CPRI 10-Q
Capri Holdings Ltd (CPRI)
10-Q
2023-02-08
For: 2022-12-31
View Original
Added on
April 12, 2026
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended December 31, 2022
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to
Commission file number: 001-35368
(Exact Name of Registrant as Specified in Its Charter)
| N/A | |||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
(Address of principal executive offices)
(Registrant’s telephone number, including area code: 44 207 632 8600 )
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol(s) | Name of Each Exchange on which Registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. | ☒ | ☐ | No | |||||||||||
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). | ☒ | ☐ | No | |||||||||||
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated filer | ☐ | ||||||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||||||||
| Emerging growth company | ||||||||||||||||||||
| If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | ☐ | |||||||||||||||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). | Yes | ☒ | No | |||||||||||||||||
As of January 31, 2023, Capri Holdings Limited had 125,709,550 ordinary shares outstanding.
TABLE OF CONTENTS
| Page No. | ||||||||
| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 6. | ||||||||
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CAPRI HOLDINGS LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
(Unaudited)
| December 31, 2022 | April 2, 2022 | ||||||||||
| Assets | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Receivables, net | |||||||||||
| Inventories, net | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Intangible assets, net | |||||||||||
| Goodwill | |||||||||||
| Deferred tax assets | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and Shareholders’ Equity | |||||||||||
| Current liabilities | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued payroll and payroll related expenses | |||||||||||
| Accrued income taxes | |||||||||||
| Short-term operating lease liabilities | |||||||||||
| Short-term debt | |||||||||||
| Accrued expenses and other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Long-term operating lease liabilities | |||||||||||
| Deferred tax liabilities | |||||||||||
| Long-term debt | |||||||||||
| Other long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies | |||||||||||
| Shareholders’ equity | |||||||||||
Ordinary shares, no par value; | |||||||||||
Treasury shares, at cost ( | ( | ( | |||||||||
| Additional paid-in capital | |||||||||||
| Accumulated other comprehensive income | |||||||||||
| Retained earnings | |||||||||||
| Total shareholders’ equity of Capri | |||||||||||
| Noncontrolling interest | ( | ||||||||||
| Total shareholders’ equity | |||||||||||
| Total liabilities and shareholders’ equity | $ | $ | |||||||||
See accompanying notes to consolidated financial statements.
3
CAPRI HOLDINGS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In millions, except share and per share data)
(Unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| December 31, 2022 | December 25, 2021 | December 31, 2022 | December 25, 2021 | ||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | |||||||||||||||||||
| Cost of goods sold | |||||||||||||||||||||||
Gross profit | |||||||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||
| Depreciation and amortization | |||||||||||||||||||||||
| Impairment of assets | |||||||||||||||||||||||
| Restructuring and other charges | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Income from operations | |||||||||||||||||||||||
| Other income, net | ( | ( | ( | ||||||||||||||||||||
| Interest expense (income), net | ( | ( | |||||||||||||||||||||
| Foreign currency (gain) loss | ( | ( | ( | ||||||||||||||||||||
| Income before income taxes | |||||||||||||||||||||||
| Provision for income taxes | |||||||||||||||||||||||
| Net income | |||||||||||||||||||||||
| Less: Net income attributable to noncontrolling interest | |||||||||||||||||||||||
| Net income attributable to Capri | $ | $ | $ | $ | |||||||||||||||||||
| Weighted average ordinary shares outstanding: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
| Net income per ordinary share attributable to Capri: | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
| Statements of Comprehensive Income: | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Foreign currency translation adjustments | ( | ||||||||||||||||||||||
| Net (loss) gain on derivatives | ( | ( | |||||||||||||||||||||
| Comprehensive income | |||||||||||||||||||||||
| Less: Net income attributable to noncontrolling interest | |||||||||||||||||||||||
| Less: Foreign currency translation adjustments attributable to noncontrolling interest | ( | ||||||||||||||||||||||
| Comprehensive income attributable to Capri | $ | $ | $ | $ | |||||||||||||||||||
See accompanying notes to consolidated financial statements.
4
CAPRI HOLDINGS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In millions, except share data which is in thousands)
(Unaudited)
| Ordinary Shares | Additional Paid-in Capital | Treasury Shares | Accumulated Other Comprehensive (Loss) Income | Retained Earnings | Total Equity of Capri | Non-controlling Interest | Total Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amounts | Shares | Amounts | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at October 1, 2022 | $ | $ | ( | $ | ( | $ | ( | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total comprehensive income | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Vesting of restricted awards, net of forfeitures | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of ordinary shares | — | — | — | ( | ( | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | ( | $ | ( | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
| Ordinary Shares | Additional Paid-in Capital | Treasury Shares | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Total Equity of Capri | Non-controlling Interest | Total Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amounts | Shares | Amounts | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at April 2, 2022 | $ | $ | ( | $ | ( | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | ( | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total comprehensive income | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Vesting of restricted awards, net of forfeitures | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of employee share options | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of ordinary shares | — | — | — | ( | ( | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Other | — | — | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | ( | $ | ( | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
5
CAPRI HOLDINGS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In millions, except share data which is in thousands)
(Unaudited)
| Ordinary Shares | Additional Paid-in Capital | Treasury Shares | Accumulated Other Comprehensive Income | Retained Earnings | Total Equity of Capri | Non-controlling Interest | Total Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amounts | Shares | Amounts | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 25, 2021 | $ | $ | ( | $ | ( | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total comprehensive income | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Vesting of restricted awards, net of forfeitures | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of employee share options | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of ordinary shares | — | — | — | ( | ( | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 25, 2021 | $ | $ | ( | $ | ( | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||||||||
| Ordinary Shares | Additional Paid-in Capital | Treasury Shares | Accumulated Other Comprehensive Income | Retained Earnings | Total Equity of Capri | Non-controlling Interest | Total Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amounts | Shares | Amounts | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at March 27, 2021 | $ | $ | ( | $ | ( | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total comprehensive income | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Vesting of restricted awards, net of forfeitures | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of employee share options | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of ordinary shares | — | — | — | ( | ( | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 25, 2021 | $ | $ | ( | $ | ( | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
6
CAPRI HOLDINGS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
| Nine Months Ended | |||||||||||
| December 31, 2022 | December 25, 2021 | ||||||||||
| Cash flows from operating activities | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Share-based compensation expense | |||||||||||
| Deferred income taxes | ( | ||||||||||
| Impairment of assets | |||||||||||
| Changes to lease related balances, net | ( | ( | |||||||||
| Foreign currency loss (gain) | ( | ||||||||||
| Other non-cash adjustments | |||||||||||
| Change in assets and liabilities: | |||||||||||
| Receivables, net | ( | ||||||||||
| Inventories, net | ( | ( | |||||||||
| Prepaid expenses and other current assets | ( | ( | |||||||||
| Accounts payable | ( | ||||||||||
| Accrued expenses and other current liabilities | |||||||||||
| Other long-term assets and liabilities | ( | ||||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities | |||||||||||
| Capital expenditures | ( | ( | |||||||||
| Settlement of net investment hedges | |||||||||||
| Net cash provided by (used in) investing activities | ( | ||||||||||
| Cash flows from financing activities | |||||||||||
| Debt borrowings | |||||||||||
| Debt repayments | ( | ( | |||||||||
| Debt issuance costs | ( | ||||||||||
| Repurchase of ordinary shares | ( | ( | |||||||||
| Exercise of employee share options | |||||||||||
| Other financing activities | |||||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | ( | ||||||||||
| Net increase in cash, cash equivalents and restricted cash | |||||||||||
| Beginning of period | |||||||||||
| End of period | $ | $ | |||||||||
| Supplemental disclosures of cash flow information | |||||||||||
| Cash paid for interest | $ | $ | |||||||||
| Net cash paid for income taxes | $ | $ | |||||||||
| Supplemental disclosure of non-cash investing and financing activities | |||||||||||
| Accrued capital expenditures | $ | $ | |||||||||
See accompanying notes to consolidated financial statements.
7
CAPRI HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Business and Basis of Presentation
Capri Holdings Limited (“Capri”, and together with its subsidiaries, the “Company”) was incorporated in the British Virgin Islands on December 13, 2002. The Company is a holding company that owns brands that are leading designers, marketers, distributors and retailers of branded women’s and men’s accessories, footwear and ready-to-wear bearing the Versace, Jimmy Choo and Michael Kors tradenames and related trademarks and logos. The Company operates in three reportable segments: Versace, Jimmy Choo and Michael Kors. See Note 16 for additional information.
2. Summary of Significant Accounting Policies
Use of Estimates
Seasonality
Cash, Cash Equivalents and Restricted Cash
All highly liquid investments with original maturities of three months or less are considered to be cash equivalents. Included in the Company’s cash and cash equivalents as of December 31, 2022 and April 2, 2022 are credit card receivables of $31 million and $18 million, respectively, which generally settle within two to three business days.
8
| December 31, 2022 | April 2, 2022 | ||||||||||
| Reconciliation of cash, cash equivalents and restricted cash | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash included within prepaid expenses and other current assets | |||||||||||
| Total cash, cash equivalents and restricted cash shown on the consolidated statements of cash flows | $ | $ | |||||||||
Inventories, net
Derivative Financial Instruments
Forward Foreign Currency Exchange Contracts
The Company uses forward foreign currency exchange contracts to manage its exposure to fluctuations in foreign currency for certain transactions. The Company, in its normal course of business, enters into transactions with foreign suppliers and seeks to minimize risks related to these transactions. The Company employs these contracts to hedge the Company’s cash flows as they relate to foreign currency transactions. Certain of these contracts are designated as hedges for accounting purposes, while others remain undesignated. All of the Company’s derivative instruments are recorded in the Company’s consolidated balance sheets at fair value on a gross basis, regardless of their hedge designation.
The Company designates certain contracts related to the purchase of inventory that qualify for hedge accounting as cash flow hedges. Formal hedge documentation is prepared for all derivative instruments designated as hedges, including a description of the hedged item and the hedging instrument and the risk being hedged. The changes in the fair value for contracts designated as cash flow hedges is recorded in equity as a component of accumulated other comprehensive income until the hedged item affects earnings. When the inventory related to forecasted inventory purchases that are being hedged is sold to a third party, the gains or losses deferred in accumulated other comprehensive income are recognized within cost of goods sold. The Company uses regression analysis to assess effectiveness of derivative instruments that are designated as hedges, which compares the change in the fair value of the derivative instrument to the change in the related hedged item. If the hedge is no longer expected to be highly effective in the future, future changes in the fair value are recognized in earnings. For those contracts that are not designated as hedges, changes in the fair value are recorded to foreign currency (gain) loss in the Company’s consolidated statements of operations and comprehensive income. The Company classifies cash flows relating to its forward foreign currency exchange contracts related to purchase of inventory consistently with the classification of the hedged item, within cash flows from operating activities.
The Company is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. In order to mitigate counterparty credit risk, the Company only enters into contracts with carefully selected financial institutions based upon their credit ratings and certain other financial factors, adhering to established limits for credit exposure. The aforementioned forward contracts generally have a term of no more than 12 months. The period of these contracts is directly related to the foreign transaction they are intended to hedge.
Net Investment Hedges
The Company also uses fixed-to-fixed cross currency swap agreements to hedge its net investments in foreign operations against future volatility in the exchange rates between the U.S. Dollars and the associated foreign currencies. The Company has elected the spot method of designating these contracts under Accounting Standards Update (“ASU”) 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities”, and has designated these contracts as net investment hedges. The net gain or loss on the net investment hedge is reported within foreign currency translation gains and losses (“CTA”), as a component of accumulated other comprehensive income on the Company’s consolidated balance sheets. Interest accruals and coupon payments are recognized directly in interest expense (income), net, in the Company’s consolidated
9
Leases
The Company leases retail stores, office space and warehouse space under operating lease agreements that expire at various dates through September 2043. The Company’s leases generally have terms of up to 10 years, generally require a fixed annual rent and may require the payment of additional rent if store sales exceed a negotiated amount. Although most of the Company’s equipment is owned, the Company has limited equipment leases that expire on various dates through May 2027. The Company acts as sublessor in certain leasing arrangements, primarily related to closed stores from previous restructuring activities. Fixed sublease payments received are recognized on a straight-line basis over the sublease term. The Company determines the sublease term based on the date it provides possession to the subtenant through the expiration date of the sublease.
The Company recognizes operating lease right-of-use assets and lease liabilities at lease commencement date, based on the present value of fixed lease payments over the expected lease term. The Company uses its incremental borrowing rates to determine the present value of fixed lease payments based on the information available at the lease commencement date, as the rate implicit in the lease is not readily determinable for the Company’s leases. The Company’s incremental borrowing rates are based on the term of the leases, the economic environment of the leases and reflect the expected interest rate it would incur to borrow on a secured basis. Certain leases include one or more renewal options. The exercise of lease renewal options is generally at the Company’s sole discretion and as such, the Company typically determines that exercise of these renewal options is not reasonably certain. As a result, the Company generally does not include the renewal option period in the expected lease term and the associated lease payments are not included in the measurement of the operating lease right-of-use asset and lease liability. Certain leases also contain termination options with an associated penalty. Generally, the Company is reasonably certain not to exercise these options and as such, they are not included in the determination of the expected lease term. The Company recognizes operating lease expense on a straight-line basis over the lease term.
Leases with an initial lease term of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense for its short-term leases on a straight-line basis over the lease term.
The Company’s leases generally provide for payments of non-lease components, such as common area maintenance, real estate taxes and other costs associated with the leased property. The Company accounts for lease and non-lease components of its real estate leases together as a single lease component and, as such, includes fixed payments of non-lease components in the measurement of the operating lease right-of-use assets and lease liabilities for its real estate leases. Variable lease payments, such as percentage rentals based on sales, periodic adjustments for inflation, reimbursement of real estate taxes, any variable common area maintenance and any other variable costs associated with the leased property are expensed as incurred as variable lease costs and are not recorded on the balance sheet. The Company’s lease agreements do not contain any material residual value guarantees, material restrictions or covenants.
| Nine Months Ended | ||||||||||||||||||||
| December 31, 2022 | December 25, 2021 | |||||||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||||||||
Operating cash flows used in operating leases | $ | $ | ||||||||||||||||||
During the three and nine months ended December 31, 2022, the Company recorded sublease income of $2 million and $7 million, respectively, within selling, general and administrative expenses. During the three and nine months ended December 25, 2021, the Company recorded $2 million and $6 million, respectively, within restructuring and other charges for stores relating to our restructuring plan and selling, general and administrative expenses for all other locations. During the three and nine months ended December 31, 2022, the Company recorded $3 million and $8 million, respectively, of rent concessions negotiated in connection with the impact of COVID-19 as if it were contemplated as part of the existing contract. During the three and nine months ended December 25, 2021, the Company recorded $3 million and $13 million, respectively, of rent concessions negotiated in connection with the impact of COVID-19 as if it were contemplated as part of the existing contract. The aforementioned rent concessions were recorded as a reduction to variable lease expense within selling, general and administrative expenses.
10
Net Income per Share
The components of the calculation of basic net income per ordinary share and diluted net income per ordinary share are as follows (in millions, except share and per share data):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| December 31, 2022 | December 25, 2021 | December 31, 2022 | December 25, 2021 | ||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net income attributable to Capri | $ | $ | $ | $ | |||||||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Basic weighted average shares | |||||||||||||||||||||||
| Weighted average dilutive share equivalents: | |||||||||||||||||||||||
Share options and restricted shares/units, and performance restricted share units | |||||||||||||||||||||||
| Diluted weighted average shares | |||||||||||||||||||||||
Basic net income per share (1) | $ | $ | $ | $ | |||||||||||||||||||
Diluted net income per share (1) | $ | $ | $ | $ | |||||||||||||||||||
(1)Basic and diluted net income per share are calculated using unrounded numbers.
During the three and nine months ended December 31, 2022, share equivalents of 187,547 shares and 546,607 shares, respectively, have been excluded from the above calculations due to their anti-dilutive effect. Share equivalents of 208,168 shares and 411,394 shares have been excluded from the above calculations for the three and nine months ended December 25, 2021, respectively, due to their anti-dilutive effect.
See Note 2 in the Company’s Annual Report on Form 10-K for the fiscal year ended April 2, 2022 for a complete disclosure of the Company’s significant accounting policies.
Recently Issued Accounting Pronouncements
The Company has considered all new accounting pronouncements and has concluded that there are no new pronouncements that may have a material impact on the Company’s results of operations, financial condition or cash flows based on current information.
11
3. Revenue Recognition
The Company accounts for contracts with its customers when there is approval and commitment from both parties, the rights of the parties and payment terms have been identified, the contract has commercial substance and collectibility of consideration is probable. Revenue is recognized when control of the promised goods or services is transferred to the Company’s customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for goods or services.
The Company sells its products through three primary channels of distribution: retail, wholesale and licensing. Within the retail and wholesale channels, substantially all of the Company’s revenues consist of sales of products that represent a single performance obligation, where control transfers at a point in time to the customer. For licensing arrangements, royalty and advertising revenue is recognized over time based on access provided to the Company’s trademarks.
Retail
The Company generates sales through directly operated stores and e-commerce sites throughout the Americas (United States, Canada and Latin America), certain parts of EMEA (Europe, Middle East and Africa) and certain parts of Asia (Asia and Oceania).
Gift Cards. The Company sells gift cards that can be redeemed for merchandise, resulting in a contract liability upon issuance. Revenue is recognized when the gift card is redeemed or upon “breakage” for the estimated portion of gift cards that are not expected to be redeemed. “Breakage” revenue is calculated under the proportional redemption methodology, which considers the historical patterns of redemption in jurisdictions where the Company is not required to remit the value of the unredeemed gift cards as unclaimed property. The contract liability related to gift cards, net of estimated “breakage”, of $15 million and $13 million as of December 31, 2022 and April 2, 2022, respectively, is included within accrued expenses and other current liabilities in the Company’s consolidated balance sheet.
Loyalty Program. The Company offers a loyalty program, which allows its Michael Kors United States customers to earn points on qualifying purchases toward monetary and non-monetary rewards, which may be redeemed for purchases at Michael Kors retail stores and e-commerce sites. The Company defers a portion of the initial sales transaction based on the estimated relative fair value of the benefits based on projected timing of future redemptions and historical activity. These amounts include estimated “breakage” for points that are not expected to be redeemed.
Wholesale
The Company’s products are sold primarily to major department stores, specialty stores and travel retail shops throughout the Americas, EMEA and Asia. The Company also has arrangements where its products are sold to geographic licensees in certain parts of EMEA, Asia and South America.
Licensing
The Company provides its third-party licensees with the right to access its Versace, Jimmy Choo and Michael Kors trademarks under product and geographic licensing arrangements. Under geographic licensing arrangements, third party licensees receive the right to distribute and sell products bearing the Company’s trademarks in retail and/or wholesale channels within certain geographical areas, including Brazil, the Middle East, Eastern Europe, South Africa and certain parts of Asia.
12
| Contractually Guaranteed Minimum Fees | |||||
| Remainder of Fiscal 2023 | $ | ||||
| Fiscal 2024 | |||||
| Fiscal 2025 | |||||
| Fiscal 2026 | |||||
| Fiscal 2027 | |||||
| Fiscal 2028 and thereafter | |||||
| Total | $ | ||||
Sales Returns
The refund liability recorded as of December 31, 2022 was $64 million, and the related asset for the right to recover returned product as of December 31, 2022 was $15 million. The refund liability recorded as of April 2, 2022 was $52 million, and the related asset for the right to recover returned product as of April 2, 2022 was $15 million.
Contract Balances
Total contract liabilities were $20 million and $30 million as of December 31, 2022 and April 2, 2022, respectively. For the three and nine months ended December 31, 2022, the Company recognized $3 million and $11 million respectively, in revenue which related to contract liabilities that existed at April 2, 2022. For the three and nine months ended December 25, 2021, the Company recognized $1 million and $9 million, respectively, in revenue which related to contract liabilities that existed at March 27, 2021. There were no
There were no changes in historical variable consideration estimates that were materially different from actual results.
13
Disaggregation of Revenue
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| December 31, 2022 | December 25, 2021 | December 31, 2022 | December 25, 2021 | ||||||||||||||||||||
| Versace revenue - the Americas | $ | $ | $ | $ | |||||||||||||||||||
| Versace revenue - EMEA | |||||||||||||||||||||||
| Versace revenue - Asia | |||||||||||||||||||||||
| Total Versace | |||||||||||||||||||||||
| Jimmy Choo revenue - the Americas | |||||||||||||||||||||||
| Jimmy Choo revenue - EMEA | |||||||||||||||||||||||
| Jimmy Choo revenue - Asia | |||||||||||||||||||||||
| Total Jimmy Choo | |||||||||||||||||||||||
| Michael Kors revenue - the Americas | |||||||||||||||||||||||
| Michael Kors revenue - EMEA | |||||||||||||||||||||||
| Michael Kors revenue - Asia | |||||||||||||||||||||||
| Total Michael Kors | |||||||||||||||||||||||
| Total revenue - the Americas | |||||||||||||||||||||||
| Total revenue - EMEA | |||||||||||||||||||||||
| Total revenue - Asia | |||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | |||||||||||||||||||
See Note 3 in the Company’s Annual Report on Form 10-K for the fiscal year ended April 2, 2022 for a complete disclosure of the Company’s revenue recognition policy.
4. Receivables, net
Receivables, net, consist of (in millions):
| December 31, 2022 | April 2, 2022 | ||||||||||
Trade receivables (1) | $ | $ | |||||||||
| Receivables due from licensees | |||||||||||
| Less: allowances | ( | ( | |||||||||
| Total receivables, net | $ | $ | |||||||||
(1)As of December 31, 2022 and April 2, 2022, $92 million and $83 million, respectively, of trade receivables were insured.
14
5. Property and Equipment, net
| December 31, 2022 | April 2, 2022 | ||||||||||
| Leasehold improvements | $ | $ | |||||||||
| Computer equipment and software | |||||||||||
| Furniture and fixtures | |||||||||||
| Equipment | |||||||||||
| Building | |||||||||||
| In-store shops | |||||||||||
| Land | |||||||||||
| Total property and equipment, gross | |||||||||||
| Less: accumulated depreciation and amortization | ( | ( | |||||||||
| Subtotal | |||||||||||
| Construction-in-progress | |||||||||||
| Total property and equipment, net | $ | $ | |||||||||
15
6. Intangible Assets and Goodwill
The following table details the carrying values of the Company’s intangible assets and goodwill (in millions):
| December 31, 2022 | April 2, 2022 | ||||||||||
| Definite-lived intangible assets: | |||||||||||
| Reacquired rights | $ | $ | |||||||||
| Trademarks | |||||||||||
Customer relationships (1) | |||||||||||
| Gross definite-lived intangible assets | |||||||||||
| Less: accumulated amortization | ( | ( | |||||||||
| Net definite-lived intangible assets | |||||||||||
| Indefinite-lived intangible assets: | |||||||||||
Jimmy Choo brand (2) | |||||||||||
Versace brand (1) | |||||||||||
| Net indefinite-lived intangible assets | |||||||||||
| Total intangible assets, excluding goodwill | $ | $ | |||||||||
Goodwill (3) | $ | $ | |||||||||
(1)The change in the carrying value since April 2, 2022 reflects the impact of foreign currency translation.
(2)Includes accumulated impairment of $249
(3)Includes accumulated impairment of $265
7. Current Assets and Current Liabilities
| December 31, 2022 | April 2, 2022 | ||||||||||
| Prepaid taxes | $ | $ | |||||||||
| Prepaid contracts | |||||||||||
| Other accounts receivables | |||||||||||
| Interest receivable related to net investment hedges | |||||||||||
| Other | |||||||||||
| Total prepaid expenses and other current assets | $ | $ | |||||||||
16
Accrued expenses and other current liabilities consist of the following (in millions):
| December 31, 2022 | April 2, 2022 | ||||||||||
| Other taxes payable | $ | $ | |||||||||
| Return liabilities | |||||||||||
| Accrued capital expenditures | |||||||||||
| Accrued advertising and marketing | |||||||||||
Accrued rent (1) | |||||||||||
| Professional services | |||||||||||
| Gift cards and retail store credits | |||||||||||
| Accrued litigation | |||||||||||
| Accrued interest | |||||||||||
| Accrued purchases and samples | |||||||||||
Charitable donations (2) | |||||||||||
| Other | |||||||||||
| Total accrued expenses and other current liabilities | $ | $ | |||||||||
(1)The accrued rent balance relates to variable lease payments.
(2)The charitable donations balance relates to a $10 million unconditional pledge to The Versace Foundation as of April 2, 2022 which was paid during the third quarter ended December 31, 2022.
8. Restructuring and Other Charges
Restructuring Charges - Capri Retail Store Optimization Program
During Fiscal 2022, the Company completed its plan to close certain retail stores as part of its Capri Retail Store Optimization Program.
During the three and nine months ended December 25, 2021, the Company closed 13 and 39 of its retail stores, respectively, which were incorporated into the Capri Retail Store Optimization Program. Net restructuring charges recorded in connection with the Capri Retail Store Optimization Program during the three and nine months ended December 25, 2021 were $10 million and $6 million, respectively.
Other Charges
17
9. Debt Obligations
| December 31, 2022 | April 2, 2022 | ||||||||||
| Revolving Credit Facilities | $ | $ | |||||||||
| Versace Term Loan | |||||||||||
| Senior Notes due 2024 | |||||||||||
| 2018 Term Loan | |||||||||||
| Other | |||||||||||
| Total debt | |||||||||||
| Less: Unamortized debt issuance costs | |||||||||||
| Less: Unamortized discount on senior notes | |||||||||||
| Total carrying value of debt | |||||||||||
| Less: Short-term debt | |||||||||||
Total long-term debt | $ | $ | |||||||||
On July 1, 2022, the Company entered into a revolving credit facility (the “2022 Credit Facility”) with, among others, JPMorgan Chase Bank, N.A. (“JPMorgan Chase”), as administrative agent (the “Administrative Agent”), which refinanced its existing senior unsecured revolving credit facility. The Company, a U.S. subsidiary of the Company, a Canadian subsidiary of the Company, a Dutch subsidiary of the Company and a Swiss subsidiary of the Company are the borrowers under the 2022 Credit Facility, and the borrowers and certain subsidiaries of the Company provide unsecured guaranties of the 2022 Credit Facility. The 2022 Credit Facility replaced the third amended and restated senior unsecured credit facility, dated as of November 15, 2018 (the “2018 Credit Facility”).
The 2022 Credit Facility provides for a $1.5 billion revolving credit facility (the “2022 Revolving Credit Facility”), which may be denominated in U.S. Dollars and other currencies, including Euros, Canadian Dollars, Pounds Sterling, Japanese Yen and Swiss Francs. The 2022 Revolving Credit Facility also includes sub-facilities for the issuance of letters of credit of up to $125 million and swing line loans at the Administrative Agent’s discretion of up to $100 million. The Company has the ability to expand its borrowing availability under the 2022 Credit Facility in the form of increased revolving commitments or one or more tranches of term loans by up to an additional $500 million, subject to the agreement of the participating lenders and certain other customary conditions.
Borrowings under the 2022 Credit Facility bear interest, at the Company’s option, at the following rates:
•For loans denominated in U.S. Dollars, (A) an alternate base rate, which is the greatest of (a) the prime rate publicly announced from time to time by JPMorgan Chase, (b) the greater of the federal funds effective rate and the Federal Reserve Bank of New York overnight bank funding rate and zero , plus 50 basis points, and (c) the greater of term Secured Overnight Financing Rate (“SOFR”) for an interest period of one month plus 10 basis points and zero , plus 100 basis points, (B) the greater of term SOFR for the applicable interest period plus 10 basis points (“Adjusted Term SOFR”) and zero or (C) the greater of daily simple SOFR plus 10 basis points and zero ;
•For loans denominated in Pounds Sterling, the greater of Secured Overnight Index Average (“SONIA”) and zero ;
•For loans denominated in Swiss Francs, the greater of Swiss Average Rate Overnight (“SARON”) and zero ;
•For loans denominated in Euro, the greater of Euro Interbank Offer Rate (“EURIBOR”) for the applicable interest period adjusted for statutory reserve requirements (“Adjusted EURIBOR Rate”) and zero ;
•For loans denominated in Canadian Dollars, the greater of the rate applicable to Canadian Dollar Canadian banker’s acceptances quoted on Reuters for the applicable interest period adjusted for statutory reserve requirements (“Adjusted CDOR Rate”) and zero ; and
•For loans denominated in Japanese Yen, the greater of Tokyo Interbank Offer Rate (“TIBOR”) for the applicable interest period adjusted for statutory reserve requirements (“Adjusted TIBOR Rate”) and zero ; in each case, plus an applicable margin based on the Company’s public debt ratings and/or net leverage ratio.
The 2022 Credit Facility provides for an annual administration fee and a commitment fee equal to 7.5 basis points to 17.5 basis points per annum, which was 15.0 basis points as of December 31, 2022. The fees are based on the Company’s public debt ratings and/or net leverage ratio, applied to the average daily unused amount of the 2022 Credit Facility.
18
Loans under the 2022 Credit Facility may be prepaid and commitments may be terminated or reduced by the borrowers without premium or penalty other than customary “breakage” costs with respect to loans bearing interest based upon Adjusted Term SOFR, the Adjusted EURIBOR Rate, the Adjusted CDOR Rate and the Adjusted TIBOR Rate.
The 2022 Credit Facility requires the Company to maintain a net leverage ratio as of the end of each fiscal quarter of no greater than 4.0 to 1.0. Such net leverage ratio is calculated as the ratio of the sum of total indebtedness as of the date of the measurement plus the capitalized amount of all operating lease obligations, minus unrestricted cash and cash equivalents not to exceed $200 million, to Consolidated EBITDAR for the last four consecutive fiscal quarters. Consolidated EBITDAR is defined as consolidated net income plus provision for taxes based on income, profits or capital, net interest expense, depreciation and amortization expense, consolidated rent expense and other non-cash losses, charge and expenses, subject to certain additions and deductions. The 2022 Credit Facility also includes covenants that limit additional indebtedness, liens, acquisitions and other investments, restricted payments and affiliate transactions.
The 2022 Credit Facility also contains events of default customary for financings of this type, including, but not limited to, payment defaults, material inaccuracy of representations and warranties, covenant defaults, cross-defaults to certain indebtedness, certain events of bankruptcy or insolvency, certain events under the Employee Retirement Income Security Act, material judgments, actual or asserted failure of any guaranty supporting the 2022 Credit Facility to be in full force and effect, and changes of control. If such an event of default occurs and is continuing, the lenders under the 2022 Credit Facility would be entitled to take various actions, including, but not limited to, terminating the commitments and accelerating amounts outstanding under the 2022 Credit Facility.
On December 5, 2022, Gianni Versace S.r.l., a wholly owned subsidiary of Capri Holdings Limited, entered into a credit facility with Intesa Sanpaolo S.p.A., Banco Nazionale del Lavoro S.p.A., and UniCredit S.p.A., as arrangers and lenders, and Intesa Sanpaolo S.p.A., as agent, which provides a senior unsecured term loan (the “Versace Term Loan”) in an aggregate principal amount of €450 million (approximately $482 million). The Versace Term Loan is not subject to required amortization and matures on December 5, 2025. The Company provides an unsecured guaranty of the Versace Term Loan.
The Versace Term Loan bears interest at a rate per annum equal to the greater of EURIBOR for the applicable interest period and zero, plus a margin of 1.35 %.
The Versace Term Loan may be prepaid without premium or penalty other than customary “breakage” costs. The Versace Term Loan requires the Company to maintain a net leverage ratio as of the end of each fiscal quarter of no greater than 4.0 to 1.0. Such net leverage ratio is calculated as the ratio of the sum of total indebtedness as of the date of the measurement plus the capitalized amount of all operating lease obligations, minus unrestricted cash and cash equivalents not to exceed $200 million, to Consolidated EBITDAR for the last four consecutive fiscal quarters. Consolidated EBITDAR is defined as consolidated net income plus provision for taxes based on income, profits or capital, net interest expense, depreciation and amortization expense, consolidated rent expense and other non-cash losses, charge and expenses, subject to certain additions and deductions. The Versace Term Loan also includes covenants that limit additional financial indebtedness, liens, acquisitions, loans and guarantees, restricted payments and mergers of GIVI Holding S.r.l., Gianni Versace S.r.l. and their respective subsidiaries.
The Versace Term Loan contains events of default customary for financings of this type, including, but not limited to payment defaults, material inaccuracy of representations and warranties, covenant defaults, cross-defaults to material financial indebtedness, certain events of bankruptcy or insolvency, illegality or repudiation of any loan document under the Versace Term Loan or any failure thereof to be in full force and effect, and changes of control. If such an event of default occurs and is continuing, the lenders under the Versace Term Loan would be entitled to take various actions, including, but not limited to, accelerating amounts outstanding under the Versace Term Loan.
As of December 31, 2022, and the date these financial statements were issued, the Company was in compliance with all covenants related to the 2022 Credit Facility and the Versace Term Loan.
As of December 31, 2022, the Company had $580 million of borrowings outstanding under the 2022 Revolving Credit Facility. The Company had $175 million of borrowings outstanding under revolver in the 2018 Credit Facility as of April 2, 2022. In addition, stand-by letters of credit of $15 million and $21 million were outstanding as of both December 31, 2022 and April 2, 2022, respectively. At December 31, 2022, the amount available for future borrowings under the 2022 Revolving Credit Facility was $905 million. The amount available for future borrowings under the revolver in the 2018 Credit Facility was $804 million as of April 2, 2022.
19
As of December 31, 2022, the carrying value of the Versace Term Loan was $481 million, which was recorded within long-term debt in the Company’s consolidated balance sheets. As of December 31, 2022, the Company no longer had an outstanding balance related to the 2018 Term Loan. As of April 2, 2022, the carrying value of the 2018 Term Loan was $495 million, which was recorded within long-term debt in the Company’s consolidated balance sheets.
The Company had $6 million and $3 million of deferred financing fees related to Revolving Credit Facilities as of December 31, 2022 and April 2, 2022, respectively, and are recorded within other assets in the Company’s consolidated balance sheets. The Company had $1 million of deferred financing fees related to the Versace Term Loan and $2 million of deferred financing fees related to the 2018 Term Loan as of December 31, 2022 and April 2, 2022, respectively, which are both recorded within long-term debt in the Company’s consolidated balance sheets.
The Company offers a supplier financing program which enables suppliers, at their sole discretion, to sell their receivables (i.e., the Company’s payment obligations to suppliers) to a financial institution on a non-recourse basis in order to be paid earlier than current payment terms provide. The Company’s obligations, including the amount due and scheduled payment dates, are not impacted by a suppliers’ decision to participate in this program. The Company does not reimburse suppliers for any costs they incur to participate in the program and their participation is voluntary. The amount outstanding under this program as of December 31, 2022 and April 2, 2022 was $18 million and $21 million, respectively, and is presented as short-term debt in the Company’s consolidated balance sheets.
During Fiscal 2022, the Company's subsidiary, Versace, entered into an agreement with Banco BPM Banking Group (“the Bank”) to sell certain tax receivables to the Bank in exchange for cash. The arrangement was determined to be a financing arrangement as the de-recognition criteria for the receivables was not met at the time of the cash receipt from the Bank. As of December 31, 2022, the outstanding balance was $11 million, with $1 million and $10 million recorded within short-term debt and long-term debt in the Company’s consolidated balance sheets, respectively. As of April 2, 2022, the outstanding balance was $18 million, with $8 million and $10 million recorded within short-term debt and long-term debt in the Company’s consolidated balance sheets, respectively.
See Note 11 to the Company’s Fiscal 2022 Annual Report on Form 10-K for additional information regarding the Company’s credit facilities and debt obligations.
10. Commitments and Contingencies
In the ordinary course of business, the Company is party to various legal proceedings and claims. Although the outcome of such claims cannot be determined with certainty, the Company believes that the outcome of all pending legal proceedings, in the aggregate, will not have a material adverse effect on its cash flow, results of operations or financial position.
Please refer to the Contractual Obligations and Commercial Commitments disclosure within the Liquidity and Capital Resources section of the Company’s Annual Report on Form 10-K for the fiscal year ended April 2, 2022 for a detailed disclosure of other commitments and contractual obligations as of April 2, 2022.
11. Fair Value Measurements
Financial assets and liabilities are measured at fair value using the three-level valuation hierarchy for disclosure of fair value measurements. The determination of the applicable level within the hierarchy of a particular asset or liability depends on the inputs used in the valuation as of the measurement date, notably the extent to which the inputs are market-based (observable) or internally derived (unobservable). Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from independent sources. Unobservable inputs are inputs based on a company’s own assumptions about market participant assumptions based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs as follows:
Level 1 – Valuations based on quoted prices in active markets for identical assets or liabilities that a company has the ability to access at the measurement date.
Level 2 – Valuations based on quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability and inputs derived principally from or corroborated by observable market data.
20
Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
All contracts are measured and recorded at fair value on a recurring basis and are categorized in Level 2 of the fair value hierarchy, as shown in the following table (in millions):
Fair value at December 31, 2022 using: | Fair value at April 2, 2022 using: | ||||||||||||||||||||||||||||||||||
| Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | ||||||||||||||||||||||||||||||
| Derivative assets: | |||||||||||||||||||||||||||||||||||
Forward foreign currency exchange contracts | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Net investment hedges | |||||||||||||||||||||||||||||||||||
| Undesignated derivative contracts | |||||||||||||||||||||||||||||||||||
| Total derivative assets | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Derivative liabilities: | |||||||||||||||||||||||||||||||||||
| Net investment hedges | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Total derivative liabilities | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| December 31, 2022 | April 2, 2022 | ||||||||||||||||||||||
| Carrying Value | Estimated Fair Value | Carrying Value | Estimated Fair Value | ||||||||||||||||||||
| Revolving Credit Facilities | $ | $ | $ | $ | |||||||||||||||||||
| Versace Term Loan | $ | $ | $ | $ | |||||||||||||||||||
| Senior Notes due 2024 | $ | $ | $ | $ | |||||||||||||||||||
| 2018 Term Loan | $ | $ | |||||||||||||||||||||
21
Non-Financial Assets and Liabilities
The Company recorded $1 million and $12 million in impairment charges during the three and nine months ended December 31, 2022, respectively. The Company recorded $10 million and $43 million in impairment charges during the three and nine months ended December 25, 2021, respectively. The following table details the carrying values and fair values of the Company’s assets that have been impaired during the three and nine months ended December 31, 2022 and the three and nine months ended December 25, 2021 (in millions):
Three Months Ended December 31, 2022 | Nine Months Ended December 31, 2022 | ||||||||||||||||||||||||||||||||||
| Carrying Value Prior to Impairment | Fair Value | Impairment Charge | Carrying Value Prior to Impairment | Fair Value | Impairment Charge | ||||||||||||||||||||||||||||||
Operating Lease Right-of-Use Assets | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Property and Equipment | |||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
Three Months Ended December 25, 2021 | Nine Months Ended December 25, 2021 | ||||||||||||||||||||||||||||||||||
| Carrying Value Prior to Impairment | Fair Value | Impairment Charge(1) | Carrying Value Prior to Impairment | Fair Value | Impairment Charge(1) | ||||||||||||||||||||||||||||||
Operating Lease Right-of-Use Assets | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Property and Equipment | |||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
(1) Includes $10
12. Derivative Financial Instruments
Forward Foreign Currency Exchange Contracts
The Company uses forward foreign currency exchange contracts to manage its exposure to fluctuations in foreign currency for certain of its transactions. The Company, in its normal course of business, enters into transactions with foreign suppliers and seeks to minimize risks related to certain forecasted inventory purchases by using forward foreign currency exchange contracts. The Company only enters into derivative instruments with highly credit-rated counterparties. The Company does not enter into derivative contracts for trading or speculative purposes.
Net Investment Hedges
During the first quarter of Fiscal 2023, the Company modified multiple fixed-to-fixed cross-currency swap agreements with aggregate notional amounts of $1.094 billion to hedge its net investment, of which $900 million was in Euro denominated subsidiaries and $194 million was in Japanese Yen denominated subsidiaries. The modification of these swaps resulted in the Company receiving $66 million in cash during the first quarter of Fiscal 2023. These contracts have been designated as net investment hedges.
22
As of July 2, 2022, the Company had multiple fixed-to-fixed cross-currency swap agreements with aggregate notional amounts of $4 billion to hedge its net investment in Euro denominated subsidiaries (the “Euro Net Investment Hedges”) and $194 million to hedge its net investment in Japanese Yen denominated subsidiaries (the “Japanese Yen Net Investment Hedges”). During the month of July 2022, the Euro Net Investment Hedges with aggregate notional amount of $4 billion outstanding as of July 2, 2022 were terminated resulting in the Company receiving $237 million in cash.
During the second quarter of Fiscal 2023, the Company also entered into, and subsequently terminated, additional Euro Net Investment Hedges with aggregate notional amount of $4 billion. The termination of these contracts resulted in the Company receiving additional $100 million in cash.
During the second quarter of Fiscal 2023, the Company modified certain Japanese Yen Net Investment Hedges with notional amounts of $100 million. The modification of these hedges resulted in the Company receiving $6 million in cash during the second quarter of Fiscal 2023. The Company entered into additional Japanese Net Investment Hedges with notional amount of $100 million. These contracts have been designated as net investment hedges.
During the second quarter of Fiscal 2023, the Company received $343 million from the termination of Euro Net Investment Hedges and the modification of Japanese Yen Net Investment Hedges.
During the third quarter of Fiscal 2023, the Company entered into multiple fixed-to-fixed cross-currency swap agreements with aggregate notional amounts of €1 billion (approximately $1.07 billion) to hedge its net investment in GBP denominated subsidiaries (the “GBP Net Investment Hedges”). Under the terms of these contracts, the Company will exchange the semi-annual fixed rate payments on GBP denominated debt for fixed rate payments of 0 % in Euro. These contracts have maturity dates between November 2024 and November 2027 and are designated as net investment hedges.
As of December 31, 2022, the Company had Japanese Yen Net Investment Hedges with aggregate notional amounts of $294 million. Under the terms of these contracts, the Company will exchange the semi-annual fixed rate payments on U.S. denominated debt for fixed rate payments of 0 % to 2.665 % in Japanese Yen. These contracts have maturity dates between May 2027 and February 2051 and are designated as net investment hedges.
Certain of these contracts are supported by a credit support annex (“CSA”) which provides for collateral exchange with the earliest effective date being September 2027. If the outstanding position of a contract exceeds a certain threshold governed by the aforementioned CSA’s, either party is required to post cash collateral.
When a cross-currency swap is used as a hedging instrument in a net investment hedge assessed under the spot method, the cross-currency basis spread is excluded from the assessment of hedge effectiveness and is recognized as a reduction in interest expense in the Company’s consolidated statements of operations and comprehensive income. Accordingly, the Company recorded interest income of $4 million and $32 million during the three and nine months ended December 31, 2022, respectively. Additionally, the Company recorded interest income of $17 million and $44 million during the three and nine months ended December 25, 2021, respectively.
The following table details the fair value of the Company’s derivative contracts, which are recorded on a gross basis in the consolidated balance sheets as of December 31, 2022 and April 2, 2022 (in millions):
| Fair Value | ||||||||||||||||||||||||||||||||||||||
| Notional Amounts | Assets | Liabilities | ||||||||||||||||||||||||||||||||||||
| December 31, 2022 | April 2, 2022 | December 31, 2022 | April 2, 2022 | December 31, 2022 | April 2, 2022 | |||||||||||||||||||||||||||||||||
| Designated forward foreign currency exchange contracts | $ | $ | $ | $ | (1) | $ | $ | |||||||||||||||||||||||||||||||
| Designated net investment hedges | (2) | (3) | (3) | |||||||||||||||||||||||||||||||||||
| Total designated hedges | ||||||||||||||||||||||||||||||||||||||
Undesignated derivative contracts (4) | ||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
(1)Recorded within prepaid expenses and other current assets in the Company’s consolidated balance sheets.
(2)Recorded within other assets in the Company’s consolidated balance sheets.
(3)Recorded within other long-term liabilities in the Company’s consolidated balance sheets.
23
The Company records and presents the fair values of all of its derivative assets and liabilities in its consolidated balance sheets on a gross basis, as shown in the previous table. However, if the Company were to offset and record the asset and liability balances for its derivative instruments on a net basis in accordance with the terms of its master netting arrangements, which provide for the right to set-off amounts for similar transactions denominated in the same currencies, the resulting impact as of December 31, 2022 and April 2, 2022 would be as follows (in millions):
| Forward Currency Exchange Contracts | Net Investment Hedges | ||||||||||||||||||||||
| December 31, 2022 | April 2, 2022 | December 31, 2022 | April 2, 2022 | ||||||||||||||||||||
Assets subject to master netting arrangements | $ | $ | $ | $ | |||||||||||||||||||
Liabilities subject to master netting arrangements | $ | $ | $ | $ | |||||||||||||||||||
| Derivative assets, net | $ | $ | $ | $ | |||||||||||||||||||
| Derivative liabilities, net | $ | $ | $ | $ | |||||||||||||||||||
Currently, the Company’s master netting arrangements do not require cash collateral to be pledged by the Company or its counterparties.
Changes in the fair value of the Company’s forward foreign currency exchange contracts that are designated as accounting hedges are recorded in equity as a component of accumulated other comprehensive income and are reclassified from accumulated other comprehensive income into earnings when the items underlying the hedged transactions are recognized into earnings, as a component of cost of goods sold within the Company’s consolidated statements of operations and comprehensive income. The net gain or loss on net investment hedges are reported within CTA as a component of accumulated other comprehensive income on the Company’s consolidated balance sheets. Upon discontinuation of the hedge, such amounts remain in CTA until the related investment is sold or liquidated.
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| December 31, 2022 | December 25, 2021 | December 31, 2022 | December 25, 2021 | ||||||||||||||||||||
| Pre-Tax Losses Recognized in OCI | Pre-Tax Gains Recognized in OCI | Pre-Tax Gains Recognized in OCI | Pre-Tax Gains Recognized in OCI | ||||||||||||||||||||
Designated forward foreign currency exchange contracts | $ | ( | $ | $ | $ | ||||||||||||||||||
| Designated net investment hedges | $ | ( | $ | $ | $ | ||||||||||||||||||
| Designated interest rate swaps | $ | $ | $ | $ | |||||||||||||||||||
24
The following tables summarize the pre-tax impact of the gains and losses within the consolidated statements of operations and comprehensive income related to the designated forward foreign currency exchange contracts for the three and nine months ended December 31, 2022 and December 25, 2021 (in millions):
| Three Months Ended | |||||||||||||||||||||||
| Pre-Tax (Gain) Loss Reclassified from Accumulated OCI | Location of (Gain) Loss Recognized | ||||||||||||||||||||||
| December 31, 2022 | December 25, 2021 | ||||||||||||||||||||||
Designated forward foreign currency exchange contracts | $ | ( | $ | Cost of goods sold | |||||||||||||||||||
| Nine Months Ended | |||||||||||||||||||||||
| Pre-Tax (Gain) Loss Reclassified from Accumulated OCI | Location of (Gain) Loss Recognized | ||||||||||||||||||||||
| December 31, 2022 | December 25, 2021 | ||||||||||||||||||||||
Designated forward foreign currency exchange contracts | $ | ( | $ | Cost of goods sold | |||||||||||||||||||
The Company expects that substantially all of the amounts currently recorded in accumulated other comprehensive income for its forward foreign currency exchange contracts will be reclassified into earnings during the next 12 months, based upon the timing of inventory purchases and turnover.
Undesignated Hedges
During the three months ended December 31, 2022, there was no gain recognized within foreign currency (gain) loss in the Company’s consolidated statements of operations and comprehensive income, while during the nine months ended December 31, 2022, a $2 million gain was recognized within foreign currency (gain) loss in the Company’s consolidated statements of operations and comprehensive income as a result of the changes in the fair value of undesignated forward foreign currency exchange contracts. During the three and nine months ended December 25, 2021, a $1
13. Shareholders’ Equity
Share Repurchase Program
During the first quarter of Fiscal 2022, the Company reinstated its $500 million share repurchase program, which was previously suspended during the first quarter of Fiscal 2021 in response to the impact of the COVID-19 pandemic and the provisions of the Second Amendment of the 2018 Credit Facility. Subsequently, on November 3, 2021, the Company announced that its Board of Directors had terminated the Company’s existing $500 million share repurchase program (the “Prior Plan”), which had $250 million of availability remaining at the time, and authorized a new share repurchase program (the “Fiscal 2022 Plan”) pursuant to which the Company was permitted, from time to time, to repurchase up to $1.0 billion of its outstanding ordinary shares within a period of two years from the effective date of the program.
On June 1, 2022, the Company announced that its Board of Directors had terminated the Fiscal 2022 Plan, with $500 million of availability remaining, and authorized a new share repurchase program (the “Fiscal 2023 Plan”) pursuant to which the Company was permitted, from time to time, to repurchase up to $1.0 billion of its outstanding ordinary shares within a period of two years from the effective date of the program.
On November 9, 2022, the Company announced that its Board of Directors approved a new share repurchase program (the “Existing Share Repurchase Plan”) of up to $1 billion of its outstanding ordinary shares, providing additional capacity to return cash to shareholders over the longer term. This new two-year program replaced the Fiscal 2023 Plan which had $250 million of availability remaining. Share repurchases may be made in open market or privately negotiated transactions and/or pursuant to Rule 10b5-1 trading plans, subject to market conditions, applicable legal requirements, trading restrictions under the Company’s insider trading policy and other relevant factors. The program may be suspended or discontinued at any time.
25
During the nine months ended December 31, 2022, the Company purchased 18,921,459 shares for a total cost of approximately $950 million, including commissions, through open market transactions, with 15,479,200 shares purchased for a total cost of $750 million including commissions under the Fiscal 2023 plan and 3,442,259 shares purchased for a total cost of $200 million under the Existing Share Repurchase Plan. As of December 31, 2022, the remaining availability under the Company’s Existing Share Repurchase Plan was $800 million.
During the nine months ended December 25, 2021, the Company purchased 5,934,244 shares for a total cost of approximately $350 million including commissions, through open market transactions, with 2,712,275 shares purchased for a total cost of $150 million including commissions under the Prior Plan and 3,221,969 shares purchased for a total cost of $200 million including commissions under the Fiscal 2022 Plan.
The Company also has in place a “withhold to cover” repurchase program, which allows the Company to withhold ordinary shares from certain executive officers and directors to satisfy minimum tax withholding obligations relating to the vesting of their restricted share awards. During the nine month periods ended December 31, 2022 and December 25, 2021, the Company withheld 300,722 shares and 193,322 shares, respectively, with a fair value of $14 million and $10 million, respectively, in satisfaction of minimum tax withholding obligations relating to the vesting of restricted share awards.
Accumulated Other Comprehensive Income
The following table details changes in the components of accumulated other comprehensive income (“AOCI”), net of taxes, for the nine months ended December 31, 2022 and December 25, 2021, respectively (in millions):
Foreign Currency Adjustments (1) | Net Gain (Loss) on Derivatives (2) | Other Comprehensive Income (Loss) Attributable to Capri | |||||||||||||||
| Balance at April 2, 2022 | $ | $ | $ | ||||||||||||||
| Other comprehensive (loss) income before reclassifications | ( | ( | |||||||||||||||
Less: amounts reclassified from AOCI to earnings | |||||||||||||||||
| Other comprehensive (loss) income, net of tax | ( | ( | ( | ||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | ||||||||||||||
| Balance at March 27, 2021 | $ | $ | ( | $ | |||||||||||||
| Other comprehensive income before reclassifications | |||||||||||||||||
Less: amounts reclassified from AOCI to earnings | ( | ( | |||||||||||||||
| Other comprehensive income, net of tax | |||||||||||||||||
| Balance at December 25, 2021 | $ | $ | $ | ||||||||||||||
(1)Foreign currency translation adjustments for the nine months ended December 31, 2022 primarily include a net $310 million translation loss partially offset by a $219 million gain, net of taxes of $113 million, relating to the Company’s net investment hedges. Foreign currency translation adjustments for the nine months ended December 25, 2021 primarily include a $249 million gain, net of taxes of $78 million, relating to the Company’s net investment hedges, and a net $102 million translation loss.
(2)Reclassified amounts primarily relate to the Company’s forward foreign currency exchange contracts for inventory purchases and are recorded within cost of goods sold in the Company’s consolidated statements of operations and comprehensive income. All tax effects were not material for the periods presented.
26
14. Share-Based Compensation
The Company grants equity awards to certain employees and directors of the Company at the discretion of the Company’s Compensation and Talent Committee. The Company has two equity plans, one stock option plan adopted in Fiscal 2008 (as amended and restated, the “2008 Plan”), and an Omnibus Incentive Plan adopted in the third fiscal quarter of Fiscal 2012 and amended and restated with shareholder approval in May 2015, and again in June 2020 (the “Incentive Plan”). The 2008 Plan only provided for grants of share options and was authorized to issue up to 23,980,823 ordinary shares. As of December 31, 2022, there were no shares available to grant equity awards under the 2008 Plan.
The Incentive Plan allows for grants of share options, restricted shares and RSUs, and other equity awards, and authorizes a total issuance of up to 22,471,000 ordinary shares after amendments in August 2022. At December 31, 2022, there were 6,151,690 ordinary shares available for future grants of equity awards under the Incentive Plan. Option grants issued from the 2008 Plan generally expire ten years from the date of the grant, and those issued under the Incentive Plan generally expire seven years from the date of the grant.
| Options | Service-Based RSUs | Performance-Based RSUs | |||||||||||||||
Outstanding/Unvested at April 2, 2022 | |||||||||||||||||
| Granted | |||||||||||||||||
| Exercised/Vested | ( | ( | ( | ||||||||||||||
| Canceled/Forfeited | ( | ( | |||||||||||||||
Outstanding/Unvested at December 31, 2022 | |||||||||||||||||
The weighted average grant date fair value of service-based and performance-based RSUs granted during the nine months ended December 31, 2022 was $48.39 and $47.41 , respectively. The weighted average grant date fair value of service-based RSUs granted during the nine months ended December 25, 2021 was $51.75 .
Share-Based Compensation Expense
The following table summarizes compensation expense attributable to share-based compensation for the three and nine months ended December 31, 2022 and December 25, 2021 (in millions):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| December 31, 2022 | December 25, 2021 | December 31, 2022 | December 25, 2021 | ||||||||||||||||||||
| Share-based compensation expense | $ | $ | $ | $ | |||||||||||||||||||
| Tax benefit related to share-based compensation expense | $ | $ | $ | $ | |||||||||||||||||||
Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company estimates forfeitures based on historical forfeiture rates. The estimated value of future forfeitures for equity awards as of December 31, 2022 is approximately $12 million.
See Note 16 in the Company’s Fiscal 2022 Annual Report on Form 10-K for additional information relating to the Company’s share-based compensation awards.
15. Income Taxes
27
16. Segment Information
The Company operates its business through three operating segments — Versace, Jimmy Choo and Michael Kors, which are based on its business activities and organization. The reportable segments are segments of the Company for which separate financial information is available and for which operating results are evaluated regularly by the Company’s chief operating decision maker (“CODM”) in deciding how to allocate resources, as well as in assessing performance. The primary key performance indicators are revenue and operating income for each segment. The Company’s reportable segments represent components of the business that offer similar merchandise, customer experience and sales/marketing strategies.
The Company’s three reportable segments are as follows:
•Versace — segment includes revenue generated through the sale of Versace luxury ready-to-wear, accessories, and footwear through directly operated Versace boutiques throughout the Americas, certain parts of EMEA and certain parts of Asia, as well as through Versace outlet stores and e-commerce sites. In addition, revenue is generated through wholesale sales to distribution partners (including geographic licensing arrangements that allow third parties to use the Versace trademarks in connection with retail and/or wholesale sales of Versace branded products in specific geographic regions), multi-brand department stores and specialty stores worldwide, as well as through product license agreements in connection with the manufacturing and sale of jeans, fragrances, watches, jewelry, eyewear and home furnishings.
•Jimmy Choo — segment includes revenue generated through the sale of Jimmy Choo luxury footwear, handbags and small leather goods and accessories through directly operated Jimmy Choo retail and outlet stores throughout the Americas, certain parts of EMEA and certain parts of Asia, through its e-commerce sites, as well as through wholesale sales of luxury goods to distribution partners (including geographic licensing arrangements that allow third parties to use the Jimmy Choo trademarks in connection with retail and/or wholesale sales of Jimmy Choo branded products in specific geographic regions), multi-brand department stores and specialty stores worldwide. In addition, revenue is generated through product licensing agreements, which allow third parties to use the Jimmy Choo brand name and trademarks in connection with the manufacturing and sale of fragrances and eyewear.
•Michael Kors — segment includes revenue generated through the sale of Michael Kors products through four primary Michael Kors retail store formats: “Collection” stores, “Lifestyle” stores (including concessions), outlet stores and e-commerce sites, through which the Company sells Michael Kors products, as well as licensed products bearing the Michael Kors name, directly to consumers throughout the Americas, certain parts of EMEA and certain parts of Asia. The Company also sells Michael Kors products directly to department stores, primarily located across the Americas and Europe, to specialty stores and travel retail shops, and to its geographic licensees. In addition, revenue is generated through product and geographic licensing arrangements, which allow third parties to use the Michael Kors brand name and trademarks in connection with the manufacturing and sale of products, including watches, jewelry, fragrances and eyewear.
28
In addition to these reportable segments, the Company has certain corporate costs that are not directly attributable to its brands and, therefore, are not allocated to its segments. Such costs primarily include certain administrative, corporate occupancy, shared service and information system expenses, including enterprise resource planning system implementation costs. In addition, certain other costs are not allocated to segments, including restructuring and other charges and COVID-19 related charges. The segment structure is consistent with how the Company’s CODM plans and allocates resources, manages the business and assesses performance. All intercompany revenues are eliminated in consolidation and are not reviewed when evaluating segment performance.
The following table presents the key performance information of the Company’s reportable segments (in millions):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| December 31, 2022 | December 25, 2021 | December 31, 2022 | December 25, 2021 | ||||||||||||||||||||
| Total revenue: | |||||||||||||||||||||||
| Versace | $ | $ | $ | $ | |||||||||||||||||||
| Jimmy Choo | |||||||||||||||||||||||
| Michael Kors | |||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | |||||||||||||||||||
| Income from operations: | |||||||||||||||||||||||
| Versace | $ | $ | $ | $ | |||||||||||||||||||
| Jimmy Choo | |||||||||||||||||||||||
| Michael Kors | |||||||||||||||||||||||
| Total segment income from operations | |||||||||||||||||||||||
Less: Corporate expenses | ( | ( | ( | ( | |||||||||||||||||||
Impairment of assets (1) | ( | ( | ( | ||||||||||||||||||||
| Restructuring and other charges | ( | ( | ( | ( | |||||||||||||||||||
| COVID-19 related charges | ( | ||||||||||||||||||||||
| Impact of war in Ukraine | |||||||||||||||||||||||
| Total income from operations | $ | $ | $ | $ | |||||||||||||||||||
(1)Impairment of assets during the nine months ended December 31, 2022 and December 25, 2021, respectively, primarily related to operating lease right-of-use assets at certain Michael Kors store locations.
Depreciation and amortization expense for each segment are as follows (in millions):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| December 31, 2022 | December 25, 2021 | December 31, 2022 | December 25, 2021 | ||||||||||||||||||||
| Depreciation and amortization: | |||||||||||||||||||||||
| Versace | $ | $ | $ | $ | |||||||||||||||||||
| Jimmy Choo | |||||||||||||||||||||||
| Michael Kors | |||||||||||||||||||||||
| Corporate | |||||||||||||||||||||||
| Total depreciation and amortization | $ | $ | $ | $ | |||||||||||||||||||
29
Total revenue (based on country of origin) by geographic location are as follows (in millions):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| December 31, 2022 | December 25, 2021 | December 31, 2022 | December 25, 2021 | ||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
The Americas (United States, Canada and Latin America) (1) | $ | $ | $ | $ | |||||||||||||||||||
| EMEA | |||||||||||||||||||||||
| Asia | |||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | |||||||||||||||||||
(1)Total revenue earned in the U.S. was $840 million and $2.312 billion, respectively, for the three and nine months ended December 31, 2022. Total revenue earned in the U.S. was $885 million and $2.207 billion, respectively, for the three and nine months ended December 25, 2021.
30
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis (“MD&A”) of our Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and notes thereto included as part of this interim report. Forward-looking statements are prospective in nature and are not based on historical facts, but rather on current expectations and projections of the management of the Company about future events, and are therefore subject to risks and uncertainties which could cause actual results to differ materially from the future results expressed or implied by the forward-looking statements. All statements other than statements of historical facts included herein, may be forward-looking statements. Forward-looking statements include information concerning the Company’s goals, future plans and strategies, including with respect to ESG goals, initiatives and ambitions as well as the Company’s possible or assumed future results of operations, including descriptions of its business strategy. Without limitation, any statements preceded or followed by or that include the words “plans”, “believes”, “expects”, “intends”, “will”, “should”, “could”, “would”, “may”, “anticipates”, “might” or similar words or phrases, are forward-looking statements. These forward-looking statements are not guarantees of future financial performance. Such forward-looking statements involve known and unknown risks and uncertainties that could significantly affect expected results and are based on certain key assumptions, which could cause actual results to differ materially from those projected or implied in any forward-looking statements. These risks, uncertainties and other factors include the effect of the COVID-19 pandemic and its potential material and significant impact on the Company’s future financial and operational results, including that our estimates could materially differ if retail stores are forced to close, or if there are further supply chain disruptions, including production delays and increased costs, changes in consumer traffic and retail trends; higher consumer debt levels, recession and inflationary pressures; levels of cash flow and future availability of credit, compliance with restrictive covenants under the Company’s credit agreement, the Company’s ability to integrate successfully and to achieve anticipated benefits of any acquisition and to successfully execute our growth strategies; the risk of disruptions to the Company’s businesses; risks associated with operating in international markets and our global sourcing activities; the risk of cybersecurity threats and privacy or data security breaches; the negative effects of events on the market price of the Company’s ordinary shares and its operating results; significant transaction costs; unknown liabilities; the risk of litigation and/or regulatory actions related to the Company’s businesses; fluctuations in demand for the Company’s products; levels of indebtedness (including the indebtedness incurred in connection with acquisitions); the timing and scope of future share buybacks, which may be made in open market or privately negotiated transactions and/or pursuant to Rule 10b5-1 trading plans, and are subject to market conditions, applicable legal requirements, trading restrictions under the Company’s insider trading policy and other relevant factors, and such share repurchases may be suspended or discontinued at any time; the level of other investing activities and uses of cash; loss of market share and industry competition; fluctuations in the capital markets; fluctuations in interest and exchange rates; the occurrence of unforeseen epidemics and pandemics, disasters or catastrophes; extreme weather conditions and natural disasters; political or economic instability in principal markets; adverse outcomes in litigation; and general, local and global economic, political, business and market conditions including acts of war and other geopolitical conflicts, as well as those risks set forth in Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended April 2, 2022, filed with the Securities and Exchange Commission on June 1, 2022.
Overview
Our Business
Capri Holdings is a global fashion luxury group consisting of iconic, founder-led brands Versace, Jimmy Choo and Michael Kors. Our commitment to glamorous style and craftsmanship is at the heart of each of our luxury brands. We have built our reputation on designing exceptional, innovative products that cover the full spectrum of fashion luxury categories. Our strength lies in the unique DNA and heritage of each of our brands, the diversity and passion of our people and our dedication to the clients and communities we serve.
Our Versace brand has long been recognized as one of the world’s leading international fashion design houses and is synonymous with Italian glamour and style. Founded in 1978 in Milan, Versace is known for its iconic and unmistakable style and unparalleled craftsmanship. Over the past several decades, the House of Versace has grown globally from its roots in haute couture, expanding into the design, manufacturing, distribution and retailing of accessories, ready-to-wear, footwear, eyewear, watches, jewelry, fragrance and home furnishings businesses. Versace’s design team is led by Donatella Versace, who has been the brand’s Artistic Director for over 20 years. Versace distributes its products through a worldwide distribution network, which includes boutiques in some of the world’s most glamorous cities, its e-commerce sites, as well as through the most prestigious department and specialty stores worldwide.
31
Our Jimmy Choo brand offers a distinctive, glamorous and fashion-forward product range, enabling it to develop into a leading global luxury accessories brand, whose core product offering is women’s luxury shoes, complemented by accessories, including handbags, small leather goods, scarves and belts, as well as a men’s luxury shoes and accessory business. In addition, certain categories, such as fragrances and eyewear, are produced under licensing agreements. Jimmy Choo’s design team is led by Sandra Choi, who has been the Creative Director for the brand since its inception in 1996. Jimmy Choo products are unique, instinctively seductive and chic. The brand offers classic and timeless luxury products, as well as innovative products that are intended to set and lead fashion trends. Jimmy Choo is represented through its global store network, its e-commerce sites, as well as through the most prestigious department and specialty stores worldwide.
Our Michael Kors brand was launched over 40 years ago by Michael Kors, whose vision has taken the Company from its beginnings as an American luxury sportswear house to a global accessories, footwear and ready-to-wear company with a global distribution network that has presence in over 100 countries through Company-operated retail stores and e-commerce sites, leading department stores, specialty stores and select licensing partners. Michael Kors is a highly recognized luxury fashion brand in the Americas and Europe with growing brand awareness in other international markets. Michael Kors features distinctive designs, materials and craftsmanship with a jet-set aesthetic that combines stylish elegance and a sporty attitude. Michael Kors offers three primary collections: the Michael Kors Collection luxury line, the MICHAEL Michael Kors accessible luxury line and the Michael Kors Mens line. The Michael Kors Collection establishes the aesthetic authority of the entire brand and is carried by select retail stores, our e-commerce sites, as well as in the finest luxury department stores in the world. MICHAEL Michael Kors has a strong focus on accessories, in addition to offering footwear and ready-to-wear, and addresses the significant demand opportunity in accessible luxury goods. We have also been developing our men’s business in recognition of the significant opportunity afforded by the Michael Kors brand’s established fashion authority and the expanding men’s market. Taken together, our Michael Kors collections target a broad customer base while retaining our premium luxury image.
Certain Factors Affecting Financial Condition and Results of Operations
Macroeconomic conditions and inflationary pressures. Our business is affected by global economic conditions and the related impact on levels of consumer spending worldwide. While our business in Russia and Ukraine represented less than 1% of our total net sales for Fiscal 2022, the war in Ukraine that began in February 2022 has created significant economic uncertainty in the region. We stopped all wholesale shipments to Russia and our third-party partners are winding down retail operations in Russia, including through the closure of our retail stores in the territory. The war has also caused broader macroeconomic implications that we expect to continue for the foreseeable future, including the continued weakening of the Euro against the US dollar and other foreign currency volatility, increases in fuel prices, volatility in the financial markets and a decline in consumer spending which may negatively impact our business, financial condition, and results of operations for Fiscal 2023. In addition, inflationary pressures, including increased labor, raw materials, and freight costs are adversely impacting our earnings. Purchases of discretionary luxury items, such as the accessories, footwear and apparel that we produce, tend to decline when disposable income is lower or when there are recessions, inflationary pressures or other economic uncertainty.
COVID-19 Pandemic. The Company's performance during fiscal 2023 was adversely impacted due to lockdowns in certain regions, most notably in Greater China, as a result of an increase in infections due to variants of COVID-19. These lockdowns resulted in store closures and an overall decline in demand in the region. The situation continues to be very volatile and infection rates and government restrictions may continue to persist in Greater China or elsewhere.
Luxury goods trends and demand for our accessories and related merchandise. Our performance is affected by trends in the luxury goods industry, global consumer spending, macroeconomic factors, overall levels of consumer travel and spending on discretionary items as well as shifts in demographics and changes in lifestyle preferences. Through 2019, the personal luxury goods market grew at a mid-single digit rate over the past 20 years. However, in 2020, due to the impact of the COVID-19 crisis, the personal luxury goods market declined 22%. The personal luxury goods market experienced a strong rebound in 2021, with sales exceeding pre-pandemic levels. Market studies forecast the personal luxury goods industry will increase at low-double-digit compound annual growth rate between 2020 and 2025. Future growth is expected to be driven by e-commerce, Chinese consumers and younger generations; however, growth may be limited by concerns over inflation, the possibility of a global recession, foreign currency volatility or worsening economic conditions.
Retail Fleet Optimization. We also continue to adjust our retail operating strategy to the changing business environment. We have finalized the planned store closures under the Capri Retail Store Optimization Program as of the end of Fiscal 2022. At the end of Fiscal 2022, we closed a total of 167 stores and recorded total net restructuring charges of $14 million relating to the program. We recorded net restructuring charges of $9 million and $5 million during Fiscal 2022 and Fiscal 2021, respectively, relating to the plan. Collectively, we continue to anticipate ongoing savings as a result of the store closures and lower depreciation associated with the impairment charges being recorded.
32
Foreign currency fluctuation. Our consolidated operations are impacted by the relationships between our reporting currency, the U.S. Dollar, and those of our non-United States subsidiaries whose functional/local currency is other than the U.S. Dollar, primarily the Euro, the British Pound, the Chinese Renminbi, the Japanese Yen, the Korean Won and the Canadian Dollar, among others. We continue to expect volatility in the global foreign currency exchange rates, which may have a negative impact on the reported results of certain of our non-United States subsidiaries in the future, when translated to the U.S. Dollar.
Disruptions or delays in shipping and distribution and other supply chain constraints. We have been experiencing global logistics challenges, including delays as a result of port congestion, vessel availability, container shortages and temporary factory closures which may continue during Fiscal 2023. Any future disruptions in our shipping and distribution network, including impacts on our supply chain due to temporary closures of our manufacturing partners and shipping and fulfillment constraints and increased transportation costs, could have a negative impact on our results of operations. See Item 1A — “Risk Factors” — “We primarily use foreign manufacturing contractors and independent third-party agents to source our finished goods and our business is subject to risks inherent in global sourcing activities, including disruptions or delays in manufacturing or shipments” of our Annual Report on Form 10-K for the fiscal year ended April 2, 2022 for additional discussion.
Costs of manufacturing, tariffs, and import regulations. Our industry is subject to volatility in costs related to certain raw materials used in the manufacturing of our products. This volatility applies primarily to costs driven by commodity prices, which can increase or decrease dramatically over a short period of time. In addition, our costs may be impacted by sanction tariffs imposed on our products due to changes in trade terms. We are also subject to government import regulations, including United States Customs and Border Protection (“CBP”) withhold release orders. The imposition of taxes, duties and quotas, the withdrawal from or material modification to trade agreements, and/or if CBP detains shipments of our goods pursuant to a withhold release order could have a material adverse effect on our business, results of operations and financial condition. If additional tariffs or trade restrictions are implemented by the United States or other countries, the cost of our products could increase which could adversely affect our business. In addition, commodity prices and tariffs may have an impact on our revenues, results of operations and cash flows. We use commercially reasonable efforts to mitigate these effects by sourcing our products as efficiently as possible and diversifying the countries where we produce. In addition, manufacturing labor costs are also subject to degrees of volatility based on local and global economic conditions. We use commercially reasonable efforts to source from localities that suit our manufacturing standards and result in more favorable labor driven costs to our products.
Segment Information
We operate in three reportable segments, which are as follows:
Versace
We generate revenue through the sale of Versace luxury accessories, ready-to-wear and footwear through directly operated Versace boutiques throughout North America (United States and Canada), certain parts of EMEA (Europe, Middle East and Africa) and certain parts of Asia (Asia and Oceania), as well as through Versace outlet stores and e-commerce sites. In addition, revenue is generated through wholesale sales to distribution partners (including geographic licensing arrangements), multi-brand department stores and specialty stores worldwide, as well as through product license agreements in connection with the manufacturing and sale of products, including jeans, fragrances, watches, jewelry, eyewear and home furnishings.
Jimmy Choo
We generate revenue through the sale of Jimmy Choo luxury goods through directly operated Jimmy Choo retail and outlet stores throughout the Americas (United States, Canada and Latin America), certain parts of EMEA and certain parts of Asia, through our e-commerce sites, as well as through wholesale sales of luxury goods to distribution partners (including geographic licensing arrangements that allow third parties to use the Jimmy Choo tradename in connection with retail and/or wholesale sales of Jimmy Choo branded products in specific geographic regions), multi-brand department stores and specialty stores worldwide. In addition, revenue is generated through product licensing agreements, which allow third parties to use the Jimmy Choo brand name and trademarks in connection with the manufacturing and sale of products, including fragrances and eyewear.
Michael Kors
We generate revenue through the sale of Michael Kors products through four primary Michael Kors retail store formats: “Collection” stores, “Lifestyle” stores (including concessions), outlet stores and e-commerce, through which we sell our products, as well as licensed products bearing our name, directly to consumers throughout the Americas, certain parts of EMEA
33
and certain parts of Asia. Our Michael Kors e-commerce business includes e-commerce sites in the United States, Canada, EMEA and Asia. We also sell Michael Kors products directly to department stores, primarily located across the Americas and EMEA, to specialty stores and travel retail shops in the Americas, Europe and Asia, and to our geographic licensees in certain parts of EMEA, Asia and Brazil. In addition, revenue is generated through product and geographic licensing arrangements, which allow third parties to use the Michael Kors brand name and trademarks in connection with the manufacturing and sale of products, including watches, jewelry, fragrances and eyewear, as well as through geographic licensing arrangements, which allow third parties to use the Michael Kors tradename in connection with the retail and/or wholesale sales of our Michael Kors branded products in specific geographic regions.
Unallocated Corporate Expenses
In addition to the reportable segments discussed above, we have certain corporate costs that are not directly attributable to our brands and, therefore, are not allocated to segments. Such costs primarily include certain administrative, corporate occupancy, shared service and information systems expenses, including ERP system implementation costs and Capri transformation program costs. In addition, certain other costs are not allocated to segments, including restructuring and other charges and COVID-19 related charges. The segment structure is consistent with how our chief operating decision maker plans and allocates resources, manages the business and assesses performance. The following table presents our total revenue and income from operations by segment for the three and nine months ended December 31, 2022 and December 25, 2021 (in millions):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| December 31, 2022 | December 25, 2021 | December 31, 2022 | December 25, 2021 | ||||||||||||||||||||
| Total revenue: | |||||||||||||||||||||||
| Versace | $ | 249 | $ | 251 | $ | 832 | $ | 773 | |||||||||||||||
| Jimmy Choo | 168 | 178 | 482 | 457 | |||||||||||||||||||
| Michael Kors | 1,095 | 1,180 | 2,970 | 2,932 | |||||||||||||||||||
| Total revenue | $ | 1,512 | $ | 1,609 | $ | 4,284 | $ | 4,162 | |||||||||||||||
| Income from operations: | |||||||||||||||||||||||
| Versace | $ | 24 | $ | 32 | $ | 138 | $ | 135 | |||||||||||||||
| Jimmy Choo | 18 | 16 | 45 | 28 | |||||||||||||||||||
| Michael Kors | 251 | 335 | 721 | 795 | |||||||||||||||||||
| Total segment income from operations | 293 | 383 | 904 | 958 | |||||||||||||||||||
Less: Corporate expenses | (56) | (37) | (171) | (123) | |||||||||||||||||||
Impairment of assets (1) | (1) | — | (12) | (33) | |||||||||||||||||||
| Restructuring and other charges | (5) | (14) | (11) | (25) | |||||||||||||||||||
| COVID-19 related charges | 2 | (1) | 6 | 7 | |||||||||||||||||||
| Impact of war in Ukraine | 3 | — | 3 | — | |||||||||||||||||||
| Total income from operations | $ | 236 | $ | 331 | $ | 719 | $ | 784 | |||||||||||||||
(1)Impairment of assets during the nine months ended December 31, 2022 and December 25, 2021, respectively, primarily related to operating lease right-of-use assets at certain Michael Kors store locations.
34
The following table presents our global network of retail stores and wholesale doors by brand:
| As of | |||||||||||
| December 31, 2022 | December 25, 2021 | ||||||||||
| Number of full price retail stores (including concessions): | |||||||||||
| Versace | 161 | 150 | |||||||||
| Jimmy Choo | 186 | 184 | |||||||||
| Michael Kors | 520 | 535 | |||||||||
| 867 | 869 | ||||||||||
| Number of outlet stores: | |||||||||||
| Versace | 64 | 62 | |||||||||
| Jimmy Choo | 56 | 56 | |||||||||
| Michael Kors | 307 | 299 | |||||||||
| 427 | 417 | ||||||||||
| Total number of retail stores | 1,294 | 1,286 | |||||||||
| Total number of wholesale doors: | |||||||||||
| Versace | 788 | 803 | |||||||||
| Jimmy Choo | 517 | 456 | |||||||||
| Michael Kors | 2,840 | 2,931 | |||||||||
| 4,145 | 4,190 | ||||||||||
The following table presents our retail stores by geographic location:
| As of | As of | ||||||||||||||||||||||||||||||||||
| December 31, 2022 | December 25, 2021 | ||||||||||||||||||||||||||||||||||
| Versace | Jimmy Choo | Michael Kors | Versace | Jimmy Choo | Michael Kors | ||||||||||||||||||||||||||||||
| Store count by region: | |||||||||||||||||||||||||||||||||||
| The Americas | 41 | 45 | 328 | 39 | 46 | 346 | |||||||||||||||||||||||||||||
| EMEA | 59 | 72 | 173 | 55 | 74 | 176 | |||||||||||||||||||||||||||||
| Asia | 125 | 125 | 326 | 118 | 120 | 312 | |||||||||||||||||||||||||||||
| 225 | 242 | 827 | 212 | 240 | 834 | ||||||||||||||||||||||||||||||
Key Consolidated Performance Indicators and Statistics
We use a number of key indicators of operating results to evaluate our performance, including the following (dollars in millions):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| December 31, 2022 | December 25, 2021 | December 31, 2022 | December 25, 2021 | ||||||||||||||||||||
| Total revenue | $ | 1,512 | $ | 1,609 | $ | 4,284 | $ | 4,162 | |||||||||||||||
| Gross profit as a percent of total revenue | 66.5 | % | 65.1 | % | 66.7 | % | 67.0 | % | |||||||||||||||
| Income from operations | $ | 236 | $ | 331 | $ | 719 | $ | 784 | |||||||||||||||
| Income from operations as a percent of total revenue | 15.6 | % | 20.6 | % | 16.8 | % | 18.8 | % | |||||||||||||||
35
Seasonality
We experience certain effects of seasonality with respect to our business. We generally experience greater sales during our third fiscal quarter, primarily driven by holiday season sales, and the lowest sales during our first fiscal quarter.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Critical accounting policies are those that are the most important to the portrayal of our results of operations and financial condition and that require our most difficult, subjective and complex judgments to make estimates about the effect of matters that are inherently uncertain. In applying such policies, we must use certain assumptions that are based on our informed judgments, assessments of probability and best estimates. Estimates, by their nature, are subjective and are based on analysis of available information, including current and historical factors and the experience and judgment of management. We evaluate our assumptions and estimates on an ongoing basis. While our significant accounting policies are detailed in Note 2 to the accompanying consolidated financial statements, our critical accounting policies are disclosed, in full, in the MD&A section of our Annual Report on Form 10-K for the fiscal year ended April 2, 2022. There have been no significant changes in our critical accounting policies and estimates since April 2, 2022.
36
Results of Operations
Comparison of the three months ended December 31, 2022 with the three months ended December 25, 2021
The following table details the results of our operations for the three months ended December 31, 2022 and December 25, 2021, and expresses the relationship of certain line items to total revenue as a percentage (dollars in millions):
| Three Months Ended | $ Change | % Change | % of Total Revenue for the Three Months Ended | ||||||||||||||||||||||||||||||||
| December 31, 2022 | December 25, 2021 | December 31, 2022 | December 25, 2021 | ||||||||||||||||||||||||||||||||
| Statements of Operations Data: | |||||||||||||||||||||||||||||||||||
| Total revenue | $ | 1,512 | $ | 1,609 | $ | (97) | (6.0) | % | |||||||||||||||||||||||||||
| Cost of goods sold | 507 | 561 | (54) | (9.6) | % | 33.5 | % | 34.9 | % | ||||||||||||||||||||||||||
| Gross profit | 1,005 | 1,048 | (43) | (4.1) | % | 66.5 | % | 65.1 | % | ||||||||||||||||||||||||||
| Selling, general and administrative expenses | 720 | 656 | 64 | 9.8 | % | 47.6 | % | 40.8 | % | ||||||||||||||||||||||||||
| Depreciation and amortization | 43 | 47 | (4) | (8.5) | % | 2.8 | % | 2.9 | % | ||||||||||||||||||||||||||
| Impairment of assets | 1 | — | 1 | NM | 0.1 | % | — | % | |||||||||||||||||||||||||||
| Restructuring and other charges | 5 | 14 | (9) | (64.3) | % | 0.3 | % | 0.9 | % | ||||||||||||||||||||||||||
| Total operating expenses | 769 | 717 | 52 | 7.3 | % | 50.9 | % | 44.6 | % | ||||||||||||||||||||||||||
| Income from operations | 236 | 331 | (95) | (28.7) | % | 15.6 | % | 20.6 | % | ||||||||||||||||||||||||||
| Other income, net | (1) | — | (1) | NM | (0.1) | % | — | % | |||||||||||||||||||||||||||
| Interest expense (income), net | 12 | (7) | 19 | NM | 0.8 | % | (0.4) | % | |||||||||||||||||||||||||||
| Foreign currency gain | (3) | (4) | 1 | (25.0) | % | (0.2) | % | (0.2) | % | ||||||||||||||||||||||||||
| Income before income taxes | 228 | 342 | (114) | (33.3) | % | 15.1 | % | 21.3 | % | ||||||||||||||||||||||||||
| Provision for income taxes | 3 | 19 | (16) | (84.2) | % | 0.2 | % | 1.2 | % | ||||||||||||||||||||||||||
| Net income | 225 | 323 | (98) | (30.3) | % | ||||||||||||||||||||||||||||||
| Less: Net income attributable to noncontrolling interest | — | 1 | (1) | NM | |||||||||||||||||||||||||||||||
| Net income attributable to Capri | $ | 225 | $ | 322 | $ | (97) | (30.1) | % | |||||||||||||||||||||||||||
NM Not meaningful
Total Revenue
Total revenue decreased $97 million, or 6.0%, to $1.512 billion for the three months ended December 31, 2022, compared to $1.609 billion for the three months ended December 25, 2021, which included net unfavorable foreign currency effects of approximately $89 million as a result of the strengthening of the U.S. dollar compared to all major currencies in which we operate for the three months ended December 31, 2022. On a constant currency basis, our total revenue decreased $8 million, or 0.5%. The decrease is attributable to lower wholesale revenues throughout the Americas and EMEA and decreased revenues in Greater China due to COVID-19 related disruptions for each of our brands.
Gross Profit
Gross profit decreased $43 million, or 4.1%, to $1.005 billion for the three months ended December 31, 2022, compared to $1.048 billion for the three months ended December 25, 2021, which included net unfavorable foreign currency effects of $60 million. Gross profit as a percentage of total revenue was 66.5% and 65.1% for the three months ended December 31, 2022 and December 25, 2021, respectively. Our gross profit margin increased primarily due to lower supply chain costs for the three months ended December 31, 2022, as compared to the three months ended December 25, 2021.
Total Operating Expenses
Total operating expenses increased $52 million, or 7.3%, to $769 million for the three months ended December 31, 2022, compared to $717 million for the three months ended December 25, 2021. Our operating expenses included a net favorable foreign currency impact of approximately $55 million. Total operating expenses increased to 50.9% as a percentage of total revenue for the three months ended December 31, 2022, compared to 44.6% for the three months ended December 25, 2021. The components that comprise total operating expenses are explained below.
37
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $64 million, or 9.8%, to $720 million for the three months ended December 31, 2022, compared to $656 million for the three months ended December 25, 2021, primarily due to increased marketing and unallocated corporate expenses for the three months ended December 31, 2022.
Selling, general, and administrative expenses as a percentage of total revenue increased to 47.6% for the three months ended December 31, 2022, compared to 40.8% for the three months ended December 25, 2021, primarily due to deleverage of costs on lower revenue for the three months ended December 31, 2022, as compared to the three months ended December 25, 2021.
Unallocated corporate expenses, which are included within selling, general and administrative expenses discussed above, but are not directly attributable to a reportable segment, increased $19 million, or 51.4%, to $56 million for the three months ended December 31, 2022 as compared to $37 million for the three months ended December 25, 2021, primarily due to an increase in professional fees and information technology costs related to the ongoing ERP system implementation and Capri transformation projects.
Depreciation and Amortization
Depreciation and amortization decreased $4 million, or 8.5%, to $43 million for the three months ended December 31, 2022, compared to $47 million for the three months ended December 25, 2021. As a percentage of total revenue, depreciation and amortization decreased to 2.8% for the three months ended December 31, 2022, compared to 2.9% for the three months ended December 25, 2021.
Impairment of Assets
During the three months ended December 31, 2022, we recognized asset impairment charges of $1 million, which primarily related to operating lease right-of-use assets at a Jimmy Choo store location. During the three months ended December 25, 2021, we did not recognize any impairment charges. See Note 11 to the accompanying consolidated financial statements for additional information.
Restructuring and Other Charges
We recognized restructuring and other charges of $5 million and $14 million for the three months ended December 31, 2022 and December 25, 2021, respectively. The charges are primarily related to equity awards associated with the acquisition of Versace. See Note 8 to the accompanying consolidated financial statements for additional information.
Restructuring and other charges are not evaluated as part of our reportable segments’ results (See Segment Information above for additional information).
Income from Operations
As a result of the foregoing, income from operations decreased $95 million, to $236 million for three months ended December 31, 2022, compared to $331 million for the three months ended December 25, 2021. Income from operations as a percentage of total revenue decreased to 15.6% for the three months ended December 31, 2022, compared to 20.6% for the three months ended December 25, 2021. See Segment Information above for a reconciliation of our segment operating income to total operating income.
Interest Expense (Income), net
For the three months ended December 31, 2022, we recognized $12 million of interest expense compared to $7 million of interest income for the three months ended December 25, 2021. The $19 million increase in interest expense (income), net, is primarily due to higher effective interest rates on our outstanding debt, higher average borrowings outstanding and lower interest income from our net investment hedges, partially offset by higher interest income earned on our cash and cash equivalents (see Note 9 and Note 12 to the accompanying consolidated financial statements for additional information).
Foreign Currency Gain
For the three months ended December 31, 2022 and December 25, 2021, we recognized a net foreign currency gain of $3 million and $4 million, respectively, primarily attributable to intercompany transactions among our subsidiaries.
38
Provision for Income Taxes
The provision for income taxes was $3 million for the three months ended December 31, 2022, compared to $19 million for the three months ended December 25, 2021. Our effective tax rates were 1.3% and 5.6% for the three months ended December 31, 2022 and December 25, 2021, respectively. In the current year, the decrease in our effective tax rate was primarily related to the release of a valuation allowance in the United Kingdom. In the prior year, our effective tax rate included a favorable impact from a net operating loss carryback claim made in the United States as a result of COVID-19 related losses. See Note 15 to the accompanying consolidated financial statements for additional information regarding the effective tax rate for the third quarter of Fiscal 2023.
Our effective tax rate may fluctuate from time to time due to the effects of changes in United States federal, state and local taxes and tax rates in foreign jurisdictions. In addition, factors such as the geographic mix of earnings, enacted tax legislation and the results of various global tax strategies, may also impact our effective tax rate in future periods.
Net Income Attributable to Capri
As a result of the foregoing, our net income decreased $97 million to $225 million for the three months ended December 31, 2022, compared to $322 million for the three months ended December 25, 2021.
Segment Information
Versace
| Three Months Ended | % Change | ||||||||||||||||||||||||||||
| (dollars in millions) | December 31, 2022 | December 25, 2021 | $ Change | As Reported | Constant Currency | ||||||||||||||||||||||||
| Revenues | $ | 249 | $ | 251 | $ | (2) | (0.8) | % | 11.2 | % | |||||||||||||||||||
| Income from operations | $ | 24 | $ | 32 | $ | (8) | (25.0) | % | |||||||||||||||||||||
| Operating margin | 9.6 | % | 12.7 | % | |||||||||||||||||||||||||
Revenues
Versace revenues decreased $2 million, or 0.8%, to $249 million for the three months ended December 31, 2022, compared to $251 million for the three months ended December 25, 2021, which included unfavorable foreign currency effects of $30 million. On a constant currency basis, revenue increased $28 million, or 11.2%, primarily attributable to increased retail revenue and higher wholesale shipments in EMEA, partially offset by decreased revenues in Greater China due to COVID-19 related disruptions.
Income from Operations
For the three months ended December 31, 2022, Versace recorded income from operations of $24 million, compared to $32 million for the three months ended December 25, 2021. Operating margin decreased from 12.7% for the three months ended December 25, 2021, to 9.6% for the three months ended December 31, 2022, primarily due to higher employee costs.
Jimmy Choo
| Three Months Ended | % Change | ||||||||||||||||||||||||||||
| (dollars in millions) | December 31, 2022 | December 25, 2021 | $ Change | As Reported | Constant Currency | ||||||||||||||||||||||||
| Revenues | $ | 168 | $ | 178 | $ | (10) | (5.6) | % | 3.4 | % | |||||||||||||||||||
| Income from operations | $ | 18 | $ | 16 | $ | 2 | 12.5 | % | |||||||||||||||||||||
| Operating margin | 10.7 | % | 9.0 | % | |||||||||||||||||||||||||
Revenues
Jimmy Choo revenues decreased $10 million, or 5.6%, to $168 million for the three months ended December 31, 2022, compared to $178 million for the three months ended December 25, 2021, which included unfavorable foreign currency effects of $16 million. On a constant currency basis, revenue increased $6 million, or 3.4%, primarily attributable to increased revenue in the Americas and EMEA, partially offset by decreased revenues in Greater China due to COVID-19 related disruptions.
39
Income from Operations
For the three months ended December 31, 2022, Jimmy Choo recorded income from operations of $18 million, compared to $16 million for the three months ended December 25, 2021. Operating margin increased from 9.0% for the three months ended December 25, 2021 to 10.7% for the three months ended December 31, 2022, primarily due to higher average unit price partially offset by deleverage of expense on lower revenues.
Michael Kors
| Three Months Ended | % Change | ||||||||||||||||||||||||||||
| (dollars in millions) | December 31, 2022 | December 25, 2021 | $ Change | As Reported | Constant Currency | ||||||||||||||||||||||||
| Revenues | $ | 1,095 | $ | 1,180 | $ | (85) | (7.2) | % | (3.6) | % | |||||||||||||||||||
| Income from operations | $ | 251 | $ | 335 | $ | (84) | (25.1) | % | |||||||||||||||||||||
| Operating margin | 22.9 | % | 28.4 | % | |||||||||||||||||||||||||
Revenues
Michael Kors revenues decreased $85 million, or 7.2%, to $1.095 billion for the three months ended December 31, 2022, compared to $1.180 billion for the three months ended December 25, 2021, which included unfavorable foreign currency effects of $43 million. On a constant currency basis, revenue decreased $42 million, or 3.6%, primarily due to decreased wholesale revenues throughout the Americas and EMEA and decreased revenues in Greater China due to COVID-19 related disruptions.
Income from Operations
For the three months ended December 31, 2022, Michael Kors recorded income from operations of $251 million, compared to $335 million for the three months ended December 25, 2021. Operating margin decreased from 28.4% for the three months ended December 25, 2021, to 22.9% for the three months ended December 31, 2022, primarily due to increased marketing investments and deleverage of expenses on lower revenues partially offset by lower supply chain costs.
40
Results of Operations
Comparison of the nine months ended December 31, 2022 with the nine months ended December 25, 2021
The following table details the results of our operations for the nine months ended December 31, 2022 and December 25, 2021, and expresses the relationship of certain line items to total revenue as a percentage (dollars in millions):
| Nine Months Ended | $ Change | % Change | % of Total Revenue for the Nine Months Ended | ||||||||||||||||||||||||||||||||
| December 31, 2022 | December 25, 2021 | December 31, 2022 | December 25, 2021 | ||||||||||||||||||||||||||||||||
| Statements of Operations Data: | |||||||||||||||||||||||||||||||||||
| Total revenue | $ | 4,284 | $ | 4,162 | $ | 122 | 2.9 | % | |||||||||||||||||||||||||||
| Cost of goods sold | 1,427 | 1,374 | 53 | 3.9 | % | 33.3 | % | 33.0 | % | ||||||||||||||||||||||||||
| Gross profit | 2,857 | 2,788 | 69 | 2.5 | % | 66.7 | % | 67.0 | % | ||||||||||||||||||||||||||
| Selling, general and administrative expenses | 1,984 | 1,800 | 184 | 10.2 | % | 46.3 | % | 43.2 | % | ||||||||||||||||||||||||||
| Depreciation and amortization | 131 | 146 | (15) | (10.3) | % | 3.1 | % | 3.5 | % | ||||||||||||||||||||||||||
| Impairment of assets | 12 | 33 | (21) | (63.6) | % | 0.3 | % | 0.8 | % | ||||||||||||||||||||||||||
| Restructuring and other charges | 11 | 25 | (14) | (56.0) | % | 0.3 | % | 0.6 | % | ||||||||||||||||||||||||||
| Total operating expenses | 2,138 | 2,004 | 134 | 6.7 | % | 49.9 | % | 48.1 | % | ||||||||||||||||||||||||||
| Income from operations | 719 | 784 | (65) | (8.3) | % | 16.8 | % | 18.8 | % | ||||||||||||||||||||||||||
| Other income, net | (2) | (2) | — | — | % | — | % | — | % | ||||||||||||||||||||||||||
| Interest expense (income), net | 13 | (11) | 24 | NM | 0.3 | % | (0.3) | % | |||||||||||||||||||||||||||
| Foreign currency (gain) loss | (10) | 1 | (11) | NM | (0.2) | % | — | % | |||||||||||||||||||||||||||
| Income before income taxes | 718 | 796 | (78) | (9.8) | % | 16.8 | % | 19.1 | % | ||||||||||||||||||||||||||
Provision for income taxes | 66 | 54 | 12 | 22.2 | % | 1.5 | % | 1.3 | % | ||||||||||||||||||||||||||
| Net income | 652 | 742 | (90) | (12.1) | % | ||||||||||||||||||||||||||||||
| Less: Net income attributable to noncontrolling interest | 2 | 1 | 1 | 100.0 | % | ||||||||||||||||||||||||||||||
| Net income attributable to Capri | $ | 650 | $ | 741 | $ | (91) | (12.3) | % | |||||||||||||||||||||||||||
NM Not meaningful
Total Revenue
Total revenue increased $122 million, or 2.9%, to $4.284 billion for the nine months ended December 31, 2022, compared to $4.162 billion for the nine months ended December 25, 2021, which included net unfavorable foreign currency effects of approximately $288 million, as a result of the strengthening of the U.S. dollar compared to all major currencies in which we operate for the nine months ended December 31, 2022. On a constant currency basis, our total revenue increased $410 million, or 9.9%. The increase is attributable to increased retail and wholesale revenues throughout the Americas and EMEA, partially offset by decreased revenues in Greater China due to COVID-19 related disruptions for each of our brands.
Gross Profit
Gross profit increased $69 million, or 2.5%, to $2.857 billion for the nine months ended December 31, 2022, compared to $2.788 billion for the nine months ended December 25, 2021, which included net unfavorable foreign currency effects of $201 million. Gross profit as a percentage of total revenue was 66.7% for the nine months ended December 31, 2022, compared to 67.0% for the nine months ended December 25, 2021. The decrease in gross profit margin was primarily attributable to increased supply chain costs and unfavorable channel mix for the nine months ended December 31, 2022, as compared to the nine months ended December 25, 2021.
41
Total Operating Expenses
Total operating expenses increased $134 million, or 6.7%, to $2.138 billion for the nine months ended December 31, 2022, compared to $2.004 billion for the nine months ended December 25, 2021. Our operating expenses included a net favorable foreign currency impact of approximately $167 million. Total operating expenses increased to 49.9% as a percentage of total revenue for the nine months ended December 31, 2022, compared to 48.1% for the nine months ended December 25, 2021. The components that comprise total operating expenses are explained below.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $184 million, or 10.2%, to $1.984 billion for the nine months ended December 31, 2022, compared to $1.800 billion for the nine months ended December 25, 2021, primarily due to increased marketing and unallocated corporate expenses for the nine months ended December 31, 2022.
Selling, general and administrative expenses as a percentage of total revenue increased to 46.3% for the nine months ended December 31, 2022, compared to 43.2% for the nine months ended December 25, 2021, primarily due to increased marketing investments and unallocated corporate expenses as a percentage of revenue for the nine months ended December 31, 2022, as compared to the nine months ended December 25, 2021.
Unallocated corporate expenses, which are included within selling, general and administrative expenses discussed above, but are not directly attributable to a reportable segment, increased $48 million, or 39.0%, to $171 million for the nine months ended December 31, 2022 as compared to $123 million for the nine months ended December 25, 2021, primarily due to an increase in professional fees and information technology costs related to the ongoing ERP system implementation and Capri transformation projects.
Depreciation and Amortization
Depreciation and amortization decreased $15 million, or 10.3%, to $131 million for the nine months ended December 31, 2022, compared to $146 million for the nine months ended December 25, 2021. Depreciation and amortization decreased to 3.1% as a percentage of total revenue for the nine months ended December 31, 2022, compared to 3.5% for the nine months ended December 25, 2021. The decrease in depreciation and amortization expense was primarily attributable to lower depreciation due to lower capital expenditures in Fiscal 2022 and Fiscal 2021.
Impairment of Assets
For the nine months ended December 31, 2022 and December 25, 2021, we recognized asset impairment charges of $12 million and $33 million, respectively, which are primarily related to operating lease right-of-use assets at certain Michael Kors store locations. See Note 11 to the accompanying consolidated financial statements for additional information.
Restructuring and Other Charges
We recognized restructuring and other charges of $11 million and $25 million for the nine months ended December 31, 2022 and December 25, 2021, respectively. These charges are primarily related to equity awards associated with the acquisition of Versace. See Note 8 to the accompanying consolidated financial statements for additional information.
Restructuring and other charges are not evaluated as part of our reportable segments’ results (see Segment Information above for additional information).
Income from Operations
As a result of the foregoing, income from operations decreased $65 million, to $719 million for the nine months ended December 31, 2022, compared to $784 million for the nine months ended December 25, 2021. Income from operations as a percentage of total revenue decreased to 16.8% for the nine months ended December 31, 2022, compared to 18.8% for the nine months ended December 25, 2021. See Segment Information above for a reconciliation of our segment operating income to total operating income.
Interest Expense (Income), net
For the nine months ended December 31, 2022, we recognized $13 million of interest expense compared to $11 million of interest income for the nine months ended December 25, 2021. The $24 million increase in interest expense (income), net, is primarily due to higher effective interest rates on our outstanding debt, higher average borrowings outstanding and lower
42
interest income from our net investment hedges, partially offset by higher interest income earned on our cash and cash equivalents (see Note 9 and Note 12 to the accompanying consolidated financial statements for additional information).
Foreign Currency (Gain) Loss
For the nine months ended December 31, 2022, we recognized a net foreign currency gain of $10 million, primarily attributable to a gain related to an undesignated forward foreign currency exchange contract partially offset by losses attributable to intercompany transactions among our subsidiaries. For the nine months ended December 25, 2021, we recognized a net foreign currency loss of $1 million, primarily attributable to the remeasurement of dollar-denominated intercompany loans with certain of our subsidiaries.
Provision for Income Taxes
For the nine months ended December 31, 2022, we recognized $66 million of income tax expense compared to $54 million for the nine months ended December 25, 2021. Our effective tax rate was 9.2% and 6.8% for the nine months ended December 31, 2022 and December 25, 2021, respectively. In the current year, our effective tax rate benefited from the release of a valuation allowance in the United Kingdom. In the prior year, our effective tax rate included a favorable impact from a net benefit recognized as a result of newly enacted tax legislation in Italy and a net operating loss carryback claim made in the United States as a result of COVID-19 related losses. See Note 15 to the accompanying consolidated financial statements for additional information regarding the effective tax rate for the current fiscal year.
Our effective tax rate may fluctuate from time to time due to the effects of changes in United States federal, state and local taxes and tax rates in foreign jurisdictions. In addition, factors such as the geographic mix of earnings, enacted tax legislation and the results of various global tax strategies, may also impact our effective tax rate in future periods.
Net Income Attributable to Capri
As a result of the foregoing, our net income decreased $91 million to $650 million for the nine months ended December 31, 2022, compared to $741 million for the nine months ended December 25, 2021.
Segment Information
Versace
| Nine Months Ended | % Change | ||||||||||||||||||||||||||||
| (dollars in millions) | December 31, 2022 | December 25, 2021 | $ Change | As Reported | Constant Currency | ||||||||||||||||||||||||
| Revenues | $ | 832 | $ | 773 | $ | 59 | 7.6 | % | 22.9 | % | |||||||||||||||||||
| Income from operations | $ | 138 | $ | 135 | $ | 3 | 2.2 | % | |||||||||||||||||||||
| Operating margin | 16.6 | % | 17.5 | % | |||||||||||||||||||||||||
Revenues
Versace revenues increased $59 million, or 7.6%, to $832 million for the nine months ended December 31, 2022, compared to $773 million for the nine months ended December 25, 2021, which included unfavorable foreign currency effects of $118 million. On a constant currency basis, revenue increased $177 million, or 22.9%, primarily attributable to increased retail revenue and wholesale shipments in the Americas and EMEA, partially offset by decreased revenues in Greater China due to COVID-19 related disruptions.
Income from Operations
For the nine months ended December 31, 2022, Versace recorded income from operations of $138 million, compared to $135 million for the nine months ended December 25, 2021. Operating margin decreased from 17.5% for the nine months ended December 25, 2021, to 16.6% for the nine months ended December 31, 2022, primarily due to unfavorable channel mix offset by higher average unit price.
43
Jimmy Choo
| Nine Months Ended | % Change | ||||||||||||||||||||||||||||
| (dollars in millions) | December 31, 2022 | December 25, 2021 | $ Change | As Reported | Constant Currency | ||||||||||||||||||||||||
| Revenues | $ | 482 | $ | 457 | $ | 25 | 5.5 | % | 15.1 | % | |||||||||||||||||||
| Income from operations | $ | 45 | $ | 28 | $ | 17 | 60.7 | % | |||||||||||||||||||||
| Operating margin | 9.3 | % | 6.1 | % | |||||||||||||||||||||||||
Revenues
Jimmy Choo revenues increased $25 million, or 5.5%, to $482 million for the nine months ended December 31, 2022, compared to $457 million for the nine months ended December 25, 2021, which included unfavorable foreign currency effects of $44 million. On a constant currency basis, revenue increased $69 million, or 15.1%, primarily attributable to increased retail revenue and wholesale shipments in the Americas and EMEA, partially offset by decreased revenue in Greater China due to the impact of COVID-19 related disruptions.
Income from Operations
For the nine months ended December 31, 2022, Jimmy Choo recorded income from operations of $45 million, compared to $28 million for the nine months ended December 25, 2021. Operating margin increased from 6.1% for the nine months ended December 25, 2021, to 9.3% for the nine months ended December 31, 2022, primarily due to higher average unit price and leveraging of operating expenses on higher revenue.
Michael Kors
| Nine Months Ended | % Change | ||||||||||||||||||||||||||||
(dollars in millions) | December 31, 2022 | December 25, 2021 | $ Change | As Reported | Constant Currency | ||||||||||||||||||||||||
| Revenues | $ | 2,970 | $ | 2,932 | $ | 38 | 1.3 | % | 5.6 | % | |||||||||||||||||||
| Income from operations | $ | 721 | $ | 795 | $ | (74) | (9.3) | % | |||||||||||||||||||||
| Operating margin | 24.3 | % | 27.1 | % | |||||||||||||||||||||||||
Revenues
Michael Kors revenues increased $38 million, or 1.3%, to $2.970 billion for the nine months ended December 31, 2022, compared to $2.932 billion for the nine months ended December 25, 2021, which included unfavorable foreign currency effects of $126 million. On a constant currency basis, revenue increased $164 million, or 5.6%, primarily due to higher wholesale shipments and increased retail revenue in the Americas and EMEA, partially offset by decreased revenue in Greater China due to the impact of COVID-19 related disruptions.
Income from Operations
For the nine months ended December 31, 2022, Michael Kors recorded income from operations of $721 million, compared to $795 million for the nine months ended December 25, 2021. Operating margin decreased from 27.1% for the nine months ended December 25, 2021, to 24.3% for the nine months ended December 31, 2022, primarily due to increased supply chain costs, unfavorable regional mix and increased marketing investments.
44
Liquidity and Capital Resources
Liquidity
Our primary sources of liquidity are the cash flows generated from operations, along with borrowings available under our credit facilities (see below discussion regarding “Revolving Credit Facilities”) and available cash and cash equivalents. Our primary use of this liquidity is to fund the ongoing cash requirements, including our working capital needs and capital investments in our business, debt repayments, acquisitions, returns of capital, including share repurchases and other corporate activities. We believe that the cash generated from operations, together with borrowings available under our revolving credit facilities and available cash and cash equivalents, will be sufficient to meet our working capital needs for the next 12 months and beyond, including investments made and expenses incurred in connection with our store growth plans, investments in corporate and distribution facilities, continued systems development, e-commerce and marketing initiatives. We spent $168 million on capital expenditures during the nine months ended December 31, 2022.
The following table sets forth key indicators of our liquidity and capital resources (in millions):
| As of | |||||||||||
| December 31, 2022 | April 2, 2022 | ||||||||||
| Balance Sheet Data: | |||||||||||
| Cash and cash equivalents | $ | 281 | $ | 169 | |||||||
| Working capital | $ | 525 | $ | 325 | |||||||
| Total assets | $ | 7,554 | $ | 7,480 | |||||||
| Short-term debt | $ | 19 | $ | 29 | |||||||
| Long-term debt | $ | 1,521 | $ | 1,131 | |||||||
| Nine Months Ended | |||||||||||
| December 31, 2022 | December 25, 2021 | ||||||||||
| Cash Flows Provided By (Used In): | |||||||||||
| Operating activities | $ | 616 | $ | 713 | |||||||
| Investing activities | $ | 241 | $ | (26) | |||||||
| Financing activities | $ | (651) | $ | (663) | |||||||
| Effect of exchange rate changes | $ | (94) | $ | 6 | |||||||
| Net increase in cash and cash equivalents | $ | 112 | $ | 30 | |||||||
Cash Provided by Operating Activities
Net cash provided by operating activities decreased $97 million to $616 million during the nine months ended December 31, 2022, as compared to $713 million for the nine months ended December 25, 2021, as a result of a decrease in our net income after non-cash adjustments partially offset by deceleration of inventory receipts compared to prior year.
Cash Provided by (Used in) Investing Activities
Net cash provided by investing activities was $241 million during the nine months ended December 31, 2022, as compared to net cash used in investing activities of $26 million during the nine months ended December 25, 2021. The increase in net cash provided by investing activities were primarily attributable to the higher settlement of net investment hedges of $350 million during the nine months ended December 31, 2022 partially offset by higher capital expenditures of $83 million compared to prior year.
Cash Used in Financing Activities
Net cash used in financing activities was $651 million during the nine months ended December 31, 2022, as compared to $663 million during the nine months ended December 25, 2021. The decrease of cash used in financing activities of $12 million was primarily attributable to an increase in net debt borrowing of $657 million, partially offset by a $604 million increase in cash payments to repurchase our ordinary shares compared to prior year.
45
Debt Facilities
The following table presents a summary of our borrowing capacity and amounts outstanding as of December 31, 2022 and April 2, 2022 (in millions):
| As of | |||||||||||
| December 31, 2022 | April 2, 2022 | ||||||||||
| Senior Unsecured Revolving Credit Facility: | |||||||||||
Revolving Credit Facility (excluding up to a $500 million accordion feature) (1) | |||||||||||
| Total availability | $ | 1,500 | $ | 1,000 | |||||||
Borrowings outstanding (2) | 580 | 175 | |||||||||
| Letter of credit outstanding | 15 | 21 | |||||||||
| Remaining availability | $ | 905 | $ | 804 | |||||||
| 2018 Term Loan ($1.6 billion) | |||||||||||
Borrowings outstanding, net of debt issuance costs (3) | $ | — | $ | 495 | |||||||
| Versace Term Loan (450 million Euro) | |||||||||||
Borrowings outstanding, net of debt issuance costs (4) | $ | 481 | $ | — | |||||||
| Senior Notes due 2024 | |||||||||||
Borrowings outstanding, net of debt issuance costs and discount amortization (2) | $ | 448 | $ | 448 | |||||||
Other Borrowings (5) | $ | 31 | $ | 42 | |||||||
| Hong Kong Uncommitted Credit Facility: | |||||||||||
Total availability (100 million and 80 million Hong Kong Dollars) (6) | $ | 13 | $ | 10 | |||||||
| Borrowings outstanding | — | — | |||||||||
| Remaining availability (100 million and 80 million Hong Kong Dollars) | $ | 13 | $ | 10 | |||||||
| China Uncommitted Credit Facility: | |||||||||||
Total availability (75 million and 45 million Chinese Yuan) (6) | $ | 11 | $ | 7 | |||||||
| Borrowings outstanding | — | — | |||||||||
| Total and remaining availability (75 million and 45 million Chinese Yuan) | $ | 11 | $ | 7 | |||||||
| Japan Credit Facility: | |||||||||||
| Total availability (1.0 billion Japanese Yen) | $ | 8 | $ | 8 | |||||||
| Borrowings outstanding | — | — | |||||||||
| Remaining availability (1.0 billion Japanese Yen) | $ | 8 | $ | 8 | |||||||
| Versace Uncommitted Credit Facilities: | |||||||||||
Total availability (40 million Euro and 48 million Euro) (6) | $ | 43 | $ | 52 | |||||||
| Borrowings outstanding | — | — | |||||||||
| Remaining availability (40 million Euro and 48 million Euro) | $ | 43 | $ | 52 | |||||||
Total borrowings outstanding (1) | $ | 1,540 | $ | 1,160 | |||||||
| Total remaining availability | $ | 980 | $ | 881 | |||||||
46
(1)The financial covenant in our 2022 Credit Facility requires us to comply with the quarterly maximum net leverage ratio test of 4.00 to 1.0. As of December 31, 2022 and April 2, 2022, we were in compliance with all covenants related to our agreements then in effect governing our debt. See Note 9 to the accompanying consolidated financial statements for additional information.
(2)As of December 31, 2022 and April 2, 2022, all amounts are recorded as long-term debt in our consolidated balance sheets.
(3)As of December 31, 2022, we no longer had an outstanding balance under the 2018 Term Loan as it was repaid. As of April 2, 2022, all amounts are recorded as long-term debt in our consolidated balance sheets.
(4)On December 5, 2022, Gianni Versace S.r.l., our wholly owned subsidiary, entered into a credit facility, which provides a senior unsecured term loan in an aggregate principal amount of €450 million (approximately $482 million). As of December 31, 2022 all amounts are recorded as long-term debt in our consolidated balance sheets.
(5)The balance as of December 31, 2022 consists of $18 million related to our supplier financing program recorded within short-term debt in our consolidated balance sheets, $11 million related to the sale of certain Versace tax receivables, with $1 million and $10 million, respectively, recorded within short-term debt and long-term debt in our consolidated balance sheets and $2 million of other loans recorded as long-term debt in our consolidated balance sheets. The balance as of April 2, 2022 consists of $21 million related to our supplier finance program recorded within short-term debt in our consolidated balance sheets, $18 million related to the sale of certain Versace tax receivables, with $8 million and $10 million, respectively, recorded within short-term debt and long-term debt in our consolidated balance sheets and $3 million of other loans recorded as long-term debt in our consolidated balance sheets.
(6)The balance as of December 31, 2022 and April 2, 2022 represents the total availability of the credit facility, which excludes bank guarantees.
We believe that our 2022 Credit Facility is adequately diversified with no undue concentration in any one financial institution. As of December 31, 2022, there were 17 financial institutions participating in the facility, with none maintaining a maximum commitment percentage in excess of 10%. We have no reason to believe that the participating institutions will be unable to fulfill their obligations to provide financing in accordance with the terms of the 2022 Credit Facility.
See Note 9 in the accompanying financial statements and Note 11 in our Fiscal 2022 Annual Report on Form 10-K for detailed information relating to our credit facilities and debt obligations.
Share Repurchase Program
The following table presents our ordinary share repurchases during the nine months ended December 31, 2022 and December 25, 2021 (dollars in millions):
| Nine Months Ended | |||||||||||
| December 31, 2022 | December 25, 2021 | ||||||||||
| Cost of shares repurchased under share repurchase program | $ | 950 | $ | 350 | |||||||
Fair value of shares withheld to cover tax obligations for vested restricted share awards | 14 | 10 | |||||||||
| Total cost of ordinary shares repurchased | $ | 964 | $ | 360 | |||||||
| Shares repurchased under share repurchase program | 18,921,459 | 5,934,244 | |||||||||
| Shares withheld to cover tax withholding obligations | 300,722 | 193,322 | |||||||||
| 19,222,181 | 6,127,566 | ||||||||||
During the first quarter of Fiscal 2022, the Company reinstated its $500 million share repurchase program, which was previously suspended during the first quarter of Fiscal 2021 in response to the impact of the COVID-19 pandemic and the provisions of the Second Amendment of the 2018 Credit Facility. Subsequently, on November 3, 2021, the Company announced that its Board of Directors had terminated the Company’s existing $500 million share repurchase program (the “Prior Plan”), which had $250 million of availability remaining at the time, and authorized a new share repurchase program (the “Fiscal 2022 Plan”) pursuant to which the Company was permitted, from time to time, to repurchase up to $1.0 billion of its outstanding ordinary shares within a period of two years from the effective date of the program.
On June 1, 2022, the Company announced that its Board of Directors had terminated the Fiscal 2022 Plan, with $500 million of availability remaining, and authorized a new share repurchase program (the “Fiscal 2023 Plan”) pursuant to
47
which the Company may, from time to time, repurchase up to $1.0 billion of its outstanding ordinary shares within a period of 2 years from the effective date of the program.
On November 9, 2022, the Company announced that its Board of Directors approved a new share repurchase program (the “Existing Share Repurchase Plan”) of up to $1 billion of its outstanding ordinary shares, providing additional capacity to return cash to shareholders over the longer term. This new two-year program replaced the Fiscal 2023 Plan which had $250 million of availability remaining.
Share repurchases may be made in open market or privately negotiated transactions and/or pursuant to Rule 10b5-1 trading plans, subject to market conditions, applicable legal requirements, trading restrictions under the Company’s insider trading policy and other relevant factors. The program may be suspended or discontinued at any time.
Contractual Obligations and Commercial Commitments
Please refer to the “Contractual Obligations and Commercial Commitments” disclosure within the “Liquidity and Capital Resources” section of our Fiscal 2022 Form 10-K for a detailed disclosure of our other contractual obligations and commitments as of April 2, 2022.
Off-Balance Sheet Arrangements
We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating our business. Our off-balance sheet commitments relating to our outstanding letters of credit were $35 million at December 31, 2022, including $20 million in letters of credit issued outside of the 2022 Credit Facility. In addition, as of December 31, 2022, bank guarantees of approximately $35 million were supported by our various credit facilities. We do not have any other off-balance sheet arrangements or relationships with entities that are not consolidated into our financial statements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.
Recent Accounting Pronouncements
See Note 2 to the accompanying interim consolidated financial statements for recently issued accounting standards, which may have an impact on our financial statements and/or disclosures upon adoption.
48
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks during the normal course of our business, such as risk arising from fluctuations in foreign currency exchange rates, as well as fluctuations in interest rates. In order to manage these risks, we employ certain strategies to mitigate the effect of these fluctuations. We enter into foreign currency forward contracts to manage our foreign currency exposure to the fluctuations of certain foreign currencies. The use of these instruments primarily helps manage our exposure to foreign denominated purchase commitments and better control product costs. We do not use derivatives for trading or speculative purposes.
Foreign Currency Exchange Risk
Forward Foreign Currency Exchange Contracts
We are exposed to risks on certain purchase commitments to foreign suppliers based on the value of our purchasing subsidiaries’ local currency relative to the currency requirement of the supplier on the date of the commitment. As such, we enter into forward foreign currency exchange contracts that generally mature in 12 months or less and are consistent with the related purchase commitments, to manage our exposure to the changes in the value of the Euro and the Canadian Dollar. These contracts are recorded at fair value in our consolidated balance sheets as either an asset or liability, and are derivative contracts to hedge cash flow risks. Certain of these contracts are designated as hedges for hedge accounting purposes, while certain of these contracts are not designated as hedges for accounting purposes. Accordingly, the changes in the fair value of the majority of these contracts at the balance sheet date are recorded in equity as a component of accumulated other comprehensive income and upon maturity (settlement) are recorded in, or reclassified into, our cost of goods sold in our consolidated statements of operations and comprehensive income as applicable to the transactions for which the forward foreign currency exchange contracts were established.
We perform a sensitivity analysis on our forward currency contracts, both designated and not designated as hedges for accounting purposes, to determine the effects of fluctuations in foreign currency exchange rates. For this sensitivity analysis, we assume a hypothetical change in the U.S. Dollar against foreign exchange rates. Based on all foreign currency exchange contracts outstanding as of December 31, 2022, a 10% appreciation or devaluation of the U.S. Dollar compared to the level of foreign currency exchange rates for currencies under contract as of December 31, 2022, would result in a net increase and decrease, respectively, of approximately $3 million in the fair value of these contracts.
Net Investment Hedges
We are exposed to adverse foreign currency exchange rate movements related to our net investment hedges. As of December 31, 2022, we have multiple fixed to fixed cross-currency swap agreements with aggregate notional amounts of $294 million to hedge our net investments in Japanese Yen denominated subsidiaries against future volatility in the exchange rates between the U.S. Dollar and the Japanese Yen, as well as multiple fixed-to-fixed cross-currency swap agreements with aggregate notional amounts of €1 billion (approximately $1.07 billion) to hedge our net investments in Euro denominated subsidiaries against future volatility in exchange rates between the Euro and British pound. Under the term of these contracts, we will exchange the semi-annual fixed rate payments on United States denominated debt for fixed rate payments of 0% to 2.665% in Japanese Yen, while also exchanging the semi-annual fixed rate payments on GBP denominated debt for fixed rate payments of 0% in Euro. Based on the net investment hedges outstanding as of December 31, 2022, a 10% appreciation or devaluation of the U.S. Dollar compared to the level of foreign currency exchange rates for currencies under contract as of December 31, 2022, would result in a net increase or decrease, respectively, of approximately $112 million in the fair value of these contracts. These contracts have maturity dates between November 2024 and February 2051. In addition, certain other contracts are supported by a credit support annex (“CSA”) which provides for collateral exchange with the earliest effective date being September 2027. If the outstanding position of a contract exceeds a certain threshold governed by the aforementioned CSA’s, either party is required to post cash collateral.
Interest Rate Risk
We are exposed to interest rate risk in relation to borrowings outstanding under our 2022 Credit Facility, our Hong Kong Credit Facility, our Japan Credit Facility, our Uncommitted Versace Credit Facilities and our Versace Term Loan. Our 2022 Credit Facility carries interest rates that are tied to the prime rate and other institutional lending rates (depending on the particular origination of borrowing), as further described in Note 9 to the accompanying consolidated financial statements. Our Hong Kong Credit Facility carries interest at a rate that is tied to the Hong Kong Interbank Offered Rate. Our China Credit Facility carries interest at a rate that is tied to the People’s Bank of China’s Benchmark lending rate. Our Japan Credit Facility carries interest at a rate posted by the Mitsubishi UFJ Financial Group. Our Uncommitted Versace Credit Facilities carries interest at a rate set by the bank on the date of borrowing that is tied to the European Central Bank. Our Versace Term Loan carries interest rates that are tied to EURIBOR. Therefore, our consolidated statements of operations and comprehensive
49
income and cash flows are exposed to changes in those interest rates. At December 31, 2022, we had $580 million borrowings outstanding under our 2022 Credit Facility, $481 million outstanding, net of debt issuance costs, under our Versace Term Loan and no borrowings outstanding under our Uncommitted Versace Credit Facilities. At April 2, 2022, we had $175 million borrowings outstanding under our 2018 Credit Facility, $495 million, net of debt issuance costs, outstanding under our 2018 Term Loan and no borrowings outstanding under our Versace Credit Facilities. These balances are not indicative of future balances that may be outstanding under our revolving credit facilities that may be subject to fluctuations in interest rates. Any increases in the applicable interest rates would cause an increase to the interest expense relative to any outstanding balance at that date.
Credit Risk
As of December 31, 2022, our $450 million Senior Notes, due in 2024, bear interest at a fixed rate equal to 4.250% per year, payable semi-annually. Our Senior Notes interest rate payable may be subject to adjustments from time to time if either Moody’s or S&P (or a substitute rating agency), downgrades (or downgrades and subsequently upgrades) the credit rating assigned to the Senior Notes.
On an overall basis, our exposure to market risk has not significantly changed from what we reported in our Annual Report on Form 10-K. The ongoing COVID-19 pandemic as well as macroeconomic conditions and inflationary pressures do present new and emerging uncertainty to the financial markets. See Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended April 2, 2022 for additional information.
50
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) under the Securities and Exchange Act of 1934 (the “Exchange Act”)) as of December 31, 2022. This evaluation was performed based on the criteria set forth in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), the 2013 Framework. Based on this assessment, our CEO and CFO concluded that our disclosure controls and procedures as of December 31, 2022 are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms, and is accumulated and communicated to our management, including our CEO and CFO, to allow timely decisions regarding required disclosures.
Changes in Internal Control over Financial Reporting
Except as discussed below, there have been no changes in our internal control over financial reporting during the three months ended December 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We are currently undertaking a major, multi-year ERP implementation to upgrade our information technology platforms and systems worldwide. The implementation is occurring in phases over several years. We have launched the finance functionality of the ERP system in certain regions starting in Fiscal 2023.
As a result of this multi-year implementation, we expect certain changes to our processes and procedures, which in turn, could result in changes to our internal control over financial reporting. While we expect this implementation to strengthen our internal control over financial reporting by automating certain manual processes and standardizing business processes and reporting across our organization, we will continue to evaluate and monitor our internal control over financial reporting as processes and procedures in the affected areas evolve. See Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended April 2, 2022 for additional information.
51
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved in various routine legal proceedings incident to the ordinary course of our business. We believe that the outcome of all pending legal proceedings, in the aggregate, will not have a material adverse effect on our business, results of operations and financial condition.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended April 2, 2022, which could materially and adversely affect our business, financial condition or future results of operations. These risks are not the only risks that we face. Our business operations could also be affected by additional factors that are not presently known to us or that we currently consider to be immaterial to our operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) Issuer Purchases of Equity Securities
The following table provides information of the Company’s ordinary shares repurchased or withheld during the three months ended December 31, 2022:
| Total Number of Shares | Average Price per Share | Total Number of Shares Purchased as Part of Publicly Announced Programs(1) | Remaining Dollar Value of Shares That May Be Purchased Under the Programs (in millions)(1) | ||||||||||||||||||||
| October 2 - October 29 | 2,295,845 | $ | 43.56 | 2,295,845 | $ | 250 | |||||||||||||||||
| October 30 - November 26 | — | $ | — | — | $ | 1,000 | |||||||||||||||||
| November 27 - December 31 | 3,469,784 | $ | 58.08 | 3,442,259 | $ | 800 | |||||||||||||||||
| 5,765,629 | 5,738,104 | ||||||||||||||||||||||
(1)On November 9, 2022, the Company announced that its Board of Directors approved a new share repurchase program of up to $1 billion of its outstanding ordinary shares, providing additional capacity to return cash to shareholders over the longer term. This new two-year program will replace the Company’s existing $1 billion share repurchase program which had $250 million of availability remaining. Share repurchases may be made in open market or privately negotiated transactions and/or pursuant to Rule 10b5-1 trading plans, subject to market conditions, applicable legal requirements, trading restrictions under the Company’s insider trading policy and other relevant factors. The program may be suspended or discontinued at any time.
ITEM 6. EXHIBITS
a. Exhibits
Please refer to the accompanying Exhibit Index included after the signature page of this report for a list of exhibits filed or furnished with this report.
52
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on February 8, 2023.
| CAPRI HOLDINGS LIMITED | ||||||||
| By: | /s/ John D. Idol | |||||||
| Name: | John D. Idol | |||||||
| Title: | Chairman & Chief Executive Officer | |||||||
| By: | /s/ Thomas J. Edwards, Jr. | |||||||
| Name: | Thomas J. Edwards, Jr. | |||||||
| Title: | Executive Vice President, Chief Financial Officer and Chief Operating Officer | |||||||
53
INDEX TO EXHIBITS
54