Business context and reporting period
Michael Kors Holdings Limited (the filer in this 2013 report; not named Capri Holdings Limited in the filing) reported unaudited results for its fiscal second quarter and first six months ended September 28, 2013. Its business comprises retail, wholesale and licensing operations for the Michael Kors brand. Comparisons are with the corresponding periods ended September 29, 2012.
Financial performance and liquidity
| Metric | Three months | Six months |
|---|---|---|
| Total revenue | $740.3 million, up 38.9% | $1,381.2 million, up 45.7% |
| Gross profit / margin | $449.9 million / 60.8%, versus 59.3% | $847.1 million / 61.3%, versus 59.8% |
| Operating income / margin | $221.5 million / 29.9%, versus 29.6% | $419.0 million / 30.3%, versus 28.5% |
| Net income | $145.8 million, up 49.0% | $270.8 million, up 62.7% |
| Diluted earnings per share | $0.71, versus $0.49 | $1.32, versus $0.83 |
| Operating cash flow | Not separately presented | $181.5 million, versus $113.7 million |
| Investing cash flow | Not separately presented | $(88.3) million, versus $(42.8) million |
| Cash and cash equivalents | $618.8 million at September 28, 2013, versus $472.5 million at March 30, 2013 | |
| Working capital | $1,127.7 million at September 28, 2013, versus $824.9 million at March 30, 2013 | |
| Debt and revolving facility | No facility borrowings at September 28, 2013; $189.2 million available under the $200 million unsecured facility |
Quarterly revenue growth reflected retail sales up 46.8%, wholesale up 29.9% and licensing up 65.4%. For the first six months, retail grew 49.0%, wholesale 41.8% and licensing 53.8%. Gross margin improvement was attributed to favorable product mix and, in wholesale, lower discounts and allowances. Operating expenses rose 44.6% in the quarter, faster than revenue, but rose 44.1% for the six-month period, slightly slower than revenue.
Material changes, outlook and risks
- Retail comparable-store sales growth was reported at 20.7% in North America and 45.2% in Europe for the quarter; the company operated 352 stores, compared with 269 a year earlier. Wholesale doors increased to 3,491 from 2,883.
- Cash from operations increased year over year, supported by higher net income and receivables collections, partly offset by inventory cash outflows. Inventory was $404.2 million at period end, up from $266.9 million at fiscal year-end.
- Management said disruption from installing automated material-handling equipment at its U.S. distribution facility limited shipping capacity during the quarter and could continue through the rest of the fiscal year. Additional shipping, payroll and consulting costs were expected in the third and fourth fiscal quarters, with possible effects on sales and earnings.
- The company expected approximately $160 million of capital expenditures during the remainder of fiscal 2014 and approximately $15 million of additional spending on intangible lease rights. It said cash, operating cash flow and facility availability should meet working-capital needs for the next 12 months. No specific revenue or earnings forecast was provided.
- Key exposures include foreign-currency movements, raw-material and manufacturing-labor cost volatility, and execution of international and store expansion. The filing disclosed $1.012 billion of minimum operating lease commitments and $13.5 million of long-term liabilities for uncertain tax positions.
- Management reported no material adverse expectation from pending legal matters and no material change to previously disclosed risk factors. The company was in compliance with its credit-facility covenants. Related-party items included $0.8 million paid for business aircraft charter from an affiliate of a shareholder and $3.4 million of inventory purchased from a manufacturer owned by a director during the six months.
Important facts for investors to verify
- Confirm the issuer and corporate-name context: this filing is for Michael Kors Holdings Limited, despite the request metadata naming Capri Holdings Ltd.
- Reconcile the filing’s North American quarterly comparable-store-sales KPI of 20.7% with MD&A language describing comparable-sales growth of 22.9%.
- Track whether distribution-system disruption continued into the third and fourth fiscal quarters and whether it affected shipment timing, sales or costs.
- Assess inventory growth, planned capital expenditures and the conversion of strong reported earnings into operating cash flow.
- Review the full 10-K risk disclosures and subsequent filings for changes in demand, international expansion, foreign exchange, lease obligations, tax matters and related-party arrangements.