.1% | $932m / 59.3% | $1.860bn / 65.0% | $2.640bn / 60.6% |
| Operating income / margin | $167m / 12.8% | $205m / 13.0% | $158m / 5.5% | $344m / 7.9% |
| Net income attributable to Capri | $179m | $210m | $121m | $328m |
| Diluted EPS | $1.18 | $1.38 | $0.80 | $2.15 |
| Operating cash flow | — | $545m | $752m |
Q3 revenue fell 17.1% reported and 19.5% at constant currency; nine-month revenue fell 34.3% reported and 35.6% constant currency. Management attributed the declines across brands to COVID-19. Gross margin improved in both comparisons, primarily on Michael Kors’ higher average unit price and favorable channel mix. However, operating income and nine-month operating margin declined; reduced selling and administrative costs did not fully offset lower revenue and impairment charges.
- Segments, Q3: Versace revenue was $195m, flat as reported (down 6.7% constant currency), with $13m operating income. Jimmy Choo revenue declined 26.7% to $121m and recorded an $8m operating loss. Michael Kors revenue declined 18.6% to $986m, while operating income was $281m; margin rose to 28.5% from 23.8%.
- Segments, nine months: Versace revenue declined 23.3% to $483m and recorded an $8m operating loss; Jimmy Choo revenue declined 34.4% to $294m and recorded a $37m operating loss; Michael Kors revenue declined 36.4% to $2.086bn and operating income fell to $423m.
- Cash and liquidity at December 26, 2020: Cash was $229m, versus $592m at March 28, 2020; working capital was negative $101m, versus positive $493m. Operating cash flow was $545m; investing cash outflow was $97m, including $85m of capital expenditures; financing cash outflow was $803m, mainly reflecting debt repayments.
- Debt: Total debt carrying value was $1.412bn, down from $2.179bn at March 28, 2020; balance-sheet short-term debt was $169m and long-term debt $1.243bn. Reported remaining credit-facility availability was $1.248bn. Cash plus facilities supported reported total liquidity of approximately $1.477bn before other considerations.
Material changes, outlook and risks
- Asset impairment charges were $90m in Q3 and $110m for nine months, primarily involving operating lease right-of-use assets. These charges weighed on reported operating results.
- Capri plans to close approximately 170 retail stores over FY2021 and FY2022 and expects about $75m of one-time costs, mostly future cash expenditures. It had closed 66 stores through December 26, 2020. The amount and timing of remaining charges were not yet determinable.
- The company suspended its $500m share-repurchase program amid pandemic impacts and credit-agreement restrictions. No open-market repurchases occurred in the nine months; remaining program authorization was $400m.
- Credit covenant relief waived the specified leverage covenant through the quarter ending June 26, 2021, with a 4.00-to-1.00 maximum net leverage ratio when reinstated. The amended facility also imposed liquidity requirements and restrictions on debt, distributions, repurchases, acquisitions and other actions. Capri reported compliance with its covenants at December 26, 2020.
- Management said operating cash flow, available borrowings and cash should meet working-capital needs for the next 12 months. This is not a quantified earnings or revenue forecast. The filing highlights uncertainty from COVID-19, including renewed closures, consumer demand and recovery pace, as well as currency, interest-rate, shipping, tariff and covenant risks.
- Other notable items: $41m of rent payments were deferred due to COVID-19; $37m of rent concessions were recorded for the nine months. A supplier financing program began in Q3, with $7m outstanding at period-end. The company recorded a $13m Q3 foreign-currency gain and a $5m income-tax benefit.
- Routine legal proceedings were not expected by management to have a material aggregate adverse effect. The filing reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue and margins recover as store access, tourism and consumer demand normalize, particularly at Jimmy Choo and Versace.
- Future cash costs, closure timing and expected savings from the approximately 170-store optimization plan.
- Cash generation, borrowing availability and covenant compliance as covenant relief expires; distinguish cash from undrawn facilities and consider lease obligations.
- Impairment assumptions and the potential for further asset or goodwill impairment.
- Potential effects of continued COVID-19 disruption, currency and interest-rate movements, and tariffs on results and liquidity.