Capri Holdings Ltd. — Q1 FY2024 Form 10-Q
Reporting period: 13 weeks ended July 1, 2023; comparison is the 13 weeks ended July 2, 2022. Capri operates Versace, Jimmy Choo and Michael Kors. Amounts are in U.S. dollars unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 FY2024 | Prior-year quarter |
|---|---|---|
| Revenue | $1.229 billion | $1.360 billion |
| Gross profit / margin | $812 million / 66.1% | $901 million / 66.3% |
| Operating income / margin | $80 million / 6.5% | $231 million / 17.0% |
| Net income attributable to Capri | $48 million | $201 million |
| Diluted EPS | $0.41 | $1.40 |
| Operating cash flow | $40 million | $137 million |
| Capital expenditures | $50 million | $36 million |
- Cash and cash equivalents were $238 million at July 1, 2023. Working capital was $472 million.
- Total debt carrying value was $1.937 billion, versus $1.827 billion at April 1, 2023. Revolver borrowings were $973 million, with $524 million available; total remaining credit availability across listed facilities was $594 million. Capri reported compliance with debt covenants; the actual leverage ratio is not stated.
- Inventory was $1.166 billion, up from $1.057 billion at April 1. Cash, cash equivalents and restricted cash totaled $240 million at quarter-end for cash-flow reporting.
Material changes versus the prior-year quarter
- Revenue declined 9.6% (9.3% at constant currency), primarily due to lower sales in the Americas. By segment, Versace revenue fell 5.8% to $259 million; Jimmy Choo rose 6.4% to $183 million; and Michael Kors fell 13.8% to $787 million.
- Segment operating income was $3 million for Versace, $16 million for Jimmy Choo and $130 million for Michael Kors, compared with $52 million, $19 million and $222 million, respectively, in the prior-year quarter.
- Operating income fell 65.4%. SG&A increased 10.8% to $689 million and rose to 56.1% of revenue from 45.7%, reflecting higher marketing and corporate costs and expense deleverage on lower sales. Gross margin was nearly flat, with normalized promotional activity offset by lower supply-chain costs.
- Net income declined 76.1%. Net interest moved from $4 million of income to $8 million of expense, and foreign currency loss increased to $21 million from $4 million.
- Operating cash flow decreased to $40 million, while the company repurchased approximately $100 million of shares under its buyback program. Debt borrowings and repayments were $593 million and $491 million, respectively.
Outlook, risks and unusual items
- The filing provides no specific revenue or earnings guidance. Management said available cash, operating cash flow and credit facilities should cover working capital and planned investments for the next 12 months and beyond. The company expects up to $220 million of Capri transformation expenditures and up to $170 million for its ERP implementation through Fiscal 2026.
- Management cited inflation, higher interest rates, recession concerns, foreign-exchange volatility, geopolitical uncertainty and pressure on discretionary luxury spending. Supply-chain disruptions, manufacturing and tariff costs, consumer demand, and debt and covenant risks are also identified.
- On August 10, 2023, after quarter-end, Capri agreed to be acquired by Tapestry in an all-cash transaction for $57 per share, subject to shareholder, regulatory and other closing conditions. The transaction has no financing condition. The filing highlights execution, employee/customer/supplier disruption, transaction litigation and the possibility of failure to close; a $240 million termination fee may apply in specified circumstances.
- Q1 restructuring and other income of $2 million included a $10 million gain on sale of a corporate asset, partly offset by acquisition-related equity-award and severance costs. The 4.0% effective tax rate reflected, among other factors, a release of a valuation allowance on Korean deferred tax assets and global financing activities.
- Capri entered into substantial cross-currency swaps to hedge foreign net investments. Derivative liabilities were $96 million at quarter-end; currency movements and intercompany-loan remeasurement affected reported results. Routine legal proceedings were not expected by management to have a material adverse effect.
Most important facts for investors to verify
- Progress toward the Tapestry merger’s shareholder and regulatory approvals, closing conditions, timing and any developments affecting the $57-per-share consideration.
- Whether revenue and operating margins stabilize, particularly at Michael Kors and Versace, and whether marketing and corporate costs moderate.
- Debt levels, revolver availability, covenant compliance and refinancing considerations, including the $450 million senior notes due 2024.
- Inventory conversion and cash generation, given lower operating cash flow, higher inventory and ongoing transformation, ERP and capital spending.
- Effects of foreign exchange, hedging and tax items on reported earnings, and any changes in the risks or contingencies disclosed in the filing.