Capri Holdings Ltd. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2024. The quarter ended December 30, 2023; comparisons are with the periods ended December 31, 2022. Financial amounts are in U.S. dollars unless stated otherwise.
Business context: Capri operates Versace, Jimmy Choo and Michael Kors across retail, wholesale and licensing channels. Its fiscal third quarter is generally its strongest, reflecting holiday sales. The statements are unaudited.
Key financial results
| Metric | Three months ended Dec. 30, 2023 | Year-over-year change | Nine months ended Dec. 30, 2023 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $1.427 billion | Down 5.6% | $3.947 billion | Down 7.9% |
| Gross profit / margin | $928 million / 65.0% | Margin down 1.5 percentage points | $2.572 billion / 65.2% | Margin down 1.5 percentage points |
| Operating income / margin | $122 million / 8.5% | Down 48.3%; margin down 7.1 points | $302 million / 7.7% | Down 58.0%; margin down 9.1 points |
| Net income attributable to Capri | $105 million | Down from $225 million | $243 million | Down from $650 million |
| Diluted earnings per share | $0.88 | Down from $1.72 | $2.06 | Down from $4.74 |
Revenue declines were primarily driven by lower sales in the Americas across the brands. Nine-month revenue on a constant-currency basis declined 8.6%. Lower full-price sell-through pressured gross margin; higher retail, marketing and corporate costs, together with lower revenue, drove operating expense deleverage.
Segments and material changes
- Versace: Quarterly revenue fell 8.8% to $227 million and the segment reported a $14 million operating loss, versus $24 million operating income a year earlier. Nine-month revenue fell 7.9% to $766 million; operating income fell to $24 million from $138 million.
- Jimmy Choo: Quarterly revenue declined 1.2% to $166 million and operating income fell to $4 million from $18 million. Nine-month revenue was nearly flat at $481 million, while operating income declined to $11 million from $45 million.
- Michael Kors: Quarterly revenue declined 5.6% to $1.034 billion and operating income fell to $219 million from $251 million. Nine-month revenue declined 9.1% to $2.700 billion and operating income fell to $518 million from $721 million.
- For the nine months, SG&A rose 5.9% to $2.102 billion, and asset impairment charges increased to $26 million from $12 million. Corporate costs increased, in part due to professional fees and information-technology spending on transformation projects.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $265 million, down from $616 million. Capital expenditures were $139 million, versus $168 million. Cash used in financing was $116 million; cash and cash equivalents were $249 million at period-end.
- Total debt carrying value was $1.844 billion, compared with $1.827 billion at April 1, 2023. This included $874 million drawn on the revolving facility, a $496 million Versace term loan and approximately $449 million in senior notes due November 2024. The notes are classified as short-term debt, contributing to short-term debt of $461 million.
- Revolving facility availability was $624 million; total reported remaining credit availability was $695 million. Working capital was $103 million, down from $420 million at April 1, 2023. Capri reported compliance with debt covenants and said available cash, operating cash flow and borrowing capacity should cover requirements for the next 12 months and beyond.
- The revolving facility and Versace term loan include maximum net-leverage covenants of 4.0 to 1.0; the filing does not state the period-end covenant ratio.
Outlook, risks and unusual items
- On February 7, 2024, after quarter-end, the board approved a Global Optimization Plan. Capri expects to reduce headcount and close approximately 100 stores over 18 months; it estimates fiscal 2025 net cost savings of $80 million to $90 million and one-time restructuring charges of $30 million to $40 million. Approximately $25 million to $30 million of pretax charges are expected in fiscal Q4 2024. Estimates may change.
- Capri is implementing new e-commerce platforms across brands through fiscal 2025; management said transition challenges negatively affected results and continued implementation may also affect future results. Multi-year transformation and ERP projects are expected to require spending of up to $220 million and $170 million, respectively, through fiscal 2026.
- The company entered an agreement for Tapestry to acquire Capri in an all-cash merger, subject to conditions and approvals. Merger-related litigation alleges proxy disclosure deficiencies; Capri provided supplemental disclosures and said management believes the matters lack merit, but cannot assure the outcome.
- Management cited economic uncertainty, inflation, interest rates, consumer spending, currency movements, geopolitical conditions, sourcing and shipping disruptions, tariffs, and technology implementation as risks. The filing does not provide a clear full-year revenue or earnings forecast.
- Other notable items: nine-month foreign-currency loss was $16 million, versus a $10 million gain in the prior-year period. A $10 million gain on sale of a corporate asset partly offset current-period restructuring and other costs.
Important facts for investors to verify
- Merger status, required approvals, closing conditions, litigation developments and any related changes to transaction timing or terms.
- Progress against the store-closure and headcount plan, the realization and timing of projected savings, and actual restructuring charges and cash costs.
- Whether sales trends and full-price sell-through improve, particularly in the Americas and at Versace and Jimmy Choo, and whether margins recover.
- Liquidity and refinancing plans for the $450 million senior notes due in November 2024; covenant headroom and interest-rate exposure.
- Cash-flow conversion and spending on transformation, e-commerce and ERP projects, including any further implementation-related disruption.