Business context and reporting period
Michael Kors Holdings Limited (the registrant named in the filing; the request metadata identifies Capri Holdings Ltd) filed this unaudited Form 10-Q for its second fiscal quarter of fiscal 2015, ended September 27, 2014. The quarter covered 13 weeks; year-to-date results covered 26 weeks. The company designs, markets, distributes and retails branded apparel and accessories through retail, wholesale and licensing businesses.
Financial performance and liquidity
Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions.
| Metric | Quarter ended Sep. 27, 2014 | Prior-year quarter | Six months ended Sep. 27, 2014 | Prior-year six months |
|---|---|---|---|---|
| Total revenue | $1,056.6 million | $740.3 million | $1,975.8 million | $1,381.2 million |
| Gross profit / margin | $645.0 million / 61.0% | $449.9 million / 60.8% | $1,216.7 million / 61.6% | $847.1 million / 61.3% |
| Operating income / margin | $305.6 million / 28.9% | $221.5 million / 29.9% | $582.3 million / 29.5% | $419.0 million / 30.3% |
| Net income | $207.0 million | $145.8 million | $394.7 million | $270.8 million |
| Diluted EPS | $1.00 | $0.71 | $1.90 | $1.32 |
- Quarterly revenue grew 42.7% year over year; six-month revenue rose 43.1%. Net income increased 42.0% and 45.8%, respectively.
- Six-month revenue by segment: retail $975.8 million, wholesale $920.9 million and licensing $79.1 million. Comparable-store sales increased 14.7% in North America, 47.1% in Europe and 50.9% in Japan year to date.
- Six-month operating cash flow was $198.3 million, versus $181.5 million a year earlier. Investing used $172.4 million, including $157.4 million of capital expenditures; financing provided $36.8 million. Cash increased $57.2 million to $1,012.4 million.
- At September 27, cash was $1,012.4 million, working capital $1,807.5 million and current assets $2,133.4 million against current liabilities of $325.9 million. Total liabilities were $444.3 million.
- No borrowings were outstanding under the $200 million revolving facility; $188.4 million was available, with $11.6 million of standby letters of credit. The company reported compliance with facility covenants.
Material changes and management commentary
- Growth reflected higher comparable and new-store sales, wholesale expansion, and increased licensing revenue. Retail revenue rose 39.4% and wholesale revenue 46.1% in the quarter; licensing revenue rose 42.8%.
- Gross margin improved modestly, chiefly from stronger wholesale margins, including a higher European sales mix and lower product costs. Retail margin was pressured by increased in-store markdowns.
- Operating expenses rose faster than revenue: six-month SG&A increased 45.0% and depreciation and amortization 85.3%. Store expansion, payroll, occupancy, distribution, advertising and infrastructure investments contributed. Management also reported distribution inefficiencies from material-handling equipment implementation, continuing through the first fiscal quarter.
- Foreign-currency losses were $3.7 million year to date, primarily from U.S.-dollar strengthening against the euro and remeasurement of intercompany loans. The six-month effective tax rate declined to 32.0% from 35.3%; management expected profitable non-U.S. operations to continue benefiting the consolidated rate, though tax rates may fluctuate.
- Management said cash, operating cash generation and available credit should meet fiscal 2015 working-capital and planned investment needs. It expected approximately $243 million in additional capital expenditures and $35 million in intangible-asset spending for European retail expansion during the remainder of fiscal 2015. No specific revenue or earnings guidance is provided in the supplied filing text.
Outlook, risks and unusual items
- Expansion plans include stores, shop-in-shops, distribution and corporate facilities, information systems and e-commerce initiatives. The filing notes that interim results should not be taken as indicative of full-year results.
- Key stated exposures include foreign-exchange movements, interest rates on potential revolver borrowings, raw-material and labor-cost volatility, consumer and luxury-market demand, and execution of international expansion. The company used forward currency contracts, with approximately $194 million notional outstanding; a 10% U.S.-dollar move was estimated to change their fair value by about $16 million.
- Operating-lease commitments totaled $1,365.6 million, including future occupancy costs that may also include taxes, contingent rent and other expenses. Long-term liabilities for uncertain tax positions of $20.3 million were excluded from the contractual-obligations table.
- Management said pending legal matters were not expected in aggregate to materially affect results or financial condition; the filing reported no material change to previously disclosed risk factors. The company disclosed related-party transactions, including licensing and product sales connected with an entity jointly owned by executives and former shareholders.
- After quarter-end, the company bought an aircraft for $16.5 million from a former board member. On October 30, 2014, the board authorized a $1.0 billion share-repurchase program over two years, subject to market conditions and other restrictions. A September secondary offering transferred 11.6 million shares; the company received no proceeds and incurred about $0.7 million in fees.
Important facts for investors to verify
- Whether rapid revenue growth and comparable-store momentum continued, particularly in Europe and Japan, and how much growth came from new locations versus existing stores.
- Whether retail markdowns, distribution execution issues and rising operating expenses affected subsequent margins and cash conversion.
- Actual fiscal-year capital and intangible-asset spending compared with management’s stated remaining-year estimates, and the returns generated by store and infrastructure investment.
- How the announced repurchase program was funded and executed, including its effect on cash, share count and capital allocation.
- Developments in foreign-exchange exposure, lease commitments, uncertain tax positions and the disclosed related-party arrangements.