Michael Kors Holdings Limited (now Capri Holdings Ltd.) — Form 10-Q summary
Reporting period: Quarter and nine months ended December 31, 2016; comparable periods ended December 26, 2015. Unaudited U.S. GAAP results. Amounts are in U.S. dollars; financial figures are in millions unless noted.
Business context
The company designs, markets, distributes and retails Michael Kors-branded products through retail, wholesale and licensing. During the quarter it operated 816 stores, including concessions, versus 623 a year earlier. Results include the Greater China business acquired May 31, 2016; the acquisition added substantial stores and assets and shifted some former licensee sales into company-operated retail and wholesale.
Financial performance
| Metric | Three months ended Dec. 31, 2016 | Three months ended Dec. 26, 2015 | Nine months ended Dec. 31, 2016 | Nine months ended Dec. 26, 2015 |
|---|---|---|---|---|
| Total revenue | $1,352.8 | $1,397.4 | $3,428.9 | $3,513.4 |
| Gross profit / margin | $805.7 / 59.6% | $831.9 / 59.5% | $2,041.7 / 59.5% | $2,100.0 / 59.8% |
| Operating income / margin | $341.9 / 25.3% | $409.3 / 29.3% | $732.5 / 21.4% | $931.0 / 26.5% |
| Net income attributable to MKHL | $271.3 | $294.6 | $579.3 | $662.1 |
| Diluted earnings per share | $1.64 | $1.59 | $3.40 | $3.45 |
| Cash from operations | — | $887.1 | $960.7 |
Quarter revenue fell 3.2% (2.6% at constant currency); nine-month revenue fell 2.4% (2.3% at constant currency). Retail revenue increased 9.2% in the quarter and 9.6% year to date, but comparable-store sales declined 6.9% and 6.6%, respectively. Wholesale revenue declined 17.8% and 15.0%; licensing revenue declined 22.9% and 18.4%. Acquisitions contributed approximately $49.2 million of quarterly and $109.6 million of nine-month revenue.
Operating income declined 16.5% in the quarter and 21.3% year to date. Higher SG&A, depreciation and amortization, and impairment charges more than offset the quarter’s slightly improved gross margin. Retail operating margin fell to 21.3% for the quarter and 15.7% year to date; wholesale margins improved, while licensing operating income and margin declined. Net income attributable to MKHL fell 7.9% for the quarter and 12.5% year to date. Lower effective tax rates—20.6% for the quarter and 20.8% year to date, versus 28.0% and 28.6%—partly cushioned the operating decline; management attributed the reduction primarily to global financing activities.
Balance sheet, liquidity and capital allocation
- At December 31, 2016: cash and cash equivalents were $368.8, down from $702.0 at April 2, 2016; working capital was $695.9, versus $1,234.3. Current assets were $1,367.7 and current liabilities $671.8.
- Total debt was approximately $147.8, reported as short-term debt, compared with $2.3 of long-term debt at April 2, 2016. This included approximately $142.0 drawn on the $1.0 billion revolving facility and $5.8 under the Hong Kong facility. The company reported covenant compliance and $847.1 available under the main facility.
- Nine-month cash from operations was $887.1; investing used $632.8, including $480.6 net cash paid for the Greater China acquisition; financing used $578.2. Cash decreased by $333.2. Capital expenditures were $147.7, with approximately $52 expected for the remainder of Fiscal 2017.
- The company repurchased $750.0 of shares under its program during the nine months and had $250.0 remaining under the $1.0 billion authorization at December 31, 2016.
Outlook, commentary, risks and unusual items
- Management said available cash, operating cash flow and revolving credit capacity should be sufficient for working capital needs over the next 12 months, including planned store, systems, e-commerce and marketing investments. The filing does not provide a broader numerical earnings or revenue forecast.
- Management cited challenging luxury-industry conditions, including lower consumer traffic, promotional selling, reduced tourist travel, restrained consumer spending and political and economic uncertainty. Comparable-store sales weakness and promotional activity pressured retail results.
- Currency remains a risk: management reported a weaker British pound against the U.S. dollar and expected significant exchange-rate volatility. A hypothetical 10% move in the U.S. dollar against currencies covered by outstanding forward contracts would change their fair value by approximately $18.9 million.
- Other identified risks include shipping and distribution disruption, raw-material and labor cost volatility, import duties and trade restrictions, and changes in tax laws or tax examinations. Legal proceedings were reported as none; management stated pending claims in aggregate were not expected to materially affect the company.
- Unusual items included $11.3 of Greater China acquisition transaction costs in nine-month SG&A, $5.4 of fixed-asset impairment charges, and $3.8 of insurance settlement income related to a prior-year e-commerce fulfillment disruption. The Greater China acquisition generated $400.4 of reacquired rights and $96.5 of goodwill; purchase accounting remained preliminary.
- Disclosure controls were assessed as effective. The company was still evaluating and integrating internal controls of the acquired Greater China business.
Most important facts for investors to verify
- Whether comparable-store sales and retail margins stabilize, given declines despite store-count growth.
- How much reported retail growth reflects acquired operations and new stores versus underlying demand.
- Whether wholesale and licensing declines persist, and the extent to which acquisition-related channel shifts explain them.
- Cash generation and liquidity after acquisition spending, capital expenditures and substantial share repurchases; also debt balances and facility covenant headroom.
- Final purchase-accounting amounts, ongoing amortization and integration costs for Greater China, and potential impairment exposure.
- Exposure to foreign exchange, promotional conditions, import and tax-policy changes, and the company’s ability to meet planned investment and operating commitments.