Capri Holdings Ltd. — Form 10-Q Summary
Business context and period: Capri owns Versace, Jimmy Choo and Michael Kors, with retail, wholesale and licensing operations. This is the 13-week first quarter of fiscal 2021, ended June 27, 2020, compared with the 13 weeks ended June 29, 2019. The filing attributes the severe deterioration in results primarily to COVID-19.
Key financial results
| Metric | Quarter ended June 27, 2020 | Prior-year quarter |
|---|---|---|
| Revenue | $451 million | $1.346 billion |
| Gross profit / margin | $302 million / 67.0% | $834 million / 62.0% |
| Operating income (loss) / margin | $(162) million / (35.9)% | $64 million / 4.8% |
| Net income (loss) attributable to Capri | $(180) million | $45 million |
| Diluted earnings (loss) per share | $(1.21) | $0.30 |
| Operating cash flow | $67 million | $158 million |
| Capital expenditures | $32 million | $54 million |
Revenue fell 66.5% (66.2% at constant currency). Gross margin rose 500 basis points, which management attributed mainly to Michael Kors’ lower promotional activity and favorable channel mix, including a higher share of sales in Asia. Despite lower operating expenses in dollars, expenses remained high relative to sharply reduced revenue.
- Segment revenue and operating result: Versace revenue was $93 million, down 55.1%, with a $41 million operating loss; Jimmy Choo revenue was $51 million, down 67.7%, with a $29 million operating loss; Michael Kors revenue was $307 million, down 68.7%, with a $48 million operating loss.
- Balance sheet at June 27, 2020: Cash and cash equivalents were $207 million, versus $592 million at March 28, 2020. Working capital was negative $100 million, versus positive $493 million. Total assets were $7.533 billion and total shareholders’ equity was $2.007 billion.
- Debt and liquidity: Total debt carrying value was $1.768 billion, including $191 million short-term and $1.577 billion long-term debt. Total remaining borrowing availability was reported as $971 million. Operating lease liabilities totaled $2.182 billion.
- Cash decreased $385 million during the quarter. Financing activities used $420 million, primarily reflecting debt repayments of $811 million, partly offset by $396 million of borrowings. Operating activities provided $67 million; working-capital movements included a $119 million inventory cash outflow and a $167 million increase in accounts payable.
Material changes, outlook and risks
- COVID-19 materially reduced sales across all brands. Management cited temporary store closures, lower traffic and tourism, and weaker consumer demand; it warned that renewed closures, a prolonged pandemic or a slower recovery could further harm results, cash flows and credit availability.
- Capri plans to close approximately 170 stores over fiscal 2021 and fiscal 2022, with approximately $75 million of expected one-time costs, most expected to involve future cash expenditures. It closed 28 stores under the program in the quarter and recorded $3 million of related charges.
- The company recorded $8 million of restructuring and other charges, including $5 million primarily for Versace acquisition-related equity awards and $3 million for store optimization. It recorded no asset impairment in the quarter; the prior-year quarter included $97 million of impairment charges.
- COVID-related rent measures included $85 million of deferred rent payments reflected in lease cash-flow disclosures and $15 million of negotiated rent concessions recorded as variable lease costs. Inventory valuation estimates incorporate expected pandemic impacts.
- A June 25 credit-facility amendment added collateral requirements and restrictions, waived the leverage covenant through the quarter ending June 26, 2021, and requires minimum unrestricted cash plus undrawn revolving availability of $300 million, rising to $400 million October 1, 2020 and $500 million December 1, 2020. The company reported covenant compliance at June 27. The amendment also added a $230 million facility maturing June 24, 2021. The filing provides no specific revenue or earnings guidance.
- The $500 million share-repurchase program was suspended; $400 million remained available under the program at quarter-end. The company stated that operating cash, available credit and cash should meet working-capital needs for the next 12 months, while noting material pandemic-related uncertainties.
- Other exposures include foreign-exchange and interest-rate movements, tariffs and sourcing costs, shipping disruptions, litigation and restrictive debt covenants. A $500 million interest-rate swap fixes the rate on part of variable-rate debt at 0.237% through December 2022.
Most important facts for investors to verify
- Whether store reopening, traffic, tourism and online demand recover sufficiently to improve sales and operating cash flow.
- Whether Capri can meet the amended minimum-liquidity thresholds as they increase, and maintain access to its revolving facilities and covenant compliance.
- How much of the planned store closures and approximately $75 million of costs will require cash, and whether the program improves store-fleet profitability.
- Whether inventory levels, receivable collections, deferred rent and supplier payment timing create additional cash or valuation pressure.
- Whether the gross-margin improvement persists as sales volumes and channel mix normalize; the quarter’s operating loss shows that higher gross margin alone did not offset fixed and operating costs.