Capri Holdings Ltd. — Form 10-Q Summary
Reporting period: Second quarter of fiscal 2023, the 13 weeks ended October 1, 2022; year-to-date figures cover 26 weeks. Comparatives are the periods ended September 25, 2021. Amounts are in U.S. dollars unless noted. The interim financial statements are unaudited.
Financial performance
| Metric | Quarter | Six months |
|---|---|---|
| Revenue | $1.412 billion, up 8.6% reported and 17.5% at constant currency | $2.772 billion, up 8.6% reported and 16.4% at constant currency |
| Gross profit / margin | $951 million / 67.4%, versus 68.0% | $1.852 billion / 66.8%, versus 68.2% |
| Operating income / margin | $252 million / 17.8%, versus $195 million / 15.0% | $483 million / 17.4%, versus $453 million / 17.7% |
| Net income attributable to Capri | $224 million, versus $200 million | $425 million, versus $419 million |
| Diluted earnings per share | $1.63, versus $1.30 | $3.03, versus $2.71 |
| Operating cash flow | Not separately reported for the quarter | $39 million, versus $396 million |
- Segment results, quarter: Versace revenue was $308 million and operating income $62 million; Jimmy Choo $142 million and $8 million; Michael Kors $962 million and $248 million. All three brands grew revenue at constant currency. China-related disruptions partly offset growth in the Americas and EMEA.
- Cash and liquidity: Cash and equivalents were $215 million at October 1, versus $169 million at April 2. Working capital was $807 million, versus $325 million.
- Debt: Total debt carrying value was approximately $1.600 billion, versus $1.160 billion at fiscal year-end. This included $1.126 billion drawn on the revolving facility and $450 million of senior notes due 2024; the term loan had been repaid. Revolver availability was $352 million; total remaining availability across facilities was $430 million. The company reported compliance with debt covenants.
- Cash flows and investment: Investing activities provided $323 million, including $409 million of net investment hedge settlements, while capital expenditures were $86 million. Financing activities used $209 million; share repurchases accounted for $650 million during the six-month period. Exchange-rate changes reduced cash by $106 million.
Material changes and notable items
- Reported revenue growth was substantially offset by unfavorable currency translation: approximately $116 million for the quarter and $199 million for the half-year. The stronger U.S. dollar also affected reported segment results.
- Gross margin declined year over year, primarily from higher supply-chain costs and unfavorable channel mix. Six-month operating margin also declined; higher SG&A, including marketing, retail, e-commerce and corporate costs, contributed.
- Quarterly operating margin improved despite lower gross margin, with lower asset impairment and restructuring charges and operating-expense leverage. Impairment charges were $11 million for the quarter and half-year, compared with $33 million in the prior-year periods.
- Operating cash flow fell to $39 million from $396 million, with working-capital movements including higher inventories and lower accounts payable contributing to the change. The filing attributes the working-capital comparison partly to timing of payments and receipts.
- The company repurchased 13.18 million shares for approximately $650 million during the six months. After the period, it repurchased an additional 2.30 million shares for approximately $100 million; on November 9, 2022, it replaced the existing plan with a new authorization of up to $1 billion.
- Foreign-currency translation produced a $232 million loss in other comprehensive income for the six months. The company received $343 million during the second quarter from termination of euro net investment hedges and modification of Japanese yen hedges; at period-end, it had $294 million of Japanese yen hedge notional and no euro hedge notional.
Outlook, risks and contingencies
- No specific numerical revenue, earnings or margin guidance is provided in the supplied filing text. Management believes operating cash generation, available borrowings and cash should fund working-capital needs and planned investments for the next 12 months and beyond.
- Management cited COVID-19 restrictions and store closures in Greater China, inflation and higher labor, raw-material and freight costs, supply-chain and shipping disruption, and weaker discretionary spending or recession as risks to results. The company had stopped shipments to Russia and Ukraine; those markets were less than 1% of fiscal 2022 net sales, but the war has broader economic and currency effects.
- Foreign-exchange and interest-rate exposure remain relevant. A hypothetical 10% U.S. dollar move would change the fair value of outstanding forward contracts by about $6 million and net investment hedges by about $35 million, in the directions described in the filing.
- The revolving facility carries a maximum quarterly net leverage covenant of 4.0 to 1.0. The company reported compliance at October 1. Legal proceedings are described as routine, with management not expecting their aggregate outcome to materially adversely affect the company.
- The company recorded $11 million of asset impairment, primarily for Michael Kors store lease assets. The filing also notes ongoing ERP implementation, which may change processes and controls; management assessed disclosure controls as effective at period-end.
Investor verification priorities
- Reconcile revenue growth at constant currency with reported growth and assess the effect of currency movements across brands and regions.
- Track gross-margin pressure, supply-chain and freight costs, channel mix, and whether operating-expense leverage can offset these pressures.
- Examine the sharp year-over-year decline in operating cash flow, inventory growth, and the extent to which working-capital timing reverses.
- Monitor borrowing levels, interest costs, revolver availability and covenant headroom after substantial buybacks; verify the capital-allocation impact of the replacement repurchase plan.
- Assess Greater China demand and restrictions, broader consumer-spending risks, and potential effects of inflation, geopolitical events and exchange rates.