Capri Holdings Limited — Fiscal 2021 Second-Quarter Form 10-Q
Reporting period: The quarter ended September 26, 2020 (13 weeks); comparative quarter ended September 28, 2019. The six-month period also ended September 26, 2020. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context and reporting period
Capri owns Versace, Jimmy Choo and Michael Kors, selling luxury apparel, accessories, footwear and related products through retail, e-commerce, wholesale and licensing. Management attributed lower sales across all three brands to COVID-19, including store closures, reduced traffic and tourism, and weaker consumer demand.
Key financial metrics
| Metric | Quarter ended Sep. 26, 2020 | Prior-year quarter | Six months ended Sep. 26, 2020 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $1,110 | $1,442 | $1,561 | $2,788 |
| Gross profit / margin | $710 / 64.0% | $874 / 60.6% | $1,012 / 64.8% | $1,708 / 61.3% |
| Operating income (loss) / margin | $153 / 13.8% | $75 / 5.2% | $(9) / (0.6)% | $139 / 5.0% |
| Net income (loss) attributable to Capri | $122 | $73 | $(58) | $118 |
| Diluted earnings (loss) per share | $0.81 | $0.47 | $(0.39) | $0.77 |
| Operating cash flow | Not separately presented | Not separately presented | $137 | $243 |
Quarterly revenue fell 23.0% year over year; six-month revenue fell 44.0%. In the quarter, higher gross margin reflected Michael Kors’ higher average unit price and favorable channel mix. Operating income also benefited from lower expenses and substantially lower impairment charges than in the prior-year quarter. For the six months, lower revenue outweighed cost reductions, resulting in an operating loss.
Segment highlights: Quarterly revenue was $195 for Versace (down 14.5%), $122 for Jimmy Choo (down 2.4%) and $793 for Michael Kors (down 27.2%). Six-month revenue was down at all three brands; Michael Kors reported $142 operating income, while Versace and Jimmy Choo recorded operating losses of $21 and $29, respectively.
Cash, working capital and debt: At September 26, cash was $238, versus $592 at March 28, 2020; working capital was $53, versus $493. Total debt carrying value was $1,781 ($200 short-term and $1,581 long-term), compared with $2,179 at year-end. Operating cash flow of $137, investing cash outflow of $71 (including $59 of capital expenditures) and financing cash outflow of $421 contributed to a $354 decline in cash. Financing outflows primarily reflected net debt repayments. Operating lease liabilities totaled $2,211.
Material changes versus the prior comparable period
- Quarterly revenue and gross profit declined, but gross margin rose 3.4 percentage points and operating income increased to $153 from $75. Six-month operating results shifted from $139 income to a $9 loss, and net results shifted from $118 income to a $58 loss.
- Six-month operating cash flow declined to $137 from $243. Management cited lower earnings after non-cash adjustments, partly offset by working-capital timing effects.
- Cash and total debt both declined from March 28, 2020, as the company used cash for net debt repayments. Total remaining borrowing availability reported at quarter-end was $963.
- The company recorded $20 of impairment charges in the six-month period, versus $201 in the prior-year period; prior-year impairment was a substantial expense.
Outlook, management commentary, risks and unusual items
- Outlook and liquidity: Capri said operating cash generation, available credit and cash should be sufficient for working-capital needs for the next 12 months. The filing provides no specific revenue or earnings guidance; results remain subject to COVID-19 uncertainty.
- Credit terms: A June 2020 amendment waived the credit facility’s specified leverage covenant through the quarter ending June 26, 2021. It also introduced minimum unrestricted cash plus undrawn revolving-credit availability requirements, rising to $400 by October 1, 2020 and $500 by December 1, 2020. The company reported covenant compliance at September 26, 2020. Verify subsequent compliance and financing terms.
- Store optimization: Capri plans to close approximately 170 stores during fiscal 2021 and 2022, with estimated one-time costs of approximately $75, most expected to require future cash expenditures. It closed 48 stores under the program in the first six months and recorded $5 of related charges. Management said the precise amounts and timing of future charges and cash expenditures were not yet determinable.
- COVID-19 effects: The company incorporated expected pandemic impacts into inventory valuation and reported $60 of deferred rent payments. It recorded $24 of rent concessions during the six months. Renewed closures, weaker traffic or tourism, and a slower recovery could materially affect future results and liquidity.
- Other risks and items: Currency and interest-rate exposure, tariffs, shipping disruptions, consumer-demand shifts and restrictive debt covenants remain relevant risks. The company uses derivatives to hedge exposures and does not use them for speculation. Management said routine legal proceedings were not expected, in aggregate, to materially harm financial condition, results or cash flow.
Important facts for investors to verify
- Whether sales, margins and cash generation recovered after September 26, 2020, and how much performance depended on cost reductions versus demand.
- Cash, debt, borrowing availability and compliance with the amended facility’s minimum-liquidity tests and later-restored leverage covenant.
- The pace, cash cost and expected benefits of the planned store closures, including future restructuring and lease obligations.
- The sensitivity of inventory, receivables and impairment estimates to ongoing pandemic conditions and customer credit quality.
- Whether foreign-exchange and interest-rate movements, tariffs or supply-chain disruptions materially changed costs or reported results.