Business context and reporting period
Michael Kors Holdings Limited (now identified in the request as Capri Holdings Ltd) filed this unaudited Form 10-Q for the 13 weeks ended July 2, 2016, its fiscal 2017 first quarter. The business operated through retail, wholesale and licensing segments. On May 31, 2016, it acquired its former Greater China licensee, consolidating the operations from June 1.
Financial performance and liquidity
| Metric | Q1 fiscal 2017 | Comparable prior period |
|---|---|---|
| Total revenue | $987.9 million | $986.0 million |
| Gross profit / margin | $591.3 million / 59.9% | $603.6 million / 61.2% |
| Operating income / margin | $186.9 million / 18.9% | $248.6 million / 25.2% |
| Net income attributable to MKHL | $147.1 million; diluted EPS $0.83 | $174.4 million; diluted EPS $0.87 |
| Operating cash flow | $322.5 million | $279.7 million |
| Cash and cash equivalents | $337.1 million at July 2 | $702.0 million at April 2 |
| Debt | $248.6 million short-term debt | $2.3 million total debt at April 2 |
| Working capital | $554.2 million | $1,234.3 million at April 2 |
Revenue was nearly unchanged year over year; net sales rose 1.1%, but licensing revenue fell 20.9%. Retail sales increased 7.6%, while wholesale sales declined 7.0%. Comparable-store sales fell 7.4% (7.6% constant currency). Gross margin contracted 130 basis points, largely because of increased retail promotions; operating expenses rose 13.9%, including acquisition-related costs and higher store expenses. The effective tax rate declined to 21.2% from 29.4%.
Operating cash flow increased, while investing used $527.7 million, including $480.6 million net cash paid for the Greater China acquisition. Financing used $156.2 million, including $404.4 million in treasury-share purchases, partly offset by revolving-credit borrowings. The company paid $46.9 million in capital expenditures and expected approximately $203 million more for the remainder of fiscal 2017. The filing says cash, operating cash flow and available credit should meet working-capital needs for the next 12 months.
Material changes and management commentary
- The Greater China acquisition cost $500 million, subject to purchase-price adjustments; it added $20.6 million of revenue and a $2.2 million net loss from acquisition through July 2. Preliminary purchase accounting included $400.4 million of reacquired rights and $99.0 million of goodwill. The company said purchase accounting remained subject to finalization.
- The retail network expanded to 771 stores from 550 a year earlier, in part through acquired and consolidated businesses. Retail operating income fell 44.9%; wholesale operating income declined 1.2%, while licensing operating income fell 28.5%.
- A new $1.0 billion share-repurchase authorization was approved May 25. The company repurchased approximately $400 million under its programs during the quarter; $600 million remained authorized at July 2.
- Management cited challenging luxury-market conditions, including lower consumer traffic, promotional selling, reduced tourist travel and restrained consumer spending. It also noted greater currency volatility after the U.K. Brexit vote and expected potential negative effects on some non-U.S. operations.
Outlook, risks and contingencies
No specific revenue or earnings guidance is provided in the filing. Management expected international growth and global financing activities to continue favorably affecting the effective tax rate, while noting that tax rates may vary with geographic earnings mix, legislation and tax strategies. Risks include international expansion and political, economic, currency and regulatory uncertainty; shipping disruptions; and volatility in material and labor costs. A 10% U.S. dollar movement against currencies under forward contracts would change their fair value by approximately $20.5 million. The company was compliant with its credit-facility covenants. Management did not expect pending legal proceedings in aggregate to materially adversely affect the company; the filing reports no legal proceedings under Part II, Item 1.
Important facts for investors to verify
- Confirm the issuer and reporting period: this filing is for Michael Kors Holdings Limited, quarter ended July 2, 2016.
- Assess the sustainability of declining comparable sales, lower gross margin and sharply reduced retail operating profitability.
- Review the Greater China acquisition’s final purchase-price allocation, integration costs and subsequent operating performance.
- Monitor cash, working capital, borrowings and liquidity after the acquisition and substantial share repurchases.
- Consider exposure to Brexit-related uncertainty, foreign exchange movements, consumer demand and promotional activity.