Michael Kors Holdings Limited (now Capri Holdings) — Form 10-Q Summary
Reporting period: First quarter of fiscal 2014, the 13 weeks ended June 29, 2013; comparable period ended June 30, 2012. Figures are unaudited and in U.S. dollars unless noted. The company designs, markets, distributes and retails Michael Kors-branded apparel and accessories through retail, wholesale and licensing segments.
Financial performance
| Metric | Quarter ended June 29, 2013 | Prior-year quarter | Change |
|---|---|---|---|
| Total revenue | $640.9 million | $414.9 million | +54.5% |
| Gross profit / margin | $397.3 million / 62.0% | $251.0 million / 60.5% | Margin +1.5 percentage points |
| Operating income / margin | $197.6 million / 30.8% | $111.9 million / 27.0% | Income +76.5% |
| Net income | $125.0 million | $68.6 million | +82.1% |
| Diluted earnings per share | $0.61 | $0.34 | — |
| Operating cash flow | $182.7 million | $58.6 million | +$124.1 million |
| Capital expenditures and intangible purchases | $39.2 million cash outflow | $17.4 million cash outflow | Higher investment |
Revenue growth came from retail, wholesale and licensing. Retail revenue rose 51.5% to $325.7 million; wholesale rose 59.3% to $290.6 million; licensing rose 40.7% to $24.6 million. Management attributed retail growth to comparable-store gains and additional stores, and wholesale growth to accessories and footwear sales, more shop-in-shops and European expansion. Comparable-store sales increased 24.7% in North America, 55.8% in Europe and 22.8% in Japan. The filing also attributes $58.2 million of retail sales growth to comparable stores.
Gross margin improved on favorable product mix in retail and wholesale and fewer wholesale discounts and allowances. Operating expenses rose 43.6% to $199.7 million, but declined as a share of revenue to 31.2% from 33.5%, reflecting scale benefits. SG&A increased 45.8%, including higher retail occupancy and payroll, corporate staffing and promotional costs. The effective tax rate was 36.6%, versus 38.6%.
Liquidity, debt and capital needs
- Cash and cash equivalents were $639.2 million at June 29, 2013, up from $472.5 million at March 30; working capital was $965.1 million.
- Operating cash flow was $182.7 million; investing activities used $39.2 million; financing activities provided $24.7 million. Cash increased $166.6 million during the quarter.
- No borrowings were outstanding under the $200 million senior unsecured revolving facility; $189.3 million was available. The company reported covenant compliance. The facility expires February 8, 2018.
- Management expected cash, operating cash flow and facility availability to meet needs for the next 12 months. It expected about $200 million of capital expenditures and a further $25 million of intangible-asset spending during the remainder of fiscal 2014, chiefly for store expansion and related infrastructure.
- Operating lease commitments totaled $717.8 million. The filing separately disclosed $10.3 million of long-term liabilities for uncertain tax positions, excluded from the contractual-obligations schedule.
Outlook, risks and notable items
- No specific revenue or earnings guidance was provided. Management described continued international expansion, store and shop-in-shop growth, and investment in systems and online marketing; results for the quarter were not considered indicative of the full fiscal year.
- Risks discussed include foreign-exchange and interest-rate exposure, volatile raw-material and labor costs, changing luxury-goods demand, and execution of international expansion. Foreign-currency forward contracts had approximately $99 million notional value. The company reported no credit-facility borrowings at quarter-end.
- Legal proceedings were described as ordinary-course matters; management did not expect pending matters in aggregate to materially affect the company. The filing reported no material changes to previously disclosed risk factors.
- The company adopted hedge accounting for certain currency forwards. A $0.6 million unrealized loss on designated hedges was recorded in other comprehensive income; realized gains on non-designated contracts were recorded in cost of sales.
- Related-party items included $0.5 million paid for business aircraft chartered from an affiliate of a shareholder and $0.7 million of inventory purchased from a manufacturer owned by a director. Certain regional licensing rights are held by entities jointly owned by the CEO, Chief Creative Officer and shareholders.
Most important facts for investors to verify
- Whether comparable-store growth, especially the reported international gains, persists and translates into sustained revenue and margins.
- Whether planned fiscal 2014 expansion spending and the large lease commitment generate adequate returns without weakening liquidity.
- How much of operating cash flow reflects durable earnings versus working-capital timing, including receivables collections and inventory purchasing.
- Exposure to foreign exchange, sourcing costs and tax uncertainties, including the forward-contract positions and $10.3 million uncertain-tax liability.
- Terms, oversight and ongoing economics of related-party transactions and regional licensing arrangements.