Business Context and Reporting Period
Michael Kors Holdings Limited (the registrant named in this filing, now associated with Capri Holdings) filed this unaudited Form 10-Q for the 13 weeks ended October 1, 2016, the second quarter of fiscal 2017. The company reports Retail, Wholesale and Licensing segments. Results include the Greater China business from June 1, 2016, following its acquisition.
Financial Performance
Amounts are in U.S. dollars; figures may not sum due to rounding.
| Metric | Three months ended October 1, 2016 | Year-over-year change | Six months ended October 1, 2016 | Year-over-year change |
|---|---|---|---|---|
| Total revenue | $1,088.2 million | -3.7% | $2,076.1 million | -1.9% |
| Gross profit / margin | $644.7 million / 59.2% | Margin +0.4 percentage points | $1,236.0 million / 59.5% | Margin -0.4 percentage points |
| Operating income / margin | $203.7 million / 18.7% | -25.4%; margin down from 24.2% | $390.6 million / 18.8% | -25.1%; margin down from 24.7% |
| Net income attributable to MKHL | $160.9 million; diluted EPS $0.95 | -16.7%; diluted EPS was $1.01 | $308.0 million; diluted EPS $1.78 | -16.2%; diluted EPS was $1.88 |
| Operating cash flow | Not provided for the quarter | — | $345.0 million | Down from $392.9 million |
For the quarter, Retail sales rose 12.1% to $597.2 million, while Wholesale sales fell 18.4% to $452.2 million and Licensing revenue declined 10.2% to $38.8 million. Comparable-store sales fell 5.4%. For the first half, Retail sales increased 9.8% to $1,160.1 million, Wholesale fell 13.4% to $846.6 million, and Licensing declined 15.3% to $69.4 million; comparable-store sales fell 6.4%.
At October 1, cash and cash equivalents were $186.4 million, down from $702.0 million at fiscal year-end. Working capital was $483.8 million, versus $1,234.3 million. Short-term debt was $384.4 million, with no long-term debt reported; cash less reported debt was approximately negative $198.0 million. The company had $609.9 million available under its principal revolving facility and reported compliance with its covenants.
First-half investing cash outflow was $585.5 million, including $480.6 million net cash paid for the Greater China acquisition and $99.2 million of capital expenditures. Financing cash outflow was $270.0 million, including $654.7 million of share repurchases, partly offset by debt borrowings. Cash decreased by $515.6 million over the period.
Material Changes and Unusual Items
- On May 31, 2016, the company acquired its former Greater China licensee for $500.0 million in cash, subject to purchase-price adjustments. The preliminary allocation included $400.4 million of reacquired rights and $96.5 million of goodwill. The business contributed $51.4 million of revenue and a $3.8 million net loss in the quarter; its results include non-cash purchase-accounting amortization and integration costs.
- First-half results included approximately $11.3 million of acquisition transaction costs. The company also recorded $4.9 million of impairment charges on fixed assets at 10 retail locations that remained open.
- During the first half, the company repurchased 13.0 million shares for $650.0 million under its repurchase programs. The new $1.0 billion authorization had $350.0 million remaining at October 1.
- Retail gross margin pressure reflected increased promotions; first-half Retail operating margin fell to 11.7% from 20.9%. Higher operating costs, store expansion and depreciation also weighed on operating income. Wholesale and Licensing operating income declined as well.
Outlook, Commentary and Risks
Management said operating cash flows, available cash and revolving-credit borrowings were expected to be sufficient for working-capital needs over the next 12 months. It expected approximately $150 million of capital expenditures during the remainder of fiscal 2017. The filing gives no clear revenue or earnings guidance. Management cited ongoing challenges in accessible luxury, including weaker consumer traffic, promotional selling, lower tourist travel, restrained spending, and political and economic factors.
Management noted currency volatility, including the impact of a weaker British pound following the U.K. vote to leave the European Union, and said foreign-exchange movements could adversely affect results. Other stated exposures include interest-rate movements, manufacturing and labor-cost volatility, and shipping or distribution disruptions. The company uses foreign-currency forwards for hedging, not speculation; a hypothetical 10% U.S. dollar move would change the fair value of outstanding contracts by approximately $17.1 million. Management did not believe pending legal matters, in aggregate, would materially affect the company. It reported disclosure controls as effective; integration of the acquired China business’s internal controls was still underway.
Important Facts for Investors to Verify
- Whether comparable-store sales and promotional activity improved after the reported 5.4% quarterly and 6.4% first-half declines.
- Whether Retail profitability recovers as store-related costs, acquisition expenses and purchase-accounting amortization evolve.
- The Greater China acquisition’s ongoing revenue, earnings, cash contribution, integration costs and final purchase-price allocation; the allocation was preliminary.
- Cash generation, working-capital needs, debt levels and covenant headroom, particularly given reduced cash and substantial share repurchases.
- Delivery of management’s remaining-fiscal-year capital-expenditure plan and any subsequent changes to business outlook or risks.