Business context and reporting period
This filing is Michael Kors Holdings Limited’s Form 10-K for the 52-week fiscal year ended March 29, 2014—not a Capri Holdings filing or a quarterly report for 2013 Q4. The company operated retail, wholesale and licensing businesses selling luxury and accessible-luxury apparel, accessories and footwear.
Retail represented 48.1% of revenue, wholesale 47.6% and licensing 4.2%. The company had 405 stores, including concessions, and wholesale sales through 3,728 full-price doors at year-end.
Financial performance and liquidity
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Total revenue | $3.311 billion | $2.182 billion | +51.8% |
| Gross profit | $2.016 billion | $1.307 billion | +54.3% |
| Gross margin | 60.9% | 59.9% | +1.0 percentage point |
| Operating income | $1.008 billion | $630.0 million | +60.0% |
| Operating margin | 30.5% | 28.9% | +1.6 percentage points |
| Net income | $661.5 million | $397.6 million | +66.4% |
| Diluted earnings per share | $3.22 | $1.97 | +63.5% |
| Cash from operations | $631.8 million | $356.3 million | +$275.4 million |
Retail sales rose 49.9% to $1.593 billion, with comparable-store sales up 26.2%. Wholesale sales grew 52.8% to $1.578 billion; licensing revenue increased 61.3% to $140.3 million. Management attributed growth chiefly to accessories, store and wholesale-door expansion, and international growth.
Cash and cash equivalents were $955.1 million at year-end, versus $472.5 million a year earlier; working capital was $1.469 billion. Investing activities used $215.5 million, including $184.7 million of capital expenditures and $28.8 million for intangible assets. No borrowings were outstanding under the $200 million revolving facility; $188.5 million was available, with $11.5 million in letters of credit. Total liabilities were $410.8 million, but operating lease commitments totaled approximately $1.081 billion through 2029.
Material changes versus the prior year
- Revenue growth moderated from 67.5% in FY2013 to 51.8% in FY2014; comparable-store growth declined from 40.1% to 26.2%, while remaining strong.
- Gross margin rose from 59.9% to 60.9%, attributed to favorable sales mix and purchase costs. Operating margin increased as revenue outpaced operating-expense growth.
- Store count increased from 304 to 405, including 101 net new stores. Wholesale doors increased from 3,249 to 3,728.
- Operating cash flow increased substantially, though inventories and receivables also rose with the business. Inventory was $426.9 million, up from $266.9 million.
- International revenue grew, particularly in Europe; Europe retail comparable-store sales rose 60.0% and wholesale sales there increased about 103.4%.
Outlook, commentary, risks and unusual items
Management stated that cash from operations, available cash and the credit facility should fund working capital and planned investment for the next 12 months. It planned continued retail and international expansion, shop-in-shop growth, and estimated a long-term opportunity to expand to approximately 600 stores in North America and Europe. An owned e-commerce site was anticipated around the middle of the next fiscal year; no specific revenue or earnings guidance was provided.
A California distribution-center automation and systems implementation disrupted shipping from the quarter ended September 28, 2013 through the quarter ended December 28, 2013. The disruption affected sales and operating expenses; related incremental expenses were not expected to continue beyond FY2014. The company also cited risks involving fashion demand, competition, international operations and currency, reliance on major wholesale customers and foreign suppliers, distribution and IT systems, and the founder and other key personnel. Its largest wholesale customer represented 14.4% of revenue and its five largest represented 28.9%.
Other items to note: advertising expense was $65.7 million; long-lived-asset impairment charges were $1.3 million; no goodwill impairment was recorded. The company reported $19.0 million of liabilities for uncertain tax positions and routine legal proceedings that management did not expect to have a material adverse effect. Management and the auditor reported effective internal controls; the financial statements received an unqualified audit opinion.
Important facts for investors to verify
- Confirm the issuer and period: the filing is Michael Kors Holdings Limited, FY2014 ended March 29, 2014; “Capri Holdings Ltd” and “2013 Q4” in the request do not match the filing.
- Review the audited financial statements and cash-flow details, particularly inventory growth, receivables, capital spending and cash conversion.
- Assess sustainability of comparable-store growth, margins and rapid store and wholesale expansion, including the effect of the distribution-system disruption.
- Examine customer and supplier concentration, the $1.081 billion lease commitment, and the credit facility’s covenants and availability.
- Review related-party arrangements, including geographic licensing agreements with entities connected to certain shareholders and purchases from a director-owned manufacturer.