Business context and reporting period
This is Michael Kors Holdings Limited’s unaudited Form 10-Q for the quarter and nine months ended December 30, 2017 (fiscal Q3 and year to date), compared with periods ended December 31, 2016. The filing identifies the registrant as Michael Kors Holdings Limited, not Capri Holdings Ltd. The company reported four segments: Michael Kors Retail, Wholesale and Licensing, plus Jimmy Choo, acquired on November 1, 2017.
Key financial metrics
| Metric | Three months | Nine months |
|---|---|---|
| Revenue | $1,440.1 million, up 6.5% reported and 4.6% constant currency | $3,539.1 million, up 3.2% reported and 2.4% constant currency |
| Gross profit / margin | $884.0 million / 61.4%, versus 59.6% | $2,149.5 million / 60.7%, versus 59.5% |
| Operating income / margin | $313.5 million / 21.8%, versus $341.9 million / 25.3% | $662.0 million / 18.7%, versus $732.5 million / 21.4% |
| Net income attributable to MKHL | $219.4 million, down 19.1%; diluted EPS $1.42, versus $1.64 | $547.8 million, down 5.4%; diluted EPS $3.53, versus $3.40 |
| Operating cash flow | Not separately presented for the quarter | $873.3 million, versus $895.7 million |
| Cash and debt at December 30 | $317.1 million cash; $992.4 million long-term debt and $0.1 million short-term debt |
Performance and material changes
- Jimmy Choo contributed $114.7 million of revenue and $5.7 million of operating income from acquisition through December 30. The acquisition’s reported-quarter contribution makes total revenue growth an incomplete measure of underlying Michael Kors trends.
- Michael Kors revenue fell 2.0% in the quarter. Retail revenue rose 1.1% reported but declined 1.0% constant currency; comparable sales decreased 3.2% reported and 5.2% constant currency. Wholesale revenue declined 8.9% reported and 10.5% constant currency, reflecting reduced shipments intended to limit promotions. For the nine months, Michael Kors wholesale revenue fell 9.2%.
- Quarterly operating income declined despite higher gross margin. The company cited higher SG&A, acquisition costs and a $27.0 million foreign-currency loss, including a $32.0 million loss on the acquisition-related currency contract. Nine-month foreign currency results were a $14.7 million gain.
- Nine-month diluted EPS increased while attributable net income declined, alongside a lower weighted-average share count. The company repurchased $157.8 million of shares in the nine months; $842.2 million remained under its $1.0 billion repurchase authorization.
Liquidity, debt and cash flow
Nine-month investing cash outflow was $1,496.8 million, including $1,414.5 million net cash paid for Jimmy Choo; financing cash inflow was $701.0 million, largely reflecting acquisition-related borrowing. Cash and restricted cash ended at $317.4 million. Working capital was $722.5 million. The company had $988.7 million available under its $1.0 billion revolving facility, no revolver borrowings, and was in compliance with debt covenants. It subsequently repaid an additional $210.0 million of term-loan principal in January 2018. Operating leases required future minimum payments of $1,869.4 million.
Outlook, risks and unusual items
- The company expected to spend approximately $90 million on capital expenditures during the remainder of fiscal 2018 and said cash, operating cash flow and borrowing availability should meet its needs for the next 12 months.
- The Retail Fleet Optimization Plan targets closure of 100–125 Michael Kors full-price stores over two years. Management estimated $100–$125 million in one-time costs and approximately $60 million in annual savings; 24 stores had closed in the first nine months.
- Management expected the lower U.S. corporate tax rate to reduce its effective tax rate by 300–400 basis points in the next fiscal year, with the benefit intended for reinvestment. The Tax Act produced a provisional $12.4 million charge; the final transition effects remained subject to evaluation and could differ, possibly materially.
- Quarterly restructuring and other charges were $28.0 million, including Jimmy Choo transaction and transition costs and store-closure costs. Nine-month charges were $51.3 million. The acquisition also added substantial goodwill and intangible assets; purchase-price allocations were preliminary.
- Management highlighted risks from acquisition integration and uncertain acquisition benefits, changing consumer preferences and online channel shifts, foreign-exchange volatility, manufacturing costs, and possible shipping or distribution disruptions. Routine legal proceedings were not expected by management to have a material adverse effect.
Most important facts for investors to verify
- Confirm the filing entity and period: the submitted 10-Q is for Michael Kors Holdings Limited, quarter ended December 30, 2017.
- Assess underlying Michael Kors performance separately from Jimmy Choo’s partial-period contribution, especially comparable retail sales and continued wholesale declines.
- Track whether store closures deliver the stated cost savings and whether the $100–$125 million estimated closure costs remain on plan.
- Review debt reduction, interest costs, revolver availability and covenant headroom following the acquisition and January 2018 term-loan repayment.
- Monitor final Tax Act accounting, acquisition purchase-price adjustments and integration results, including any changes to the reported provisional tax charge.