Business context and reporting period
This is Michael Kors Holdings Limited’s unaudited Form 10-Q for the 13-week quarter and 39-week nine-month period ended December 27, 2014, compared with periods ended December 28, 2013. The company operated retail, wholesale and licensing businesses. The filing identifies the registrant as Michael Kors Holdings Limited; “Capri Holdings Ltd” is the name in the request metadata.
Key financial metrics
| Metric | Quarter ended Dec. 27, 2014 | Prior-year quarter | Nine months ended Dec. 27, 2014 | Prior-year nine months |
|---|---|---|---|---|
| Total revenue | $1,314.7 million | $1,012.2 million | $3,290.5 million | $2,393.4 million |
| Gross profit | $800.1 million | $619.5 million | $2,016.8 million | $1,466.6 million |
| Gross margin | 60.9% | 61.2% | 61.3% | 61.3% |
| Operating income | $418.5 million | $343.2 million | $1,000.8 million | $762.3 million |
| Operating margin | 31.8% | 33.9% | 30.4% | 31.8% |
| Net income | $303.7 million | $229.6 million | $698.4 million | $500.4 million |
| Diluted earnings per share | $1.48 | $1.11 | $3.38 | $2.44 |
For the nine months, operating cash flow was $672.1 million, capital expenditures were $282.7 million, and cash used in investing activities was $311.8 million. Financing activities used $353.0 million, primarily reflecting share repurchases. Cash declined $5.3 million from fiscal year-end to $949.8 million. At December 27, 2014, working capital was $1,622.0 million; inventory was $537.5 million. The company had no borrowings under its revolving facility, $188.6 million available for future borrowing, and $11.4 million in standby letters of credit. Total liabilities were $479.1 million; the filing reports no outstanding facility debt.
Changes versus the prior comparable period
- Quarter revenue rose 29.9%, net income 32.2%, and diluted EPS from $1.11 to $1.48. Nine-month revenue rose 37.5% and net income 39.6%.
- Quarter retail sales grew 37.0% and wholesale sales 24.4%; licensing revenue grew 8.6%. Nine-month retail, wholesale and licensing revenue grew 40.6%, 35.4% and 24.4%, respectively.
- Retail expansion was a major growth driver: the company reported 509 stores, including concessions, versus 395 a year earlier. Quarter comparable-store sales increased 6.0% in North America, 21.2% in Europe and 35.4% in Japan.
- Despite higher earnings, quarter operating margin fell 2.1 percentage points, as operating expenses grew faster than revenue. Nine-month operating margin declined 1.4 points. Quarter gross margin edged down 0.3 points; nine-month gross margin was flat.
- Nine-month operating cash flow increased from $449.8 million to $672.1 million, while capital expenditures rose from $126.9 million to $282.7 million and share-repurchase spending increased substantially.
Outlook, commentary, risks and unusual items
- Management said available cash, operating cash generation and the credit facility were expected to meet working-capital needs for the remainder of fiscal 2015, including planned expansion. It expected approximately $118.0 million of additional capital expenditures for the remainder of the fiscal year, primarily for store openings and other growth investments.
- The board authorized a $1.0 billion share-repurchase program in October 2014. During the quarter, the company paid $355.0 million under an accelerated repurchase arrangement and also bought shares in the open market; total reported quarter repurchase-program expenditure was approximately $399.9 million. Further repurchases were possible, but management expected them to be lower than the quarter’s level.
- Management highlighted a stronger U.S. dollar and a roughly 10% year-over-year decline in the euro, which could weigh on translated European results. Currency exposure, commodity and labor costs, changing luxury demand, and international expansion were identified as business risks. A hypothetical 10% U.S.-dollar movement against currencies under forward contracts would change their fair value by approximately $16.0 million.
- The effective tax rate fell to 27.2% for the quarter and 30.0% for the nine months, versus 33.1% and 34.3%. Management attributed the decrease to international tax structuring and the growing contribution of profitable non-U.S. operations, and said the lower-tax mix was expected to continue. The quarter tax-structuring settlement was also expected to benefit the following quarter to a lesser degree.
- Unusual and related-party items included a $16.5 million aircraft purchase from a former board member, described as being at fair market value, and aircraft charter costs from an entity associated with former shareholders. The company also disclosed licensing and inventory transactions with an affiliate in the Far East and purchases from a manufacturer owned by a former director.
- Operating lease commitments totaled $1,434.7 million. Management said 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, with no material change in internal control reported for the quarter.
- The company was evaluating the effect of the new revenue-recognition standard, ASU 2014-09, which was scheduled to become effective in January 2017.
Important facts for investors to verify
- How much of reported sales growth reflects new stores and expanded wholesale distribution versus comparable-store demand, particularly as North American comparable growth slowed from the prior-year rate.
- Whether margin pressure from markdowns, wholesale discounts, store occupancy, staffing and depreciation continues as the company expands.
- The effect of euro weakness and other currency movements on reported sales, earnings, hedging results and inventory costs.
- Whether planned capital spending and share repurchases remain supportable alongside working-capital needs and the large operating-lease commitment.
- The assumptions and final settlement of the accelerated share repurchase, and the terms and governance of disclosed related-party transactions.
- Whether lower effective tax rates persist and how the forthcoming revenue-recognition standard affects reported results.