Business context and reporting period
Michael Kors Holdings Limited (the registrant named in this filing; not identified here as Capri Holdings) filed an unaudited Form 10-Q for the 13 weeks ended June 27, 2015, its first quarter of fiscal 2016. The company designs, markets, distributes and retails branded apparel and accessories through retail, wholesale and licensing segments.
Key financial metrics
Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
| Metric | Quarter ended June 27, 2015 | Prior-year quarter |
|---|---|---|
| Total revenue | $986.0 | $919.2 |
| Gross profit / margin | $603.6 / 61.2% | $571.6 / 62.2% |
| Operating income / margin | $248.6 / 25.2% | $276.8 / 30.1% |
| Net income | $174.4 | $187.7 |
| Diluted earnings per share | $0.87 | $0.91 |
| Cash from operations | $279.7 | $222.4 |
| Capital expenditures | $106.0 | $73.2 |
At June 27, 2015, cash and cash equivalents were $808.5 million, working capital was $1,474.9 million, and total liabilities were $467.5 million. No revolving-credit borrowings were outstanding; $189.1 million remained available, with $10.9 million of letters of credit outstanding. The company reported compliance with facility covenants.
Material changes versus the prior comparable period
- Revenue rose 7.3% as reported, or 13.4% on a constant-currency basis; management estimated a $56.0 million unfavorable currency impact.
- Comparable-store sales fell 9.5% as reported and 5.0% at constant currency, primarily due to North American weakness and lower watch and apparel sales. Revenue growth was supported by new stores, e-commerce, wholesale and licensing.
- Operating income declined 10.2% and net income declined 7.1%. Gross margin fell 100 basis points, while operating expenses increased 20.4% and rose to 36.0% of revenue from 32.1%.
- Retail revenue increased 9.0% as reported, wholesale revenue 4.2%, and licensing revenue 20.5%. Retail and wholesale operating income declined; licensing operating income increased 30.5%.
- Operating cash flow increased by $57.3 million. Investing outflows increased to $114.3 million, while financing outflows were $337.8 million, primarily reflecting $350.0 million spent on share repurchases. Cash declined $170.4 million during the quarter.
- The company repurchased 6.96 million shares under its program for approximately $350 million. Remaining authorization was approximately $658.1 million.
Outlook, commentary, risks and unusual items
- Management expected cash, operating cash flow and available borrowing capacity to meet working-capital needs and planned investments for the next 12 months. It expected approximately $294 million of capital expenditures for the remainder of fiscal 2016. No specific revenue or earnings guidance was provided in the filing text.
- Management said weaker Euro, Canadian-dollar and yen exchange rates had adversely affected reported results and might remain a factor for the rest of fiscal 2016. It also cited challenged luxury-sector traffic, restrained consumer spending, manufacturing-cost volatility, and potential shipping or distribution disruption.
- The company cited earlier damage at its U.S. third-party e-commerce fulfillment center and West Coast port delays, with inventory-delivery effects continuing into fiscal 2016.
- Retail margin pressure reflected greater North American promotions; wholesale margin pressure reflected increased allowances and inventory reserves. Higher store, corporate, and depreciation costs also weighed on operating margins.
- In July 2015, after quarter-end, the company contributed capital to its Latin American joint venture and obtained a controlling interest; it expected to consolidate the venture beginning in fiscal 2016’s second quarter. Accounting and ownership details were still being finalized.
- Management stated pending legal proceedings were not expected, in aggregate, to have a material adverse effect. The filing reported no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether comparable-store sales and North American demand stabilize, and whether growth continues to depend on new stores and other non-comparable sales.
- Whether gross-margin pressure, promotional activity, wholesale allowances and inventory reserves persist.
- The impact of foreign exchange rates on reported revenue, profitability, hedges and the expected reclassification of hedge losses into earnings.
- Cash generation relative to planned capital spending, share repurchases and the remaining repurchase authorization.
- The final accounting, financial contribution and operating performance of the newly controlled Latin American joint venture.