Capri Holdings Limited — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months ended September 28, 2019; the quarter covered 13 weeks and the six-month period 26 weeks. Amounts are in U.S. dollars unless noted. Capri operates Versace, Jimmy Choo and Michael Kors. Versace was acquired December 31, 2018, so its contribution makes year-over-year comparisons less like-for-like.
Financial performance
| Metric | Three months ended Sept. 28, 2019 | Three months ended Sept. 29, 2018 | Six months ended Sept. 28, 2019 | Six months ended Sept. 29, 2018 |
|---|---|---|---|---|
| Revenue | $1,442 million | $1,253 million | $2,788 million | $2,456 million |
| Gross profit / margin | $874 million / 60.6% | $763 million / 60.9% | $1,708 million / 61.3% | $1,514 million / 61.6% |
| Operating income / margin | $75 million / 5.2% | $190 million / 15.2% | $139 million / 5.0% | $405 million / 16.5% |
| Net income attributable to Capri | $73 million | $138 million | $118 million | $324 million |
| Diluted earnings per share | $0.47 | $0.91 | $0.77 | $2.13 |
| Operating cash flow | Not separately reported | Not separately reported | $243 million | $264 million |
- Revenue mix: Second-quarter revenue rose 15.1% reported and 16.1% at constant currency; first-half revenue rose 13.5% reported and 15.0% constant currency. Versace contributed $228 million in the quarter and $435 million in the first half.
- Brands: Second-quarter revenue was $1,089 million for Michael Kors, $125 million for Jimmy Choo and $228 million for Versace. Michael Kors revenue declined 4.2% reported (3.3% constant currency); Jimmy Choo increased 7.8% reported (9.5% constant currency). For the first half, Michael Kors revenue fell 4.5% reported and Jimmy Choo fell 2.1% reported.
- Profitability: Operating income fell 60.5% in the quarter and 65.7% in the first half. Lower Michael Kors margins, higher SG&A and substantial asset impairment charges more than offset revenue growth. Michael Kors operating margin was 20.4% in both periods, down from 21.8% in the quarter and 22.1% in the first half a year earlier. Jimmy Choo reported a second-quarter operating loss of $10 million and first-half operating income of $1 million.
- Cash flow and investment: First-half operating cash flow was $243 million versus $264 million. Capital expenditures were $105 million; investing cash outflow was $75 million. Financing cash outflow was $157 million, and cash increased $7 million to $179 million.
- Debt and liquidity: Debt carrying value was $2,399 million, including $603 million short-term and $1,796 million long-term, compared with $2,566 million at March 30, 2019. Working capital was $92 million versus $187 million. The company reported $518 million of total remaining borrowing availability, including $471 million under its revolving facility, and said it complied with debt covenants.
Material changes and unusual items
- Capri recognized long-lived asset impairment charges of $104 million in the quarter and $201 million in the first half, versus $7 million and $11 million in the comparable periods. Charges included write-downs of operating lease right-of-use assets, property and equipment, and key money. Management cited Hong Kong conditions as a significant factor in the quarter’s impairment; a change to individual-store asset groupings also contributed to first-half charges.
- Adoption of lease accounting on March 31, 2019 added operating lease right-of-use assets and lease liabilities to the balance sheet. At September 28, right-of-use assets were $1,671 million and operating lease liabilities totaled $2,169 million. Adoption also reduced opening retained earnings by $152 million, net of tax. This accounting change affects balance-sheet comparability.
- Revenue growth included the newly acquired Versace business; excluding it, Michael Kors was weaker and Jimmy Choo’s first-half revenue was slightly lower. Michael Kors cited lower women’s accessories and footwear sales and increased markdowns.
- Income tax benefit was $4 million for the quarter; the six-month effective tax rate was 1.7%, reflecting previously unrecognized tax benefits and return-to-provision adjustments, among other factors. Foreign currency losses were $4 million in the quarter and $6 million in the first half, down from $33 million and $36 million in the prior-year periods.
Outlook, commentary and risks
- Management said available cash, operating cash generation and borrowing capacity should meet working-capital needs for the next 12 months. It expected approximately $170 million of capital expenditures for the remainder of Fiscal 2020. The filing provides no specific revenue or earnings guidance.
- The Michael Kors Retail Fleet Optimization Plan targeted 100–125 store closures at an estimated total one-time cost of $100–$125 million. Capri had closed 123 stores at a cumulative cost of $95 million and expected to complete the remaining planned closures by the end of Fiscal 2020.
- Management cited risks from continued foreign-exchange volatility, shifts from physical retail to online shopping, shipping and distribution disruption, and manufacturing costs and tariffs. U.S. tariffs on certain Chinese imports increased, including a 10% tariff effective September 1, 2019 on an additional group of goods that included apparel and footwear.
- The company reported routine legal proceedings and stated that their aggregate outcome was not expected to have a material adverse effect. It also stated that disclosure controls and procedures were effective as of September 28, 2019.
Important facts for investors to verify
- How much of revenue growth and future profitability is attributable to Versace, and how its operating results develop after acquisition-related purchase accounting.
- Whether Michael Kors sales, markdowns and operating margins stabilize, and whether Jimmy Choo can improve its sharply lower first-half operating margin.
- The assumptions, store-level performance and potential additional charges behind the $201 million first-half impairment, including exposure to Hong Kong conditions.
- Debt maturities, floating-rate exposure, covenant headroom and liquidity needs, considering both borrowings and substantial lease commitments.
- Execution and remaining costs of the retail-closure plan, planned capital spending, and the effects of tariffs and currency movements.