Capri Holdings Limited — Form 10-Q Summary
Reporting period: 13 weeks ended June 29, 2019, the first quarter of fiscal 2020. Comparisons are with the 13 weeks ended June 30, 2018. Unless stated otherwise, amounts are in U.S. dollars.
Business context
Capri operates Versace, Jimmy Choo and Michael Kors, selling luxury apparel, footwear and accessories through retail, e-commerce, wholesale and licensing. Versace was acquired on December 31, 2018; its results are included in the current period, making year-over-year comparisons less directly comparable.
Key financial metrics
| Metric | Q1 FY2020 | Prior period |
|---|---|---|
| Revenue | $1.346 billion | $1.203 billion |
| Gross profit / gross margin | $834 million / 62.0% | $751 million / 62.4% |
| Operating income / margin | $64 million / 4.8% | $215 million / 17.9% |
| Net income attributable to Capri | $45 million | $186 million |
| Diluted earnings per share | $0.30 | $1.22 |
| Operating cash flow | $158 million | $206 million |
| Capital expenditures | $54 million | $41 million |
| Cash and cash equivalents at period end | $160 million | $172 million at March 30, 2019 |
| Total debt carrying value | $2.431 billion | $2.566 billion at March 30, 2019 |
| Working capital | $42 million | $187 million at March 30, 2019 |
Material changes and drivers
- Revenue rose 11.9% as reported and 13.8% at constant currency. Versace contributed $207 million; unfavorable currency effects reduced reported revenue by about $23 million.
- Michael Kors revenue fell 4.8% to $981 million (3.0% lower at constant currency), while operating income declined 12.6% to $201 million. Management cited weaker women’s accessories and comparable-store sales, markdown pressure and higher store-related costs.
- Jimmy Choo revenue fell 8.7% to $158 million (5.8% lower at constant currency); operating income declined to $11 million from $22 million, with margin falling to 7.0% from 12.7%. Lower wholesale footwear sales and higher retail and marketing costs contributed.
- Versace reported a $3 million operating loss after non-cash purchase-accounting amortization. Its reported results use a one-month reporting lag.
- Operating income and net income fell sharply despite higher revenue. A $97 million long-lived-asset impairment charge was the principal unusual expense; operating expenses also increased, including costs associated with Versace and acquisitions.
Cash, debt and liquidity
Operating cash flow was $158 million, down from $206 million, primarily due to lower net income after non-cash adjustments. Investing activities used $32 million, including $54 million of capital expenditures and a $23 million net-investment-hedge settlement. Financing activities used $138 million; debt borrowings of $390 million were more than offset by $526 million of repayments.
Total debt carrying value was $2.431 billion, alongside $160 million of cash. The company had $561 million available under its $1.0 billion revolving facility and reported compliance with debt covenants. Management said available cash, operating cash flow and borrowing capacity should meet working-capital needs for the next 12 months. On July 19, 2019, after quarter-end, Capri repaid $125 million of term-loan borrowings.
Adoption of lease accounting added $1.718 billion of operating-lease right-of-use assets and $2.138 billion of lease liabilities at June 29. The balance-sheet increase is substantially an accounting recognition of lease obligations, rather than a comparable-period operating change. Lease payments were $120 million in operating cash flow for the quarter.
Outlook, risks and unusual items
- Management expected approximately $250 million of capital expenditures for the remainder of fiscal 2020 and said liquidity was sufficient for anticipated needs. No quantified revenue or earnings guidance is provided in the supplied filing text.
- The Michael Kors Retail Fleet Optimization Plan targets 100–125 store closures, with 113 closed by June 29. The company expected to complete the remaining planned closures by fiscal 2020-end and estimated total one-time costs of $100–$125 million.
- On August 1, 2019, the board authorized a new $500 million share-repurchase program, expiring August 1, 2021.
- Management identified risks from foreign-exchange volatility, shifts from physical retail to online shopping, shipping disruptions, commodity and labor costs, and tariffs. A 25% U.S. tariff on selected Chinese imports was in effect; an additional 10% tariff on another $300 billion of Chinese goods, including apparel and footwear, was scheduled to take effect September 1, 2019.
- The company recorded $97 million of impairments after changing its long-lived-asset grouping methodology to assess certain premier stores individually. Separately, lease-standard adoption reduced opening retained earnings by $152 million, net of tax, for initial impairments of certain underperforming locations.
- Management said routine legal proceedings were not expected, in aggregate, to materially adversely affect the company. Disclosure controls were assessed as effective.
Most important facts to verify
- Whether revenue and brand performance excluding Versace, currency effects and acquisition-related accounting costs support the reported growth.
- The scale and persistence of Michael Kors and Jimmy Choo sales, margin and markdown pressures.
- The assumptions behind the $97 million impairment, and whether further store or lease impairments are possible.
- Liquidity and covenant headroom after the July term-loan repayment, capital spending and lease payments.
- The actual effects of announced and potential tariffs, foreign-exchange movements, and the store-closure and share-repurchase plans.