Capri Holdings Limited — FY2019 Form 10-K Summary
Reporting period: Fiscal year ended March 30, 2019 (52 weeks). The filing also reports the quarter ended March 30, 2019. Capri operates the Versace, Jimmy Choo and Michael Kors brands. Versace was acquired on December 31, 2018; Jimmy Choo was acquired in November 2017. Fiscal 2019 includes Versace only from its acquisition date and Jimmy Choo for the full year.
Financial performance
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Revenue | $5.238 billion | $4.719 billion | Up 11.0%; up 11.7% at constant currency |
| Gross profit / margin | $3.180 billion / 60.7% | $2.859 billion / 60.6% | Margin up 10 basis points |
| Operating income / margin | $735 million / 14.0% | $749 million / 15.9% | Income down 1.9%; margin down 190 basis points |
| Net income attributable to Capri | $543 million | $592 million | Down 8.3% |
| Diluted EPS | $3.58 | $3.82 | Down 6.3% |
| Operating cash flow | $694 million | $1.062 billion | Down $368 million |
| Cash and cash equivalents | $172 million | $163 million | Up $9 million |
FY2019 total revenue growth included approximately $329 million of incremental Jimmy Choo revenue and $137 million from Versace. Michael Kors revenue was $4.511 billion, up 0.3% reported and 0.8% at constant currency; comparable sales declined 2.0%. Jimmy Choo revenue was $590 million and operating income was $20 million. Versace contributed $137 million of revenue and an $11 million operating loss after purchase-accounting amortization and transaction and transition costs.
Fiscal fourth-quarter revenue was $1.344 billion, gross profit $793 million, operating income $40 million, and net income attributable to Capri $19 million. The quarter included $44 million of acquisition-related transaction and transition costs, $31 million of restructuring charges, and $4 million of impairment charges.
Balance sheet, debt and liquidity
- Total assets were $6.650 billion and working capital was $187 million, down from $302 million a year earlier. Inventory increased to $953 million from $661 million.
- Debt carrying value was approximately $2.566 billion: $630 million short-term and $1.936 billion long-term. Borrowings included $1.570 billion under the term loan facility, $539 million under the revolving facility, and $450 million principal amount of 4.000% senior notes due 2024.
- Remaining availability under revolving credit facilities was reported as $489 million. The company was in compliance with its debt covenants at year-end; the credit facility includes a maximum leverage ratio of 3.75 to 1.0.
- Operating cash flow was $694 million; investing cash outflow was $2.125 billion, including $1.875 billion net cash paid for acquisitions and $181 million in capital expenditures. Financing cash inflow was $1.451 billion.
- Management stated that cash, operating cash flows and available borrowings were expected to cover working capital needs for the next 12 months. Planned FY2020 capital expenditures were approximately $300 million.
- Future minimum operating lease payments totaled $2.174 billion; inventory purchase obligations were $865 million. These commitments are material alongside debt obligations.
Material changes and unusual items
- Capri completed its approximately $2.005 billion Versace acquisition, financed with term loans, revolving borrowings and cash. The Versace family received approximately 2.4 million Capri shares as part of the consideration.
- Foreign currency loss was $80 million, primarily reflecting a $77 million loss on acquisition-related forward contracts for Versace. FY2018 had a $13 million foreign currency gain.
- Restructuring and other charges were $124 million, including $79 million of acquisition transaction and transition costs and $45 million of restructuring charges. Long-lived asset impairment charges were $21 million.
- Effective tax rate fell to 12.7% from 20.2%, mainly due to a greater share of earnings in lower-tax jurisdictions and releases of certain tax reserves. The company reported approximately $203 million of uncertain-tax-position liabilities, including interest.
- The $1.0 billion share repurchase program expired May 25, 2019. Capri repurchased $200 million of shares under it in FY2019; no public-program repurchases were reported in the final fiscal quarter.
- Management reported effective disclosure controls and internal control over financial reporting. Versace, representing about 9% of year-end assets and 3% of FY2019 revenue, was excluded from management’s internal-control assessment while integration and evaluation continued.
Outlook, strategy and risks
- Management’s longer-term brand goals were approximately $2 billion in Versace revenue, $1 billion in Jimmy Choo revenue, and $5 billion in Michael Kors revenue. These are strategic targets, not a quantified near-term earnings forecast.
- Capri planned to expand Versace’s retail footprint from 188 stores toward 300, and Jimmy Choo’s toward 275, with emphasis on Asia, e-commerce and omnichannel capabilities. It also planned a multi-year ERP implementation beginning in FY2020.
- The Michael Kors Retail Fleet Optimization Plan targeted 100 to 125 full-price store closures. Capri had closed 100 by year-end and expected to finish by FY2020. Estimated one-time costs remained $100 million to $125 million, with anticipated ongoing annual savings of about $60 million; the timing and final cash costs were not yet determinable.
- On May 10, 2019, after year-end, the U.S. raised tariffs on $200 million of selected Chinese imports from 10% to 25% and announced possible broader tariffs. Management warned further tariffs or trade restrictions could raise product costs and adversely affect results.
- Key risks include acquisition integration and realization of synergies, fashion and consumer-demand shifts, markdown and margin pressure, international exposure and foreign exchange, tariffs and sourcing concentration, cybersecurity and ERP execution, substantial debt and lease obligations, wholesale customer exposure, and tax uncertainty. The five largest wholesale customers represented 19% of revenue.
- Routine legal proceedings were disclosed; management did not expect their aggregate outcome to have a material adverse effect.
Important facts for investors to verify
- How much of reported growth and future profitability is attributable to acquisitions versus underlying comparable sales and organic growth.
- Whether Versace and Jimmy Choo integration, sales targets and anticipated operating synergies are progressing, and whether acquisition-related costs or impairments recur.
- Whether Michael Kors comparable sales recover and planned store closures deliver the expected savings without material residual lease costs.
- Debt repayment capacity, covenant headroom, interest-rate exposure, and liquidity after planned capital spending and substantial lease and inventory commitments.
- The eventual scope and financial impact of tariffs, foreign-exchange movements, and the multi-year ERP implementation.
- Resolution of uncertain tax positions and the effectiveness of controls as Versace is integrated into Capri’s reporting processes.