Capri Holdings (then Michael Kors Holdings Limited) — FY2018 Form 10-K
Reporting period: Fiscal year ended March 31, 2018 (52 weeks), with comparative FY2017 ended April 1, 2017. The filing is an annual report, not a standalone 2017 fourth-quarter filing. It includes Q4 results for the 13 weeks ended March 31, 2018.
Business context
The company operated the Michael Kors business across retail, wholesale and licensing, and added Jimmy Choo as a fourth reportable segment following its November 1, 2017 acquisition. Jimmy Choo contributed results for five months. Fiscal 2018 revenue was 4.7% from Jimmy Choo; the company’s total store network, including concessions, was 1,011 at year-end.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $4.719 billion | $4.494 billion |
| Gross profit / gross margin | $2.859 billion / 60.6% | $2.661 billion / 59.2% |
| Operating income / margin | $749.1 million / 15.9% | $689.9 million / 15.4% |
| Net income attributable to the company | $591.9 million | $552.5 million |
| Diluted earnings per share | $3.82 | $3.29 |
| Cash from operations | $1.063 billion | $1.035 billion |
| Capital expenditures | $120.4 million | $164.8 million |
Revenue grew 5.0% as reported and 3.6% at constant currency, including $222.6 million from Jimmy Choo. Michael Kors retail revenue rose 5.4% (3.9% constant currency), while wholesale revenue fell 7.7% (9.1% constant currency) and licensing revenue declined 0.6%. Comparable sales decreased 2.2% (3.7% constant currency); e-commerce contributed about 230 basis points to reported comparable sales.
Gross margin improved 140 basis points, primarily from a higher retail sales mix, improved Michael Kors retail margin and reduced promotional activity. Operating income rose 8.6%, but SG&A increased 14.6% to $1.767 billion, including $134.6 million of Jimmy Choo costs and increased retail, corporate and advertising expenses. Operating results included $32.7 million of long-lived asset impairment and $102.1 million of restructuring and other charges. Jimmy Choo recorded a segment operating loss of $16.7 million for its included period.
Cash and cash equivalents were $163.1 million at year-end, versus $227.7 million a year earlier; working capital was $301.8 million, versus $598.9 million. Reported debt carrying value was $874.4 million: $200.0 million short-term and $674.4 million long-term. The company reported $804.7 million of remaining borrowing availability under its revolving and other facilities and said it complied with debt covenants. Cash used in investing activities was $1.533 billion, mainly reflecting $1.415 billion of acquisition payments net of cash acquired. Financing activities provided $389.6 million.
For Q4 FY2018, revenue was $1.180 billion, operating income $87.1 million and net income $44.5 million. Q4 included $44.3 million in retail restructuring charges, $13.8 million in impairment charges and $6.5 million in Jimmy Choo transaction and transition costs.
Material changes versus FY2017
- FY2018 revenue returned to growth, but Michael Kors wholesale revenue continued to contract as the company reduced promotional activity and shipments.
- Net income attributable to the company rose 7.1%; the prior year included unusually high $199.2 million impairment charges, compared with $32.7 million in FY2018.
- The Jimmy Choo acquisition materially expanded assets, debt and intangible assets. Goodwill increased to $847.7 million and intangible assets to $1.236 billion at year-end.
- Debt carrying value increased from $133.1 million to $874.4 million, while cash declined and working capital decreased.
- Comparable sales improved from an 8.3% decline in FY2017 to a 2.2% decline in FY2018, but remained negative.
Outlook, commentary and risks
- Management planned to close 100–125 underperforming Michael Kors full-price stores over two years. Forty-seven had closed by year-end. It expected $100–$125 million total one-time costs, with $52.6 million recorded in FY2018, and approximately $60 million in annual savings. A further $50–$75 million of cash expenditures was expected; timing and final amounts were uncertain.
- FY2019 capital expenditures were projected at approximately $250 million. Management planned to reinvest an expected 300–400 basis-point FY2019 effective-tax-rate benefit in the business.
- The Tax Act caused a provisional $21.2 million charge, partly offset by a $6.1 million net benefit from tax-rate reductions; the company said the final transition-tax and deferred-tax effects could change.
- Management cited acquisition integration, store performance and lease obligations, fashion and consumer-demand shifts, wholesale customer concentration, international sourcing and trade exposure, currency movements, cybersecurity, and competition as significant risks. The company also depends on key designers and executives.
- Operating lease commitments totaled $1.907 billion; inventory purchase obligations were $750.6 million. The company had $100.8 million of long-term uncertain-tax-position liabilities excluded from its contractual-obligations table. Routine legal proceedings were not expected to have a material aggregate effect.
- Management reported effective disclosure controls and internal control over financial reporting. Jimmy Choo was excluded from management’s internal-control assessment while integration and evaluation continued.
Important facts for investors to verify
- Whether the store closures achieve the projected annual savings and whether remaining closure costs stay within the disclosed range.
- Jimmy Choo’s post-acquisition sales, profitability and integration progress, including the basis for its reported operating loss.
- Trends in comparable sales, Michael Kors wholesale shipments and promotional intensity.
- Debt repayment, covenant headroom, available liquidity and the cash burden from leases, inventory commitments and planned capital spending.
- Final Tax Act accounting, uncertain tax positions and the projected tax-rate benefit.
- Whether the significant goodwill and acquired brand/intangible asset balances remain supportable as the businesses perform.