Business context and reporting period
This Form 10-Q is for Michael Kors Holdings Limited (the registrant named in the filing; now known as Capri Holdings Limited), for the fiscal third quarter ended December 26, 2015, and the nine months then ended. Fiscal 2016 has 53 weeks, versus 52 weeks in fiscal 2015; the reported comparative periods are not full-year results. The company operates retail, wholesale, and licensing businesses.
Key financial results
Amounts are in U.S. dollars; financial figures below are in millions except per-share data.
| Metric | Quarter ended Dec. 26, 2015 | Prior-year quarter | Nine months ended Dec. 26, 2015 | Prior-year nine months |
|---|---|---|---|---|
| Total revenue | $1,397.5 | $1,314.7 | $3,513.4 | $3,290.5 |
| Gross profit | $832.0 | $800.1 | $2,100.0 | $2,016.8 |
| Income from operations | $409.3 | $418.5 | $931.0 | $1,000.8 |
| Net income attributable to Michael Kors Holdings | $294.6 | $303.7 | $662.1 | $698.4 |
| Diluted earnings per share | $1.59 | $1.48 | $3.45 | $3.38 |
| Gross margin | 59.5% | 60.9% | 59.8% | 61.3% |
| Operating margin | 29.3% | 31.8% | 26.5% | 30.4% |
- Revenue grew 6.3% for the quarter and 6.8% for the nine-month period as reported. At constant currency, management reported growth of 9.9% and 11.6%, respectively. Foreign exchange reduced reported revenue by $47.1 million in the quarter and $159.8 million in the nine months.
- Quarterly net sales were $1,341.7 million and licensing revenue was $55.8 million. Retail revenue rose 11.1% as reported in the quarter, while wholesale revenue was nearly flat (+0.3%). For the nine months, retail rose 9.4% and wholesale 3.9% as reported.
- Comparable-store sales declined 0.9% in the quarter as reported (up 2.0% at constant currency) and fell 5.6% for the nine months (down 1.6% at constant currency). The filing notes that inclusion of U.S. e-commerce sales benefited the reported comparable-sales measure.
- Operating income fell 2.2% in the quarter and 7.0% in the nine months; attributable net income fell 3.0% and 5.2%, respectively. Diluted EPS increased despite lower net income, alongside a substantial reduction in weighted-average shares following repurchases.
Cash flow, balance sheet, and liquidity
- For the nine months, operating cash flow was $960.7 million, capital expenditures were $290.2 million, and net cash used in investing activities was $296.5 million. Financing activities used $940.7 million, principally reflecting share repurchases.
- Cash and cash equivalents were $696.8 million at December 26, 2015, down from $978.9 million at March 28, 2015. The company reported working capital of $1,238.6 million.
- The company spent $950.0 million repurchasing shares under its program during the nine months, and reported $558.1 million of remaining authorization. Treasury shares increased by approximately 21.1 million during the period.
- The amended $1.0 billion revolving credit facility runs to October 2020. No revolver borrowings were outstanding; $10.5 million of letters of credit were outstanding and $989.5 million was available. The company reported compliance with its covenants. Consolidated long-term debt of $4.0 million relates to MK Panama.
- Future minimum operating lease payments totaled $1,733.3 million. Management expected approximately $100 million of additional capital expenditures for the remainder of fiscal 2016 and stated that available cash, operating cash flow, and credit availability were expected to meet needs for the next 12 months.
Material changes, outlook, and risks
- Margins weakened: gross margin declined 140 basis points in the quarter and 150 basis points for the nine months. Management attributed retail pressure mainly to increased promotions and wholesale pressure to higher allowances. Higher store-related costs, corporate spending, and depreciation also weighed on operating margins.
- Store expansion continued: the company had 623 retail stores, including concessions, versus 509 a year earlier. Management attributed much of non-comparable retail sales growth to additional stores. Retail and wholesale operating income declined for the nine-month period, while licensing operating income increased.
- In June 2015, the company obtained a 75% controlling interest in MK Panama and began consolidating it. The acquisition added $9.2 million of goodwill; purchase accounting estimates were still being finalized. On January 1, 2016, it took direct control of its previously licensed South Korean business for approximately $3.6 million and planned to consolidate it beginning in fiscal fourth quarter.
- Management cited continuing currency headwinds, including weakness in the euro, Canadian dollar, and yen, and believed the trends could continue for the remainder of fiscal 2016. Other identified risks include promotional retail conditions, consumer demand and traffic, shipping and distribution disruptions, manufacturing costs, and challenges of international expansion and integration.
- The filing provides no specific revenue or earnings forecast. Management’s stated outlook includes planned investment and the expectation that liquidity will be adequate for the next 12 months. The company disclosed ordinary-course legal matters but did not expect pending proceedings in aggregate to materially adversely affect its financial position, results, or cash flow. No material changes to previously disclosed risk factors were reported apart from international-expansion risks.
- Related-party arrangements include licensing and product sales involving entities in which the CEO and Chief Creative Officer have an ownership interest. The filing reports royalties, product sales, and receivables from those entities; investors may wish to review the amounts and terms disclosed.
Important facts for investors to verify
- Whether comparable-store trends and margins stabilize, particularly given promotional activity and wholesale allowances.
- How much reported growth reflects new stores, e-commerce, and constant-currency effects rather than underlying comparable demand.
- Whether share repurchases, store investment, and other spending can be sustained without materially reducing cash or increasing debt.
- Progress and financial effects of consolidating MK Panama and taking direct control of the South Korean business.
- Exposure to foreign-exchange movements, lease commitments, and the disclosed related-party arrangements.