CAPRI HOLDINGS LIMITED
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 level, 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 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 Limited is a global fashion luxury group, consisting of iconic
brands that are industry leaders in design, style and craftsmanship, led by a
world-class management team and renowned designers. Our brands cover the full
spectrum of fashion luxury categories including women's and men's accessories,
footwear and ready-to-wear as well as wearable technology, watches, jewelry,
eyewear and a full line of fragrance products. Our goal is to continue to extend
the global reach of our brands while ensuring that they maintain their
independence and exclusive DNA.
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.
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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
COVID-19 Pandemic. The Company's performance during fiscal 2023 was adversely impacted due to lockdowns in certain regions, most notably inGreater 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 inGreater China or elsewhere. Macroeconomic conditions and inflationary pressures. Our business is affected by global economic conditions and the related impact on levels of consumer spending worldwide. The war inUkraine that began inFebruary 2022 has created significant economic uncertainty in the region and caused us to stop all shipments toRussia andUkraine . While our business inRussia andUkraine represented less than 1% of our total net sales for Fiscal 2022, the war has caused broader macroeconomic implications that we expect to continue for the foreseeable future, including the continued weakening of the Euro against the US dollar, 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. 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 and the possibility of a global recession. 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, theU.S. Dollar, and those of our non-United States subsidiaries whose functional/local currency is other than theU.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 theU.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 are expected to continue throughout Fiscal 2023. Our freight costs have increased as carrier rates for ocean and air shipments have increased significantly, and the supply chain disruptions have caused us to increase our use of air freight with greater frequency than in the past. 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, 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 endedApril 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 bythe 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 throughoutNorth America (United States andCanada ), certain parts of EMEA (Europe ,Middle East andAfrica ) and certain parts ofAsia (Asia andOceania ), 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 theAmericas (United States ,Canada andLatin America ), certain parts of EMEA and certain parts ofAsia , 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
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products, as well as licensed products bearing our name, directly to consumers
throughout the Americas , certain parts of EMEA and certain parts of Asia . Our
Michael Kors e-commerce business includes e-commerce sites in the United States ,
Canada and 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 six months endedOctober 1, 2022 andSeptember 25, 2021 (in millions): Three Months Ended Six Months Ended October 1, September 25, October 1, September 25, 2022 2021 2022 2021 Total revenue: Versace$ 308 $ 282$ 583 $ 522 Jimmy Choo 142 137 314 279 Michael Kors 962 881 1,875 1,752 Total revenue$ 1,412 $ 1,300 $ 2,772 $ 2,553 Income from operations: Versace$ 62 $ 55$ 114 $ 103 Jimmy Choo 8 1 27 12 Michael Kors 248 220 470 460 Total segment income from operations 318 276 611 575 Less: Corporate expenses (55) (45) (115) (86) Impairment of assets (11) (33) (11) (33) Restructuring and other charges (3) (8) (6) (11) COVID-19 related charges 3 5 4 8 Total income from operations$ 252 $
195
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The following table presents our global network of retail stores and wholesale
doors by brand:
As of
October 1, September 25,
2022 2021
Number of full price retail stores (including concessions):
Versace 155 151
Jimmy Choo 182 181
Michael Kors 517 530
854 862
Number of outlet stores:
Versace 62 60
Jimmy Choo 56 56
Michael Kors 304 293
422 409
Total number of retail stores 1,276 1,271
Total number of wholesale doors:
Versace 798 777
Jimmy Choo 487 454
Michael Kors 2,710 2,793
3,995 4,024
The following table presents our retail stores by geographic location:
As of As of
October 1, 2022 September 25, 2021
Versace Jimmy Choo Michael Kors Versace Jimmy Choo Michael Kors
Store count by region:
The Americas 40 45 326 37 46 350
EMEA 58 72 173 55 75 176
Asia 119 121 322 119 116 297
217 238 821 211 237 823
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 Six Months Ended
October 1, September 25, October 1, September 25,
2022 2021 2022 2021
Total revenue $ 1,412 $ 1,300 $ 2,772 $ 2,553
Gross profit as a percent of total revenue 67.4 % 68.0 % 66.8 % 68.2 %
Income from operations $ 252 $ 195 $ 483 $ 453
Income from operations as a percent of total
revenue 17.8 % 15.0 % 17.4 % 17.7 %
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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 inthe 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 endedApril 2, 2022 . There have been no significant changes in our critical accounting policies and estimates sinceApril 2, 2022 . 36 --------------------------------------------------------------------------------
Results of Operations
Comparison of the three months ended
The following table details the results of our operations for the three months endedOctober 1, 2022 andSeptember 25, 2021 , and expresses the relationship of certain line items to total revenue as a percentage (dollars in millions): % of Total Revenue for Three Months Ended the Three Months Ended October 1, September 25, October 1, September 25, 2022 2021 $ Change % Change 2022 2021 Statements of Operations Data: Total revenue$ 1,412 $ 1,300 $ 112 8.6 % Cost of goods sold 461 416 45 10.8 % 32.6 % 32.0 % Gross profit 951 884 67 7.6 % 67.4 % 68.0 % Selling, general and administrative expenses 642 599 43 7.2 % 45.5 % 46.1 % Depreciation and amortization 43 49 (6) (12.2) % 3.0 % 3.8 % Impairment of assets 11 33 (22) (66.7) % 0.8 % 2.5 % Restructuring and other charges 3 8 (5) (62.5) % 0.2 % 0.6 % Total operating expenses 699 689 10 1.5 % 49.5 % 53.0 % Income from operations 252 195 57 29.2 % 17.8 % 15.0 % Other income, net (1) (2) 1 NM (0.1) % (0.2) % Interest expense (income), net 5 (5) 10 NM 0.4 % (0.4) % Foreign currency (gain) loss (11) 4 (15) NM (0.8) % 0.3 % Income before income taxes 259 198 61 30.8 % 18.3 % 15.2 % Provision (benefit) for income taxes 35 (2) 37 NM 2.5 % (0.2) % Net income 224 200 24 12.0 % Less: Net income attributable to noncontrolling interest - - - NM Net income attributable to Capri$ 224 $ 200$ 24 12.0 % NM Not meaningful Total Revenue Total revenue increased$112 million , or 8.6%, to$1.412 billion for the three months endedOctober 1, 2022 , compared to$1.300 billion for the three months endedSeptember 25, 2021 , which included net unfavorable foreign currency effects of approximately$116 million as a result of the strengthening of theU.S. dollar compared to all major currencies in which we operate for the three months endedOctober 1, 2022 . On a constant currency basis, our total revenue increased$228 million , or 17.5%. The increase is attributable to increased retail and wholesale revenues throughout theAmericas and EMEA, partially offset by decreased revenues inGreater China due to COVID-19 related disruptions, for each of our brands. Gross Profit Gross profit increased$67 million , or 7.6%, to$951 million for the three months endedOctober 1, 2022 , compared to$884 million for the three months endedSeptember 25, 2021 , which included net unfavorable foreign currency effects of$83 million . Gross profit as a percentage of total revenue was 67.4% and 68.0% for the three months endedOctober 1, 2022 andSeptember 25, 2021 , respectively. Our gross profit margin decreased primarily due to increased supply chain costs and unfavorable channel mix for the three months endedOctober 1, 2022 , as compared to the three months endedSeptember 25, 2021 . 37 --------------------------------------------------------------------------------
Total Operating Expenses
Total operating expenses increased$10 million , or 1.5%, to$699 million for the three months endedOctober 1, 2022 , compared to$689 million for the three months endedSeptember 25, 2021 . Our operating expenses included a net favorable foreign currency impact of approximately$66 million . Total operating expenses decreased to 49.5% as a percentage of total revenue for the three months endedOctober 1, 2022 , compared to 53.0% for the three months endedSeptember 25, 2021 . The components that comprise total operating expenses are explained below.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased$43 million , or 7.2%, to$642 million for the three months endedOctober 1, 2022 , compared to$599 million for the three months endedSeptember 25, 2021 , primarily due to increased e-commerce costs from higher revenue and higher corporate costs for the three months endedOctober 1, 2022 . Selling, general, and administrative expenses as a percentage of total revenue decreased to 45.5% for the three months endedOctober 1, 2022 , compared to 46.1% for the three months endedSeptember 25, 2021 , primarily due to decreased retail store costs as a percentage of revenue due to higher revenue, partially offset by increased e-commerce costs as a percentage of revenue for the three months endedOctober 1, 2022 , as compared to the three months endedSeptember 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$10 million , or 22.2%, to$55 million for the three months endedOctober 1, 2022 as compared to$45 million for the three months endedSeptember 25, 2021 , primarily due to an increase in costs related to the ongoing ERP system implementation and Capri transformation projects.
Depreciation and Amortization
Depreciation and amortization decreased$6 million , or 12.2%, to$43 million for the three months endedOctober 1, 2022 , compared to$49 million for the three months endedSeptember 25, 2021 . As a percentage of total revenue, depreciation and amortization decreased to 3.0% for the three months endedOctober 1, 2022 , compared to 3.8% for the three months endedSeptember 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
During the three months ended
Restructuring and Other Charges
We recognized restructuring and other charges of$3 million and$8 million for the three months endedOctober 1, 2022 andSeptember 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 increased$57 million , to$252 million for three months endedOctober 1, 2022 , compared to$195 million for the three months endedSeptember 25, 2021 . Income from operations as a percentage of total revenue increased to 17.8% for the three months endedOctober 1, 2022 , compared to 15.0% for the three months endedSeptember 25, 2021 . See Segment Information above for a reconciliation of our segment operating income to total operating income. 38 --------------------------------------------------------------------------------
Interest Expense (Income), net
For the three months endedOctober 1, 2022 , we recognized$5 million of interest expense compared to$5 million of interest income for the three months endedSeptember 25, 2021 . The$10 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) Loss
For the three months endedOctober 1, 2022 , we recognized a net foreign currency gain of$11 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 three months endedSeptember 25, 2021 , we recognized a net foreign currency loss of$4 million , primarily attributable to the revaluation and settlement of certain of our accounts payable in currencies other than the functional currency, as well as the remeasurement of dollar-denominated intercompany loans with certain of our subsidiaries.
Provision (Benefit) for Income Taxes
The provision for income taxes was$35 million for the three months endedOctober 1, 2022 , compared to a benefit of$2 million for the three months endedSeptember 25, 2021 . Our effective tax rates were 13.5% and (1.0)% for the three months endedOctober 1, 2022 andSeptember 25, 2021 , respectively. The increase in our effective tax rate was primarily related to a benefit recognized during the prior year due to newly enacted tax legislation inItaly , which allowed a step up in certain intangible assets and a reduction of deferred tax liabilities. See Note 15 to the accompanying consolidated financial statements for additional information regarding the effective tax rate for the current fiscal year quarter. Our effective tax rate may fluctuate from time to time due to the effects of changes inUnited 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 increased
Segment Information
Versace
Three Months Ended % Change
October 1, September 25, As Constant
(dollars in millions) 2022 2021 $ Change Reported Currency
Revenues $ 308 $ 282 $ 26 9.2 % 27.7 %
Income from operations $ 62 $ 55 $ 7 12.7 %
Operating margin 20.1 % 19.5 %
Revenues
Versace revenues increased $26 million , or 9.2%, to $308 million for the three
months ended October 1, 2022 , compared to $282 million for the three months
ended September 25, 2021 , which included unfavorable foreign currency effects of
$52 million . On a constant currency basis, revenue increased $78 million , or
27.7%, primarily attributable to increased retail revenue and higher 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 three months endedOctober 1, 2022 , Versace recorded income from operations of$62 million , compared to$55 million for the three months endedSeptember 25, 2021 . Operating margin increased from 19.5% for the three months endedSeptember 25, 2021 , to 20.1% for the three months endedOctober 1, 2022 , primarily due to leveraging of operating expenses on higher revenue and higher average unit price partially offset by unfavorable channel mix. 39 --------------------------------------------------------------------------------
Jimmy Choo
Three Months Ended % Change
October 1, September 25, As Constant
(dollars in millions) 2022 2021 $ Change Reported Currency
Revenues $ 142 $ 137 $ 5 3.6 % 15.3 %
Income from operations $ 8 $ 1 $ 7 NM
Operating margin 5.6 % 0.7 %
NM Not meaningful
Revenues
Jimmy Choo revenues increased $5 million , or 3.6%, to $142 million for the three
months ended October 1, 2022 , compared to $137 million for the three months
ended September 25, 2021 , which included unfavorable foreign currency effects of
$16 million . On a constant currency basis, revenue increased $21 million , or
15.3%, primarily attributable to increased retail revenue in the Americas .
Income from Operations
For the three months endedOctober 1, 2022 , Jimmy Choo recorded income from operations of$8 million , compared to$1 million for the three months endedSeptember 25, 2021 . Operating margin increased from 0.7% for the three months endedSeptember 25, 2021 to 5.6% for the three months endedOctober 1, 2022 , primarily due to higher average unit price and lower promotional activity.
Michael Kors
Three Months Ended % Change
October 1, September 25, As Constant
(dollars in millions) 2022 2021 $ Change Reported Currency
Revenues $ 962 $ 881 $ 81 9.2 % 14.6 %
Income from operations $ 248 $ 220 $ 28 12.7 %
Operating margin 25.8 % 25.0 %
Revenues
Michael Kors revenues increased $81 million , or 9.2%, to $962 million for
the three months ended October 1, 2022 , compared to $881 million for the three
months ended September 25, 2021 , which included unfavorable foreign currency
effects of $48 million . On a constant currency basis, revenue increased $129
million , or 14.6%, 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 three months endedOctober 1, 2022 , Michael Kors recorded income from operations of$248 million , compared to$220 million for the three months endedSeptember 25, 2021 . Operating margin increased from 25.0% for the three months endedSeptember 25, 2021 , to 25.8% for the three months endedOctober 1, 2022 , primarily due to leveraging of operating expenses on higher revenue, partially offset by increased supply chain costs. 40 --------------------------------------------------------------------------------
Results of Operations
Comparison of the six months ended
The following table details the results of our operations for the six months endedOctober 1, 2022 andSeptember 25, 2021 , and expresses the relationship of certain line items to total revenue as a percentage (dollars in millions): % of Total Revenue for the Six Months Six Months Ended Ended October 1, September 25, September 25, 2022 2021 $ Change % Change October 1, 2022 2021 Statements of Operations Data: Total revenue$ 2,772 $ 2,553 $ 219 8.6 % Cost of goods sold 920 813 107 13.2 % 33.2 % 31.8 % Gross profit 1,852 1,740 112 6.4 % 66.8 % 68.2 % Selling, general and administrative expenses 1,264 1,144 120 10.5 % 45.6 % 44.8 % Depreciation and amortization 88 99 (11) (11.1) % 3.2 % 3.9 % Impairment of assets 11 33 (22) (66.7) % 0.4 % 1.3 % Restructuring and other charges 6 11 (5) (45.5) % 0.2 % 0.4 % Total operating expenses 1,369 1,287 82 6.4 % 49.4 % 50.4 % Income from operations 483 453 30 6.6 % 17.4 % 17.7 % Other income, net (1) (2) 1 NM - % (0.1) % Interest expense (income), net 1 (4) 5 NM - % (0.2) % Foreign currency (gain) loss (7) 5 (12) NM (0.3) % 0.2 % Income before income taxes 490 454 36 7.9 % 17.7 % 17.8 % Provision for income taxes 63 35 28 80.0 % 2.3 % 1.4 % Net income 427 419 8 1.9 % Less: Net income attributable to noncontrolling interest 2 - 2 NM
Net income attributable to Capri
$ 6 1.4 % NM Not meaningful Total Revenue Total revenue increased$219 million , or 8.6%, to$2.772 billion for the six months endedOctober 1, 2022 , compared to$2.553 billion for the six months endedSeptember 25, 2021 , which included net unfavorable foreign currency effects of approximately$199 million , as a result of the strengthening of theU.S. dollar compared to all major currencies in which we operate for the six months endedOctober 1, 2022 . On a constant currency basis, our total revenue increased$418 million , or 16.4%. The increase is attributable to increased retail and wholesale revenues throughout theAmericas and EMEA, partially offset by decreased revenues inGreater China due to COVID-19 related disruptions for each of our brands. Gross Profit Gross profit increased$112 million , or 6.4%, to$1.852 billion for the six months endedOctober 1, 2022 , compared to$1.740 billion for the six months endedSeptember 25, 2021 , which included net unfavorable foreign currency effects of$141 million . Gross profit as a percentage of total revenue was 66.8% for the six months endedOctober 1, 2022 , compared to 68.2% for the six months endedSeptember 25, 2021 . The decrease in gross profit margin was primarily attributable to increased supply chain costs and unfavorable channel mix for the six months endedOctober 1, 2022 , as compared to the six months endedSeptember 25, 2021 . 41 --------------------------------------------------------------------------------
Total Operating Expenses
Total operating expenses increased$82 million , or 6.4%, to$1.369 billion for the six months endedOctober 1, 2022 , compared to$1.287 billion for the six months endedSeptember 25, 2021 . Our operating expenses included a net favorable foreign currency impact of approximately$112 million . Total operating expenses decreased to 49.4% as a percentage of total revenue for the six months endedOctober 1, 2022 , compared to 50.4% for the six months endedSeptember 25, 2021 . The components that comprise total operating expenses are explained below.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased$120 million , or 10.5%, to$1.264 billion for the six months endedOctober 1, 2022 , compared to$1.144 billion for the six months endedSeptember 25, 2021 , primarily due to increased e-commerce costs on higher revenue, higher retail store and corporate costs and increased marketing investments for the six months endedOctober 1, 2022 . Selling, general and administrative expenses as a percentage of total revenue increased to 45.6% for the six months endedOctober 1, 2022 , compared to 44.8% for the six months endedSeptember 25, 2021 , primarily due to increased e-commerce costs partially offset by leveraging retail store costs as a percentage of revenue for the six months endedOctober 1, 2022 , as compared to the six months endedSeptember 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$29 million , or 33.7%, to$115 million for the six months endedOctober 1, 2022 as compared to$86 million for the six months endedSeptember 25, 2021 , primarily due to an increase in costs related to the ongoing ERP system implementation and Capri transformation projects.
Depreciation and Amortization
Depreciation and amortization decreased$11 million , or 11.1%, to$88 million for the six months endedOctober 1, 2022 , compared to$99 million for the six months endedSeptember 25, 2021 . Depreciation and amortization decreased to 3.2% as a percentage of total revenue for the six months endedOctober 1, 2022 , compared to 3.9% for the six months endedSeptember 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 six months endedOctober 1, 2022 andSeptember 25, 2021 , we recognized asset impairment charges of$11 million and$33 million , respectively, which 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$6 million and$11 million for the six months endedOctober 1, 2022 andSeptember 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 increased$30 million , to$483 million for the six months endedOctober 1, 2022 , compared to$453 million for the six months endedSeptember 25, 2021 . Income from operations as a percentage of total revenue decreased to 17.4% for the six months endedOctober 1, 2022 , compared to 17.7% for the six months endedSeptember 25, 2021 . See Segment Information above for a reconciliation of our segment operating income to total operating income.
Interest Expense (Income), net
For the six months endedOctober 1, 2022 , we recognized$1 million of interest expense compared to$4 million of interest income for the six months endedSeptember 25, 2021 . The$5 million increase in interest expense (income), net, is primarily due to higher effective interest rates on our outstanding debt and higher average borrowings outstanding, partially 42 --------------------------------------------------------------------------------
offset by higher interest income earned on our cash and cash equivalents (see Note 9 to the accompanying consolidated financial statements for additional information).
Foreign Currency (Gain) Loss
For the six months endedOctober 1, 2022 , we recognized a net foreign currency gain of$7 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 six months endedSeptember 25, 2021 , we recognized a net foreign currency loss of$5 million , primarily attributable to the revaluation and settlement of certain of our accounts payable in currencies other than the functional currency, as well as the remeasurement of dollar-denominated intercompany loans with certain of our subsidiaries. Provision for Income Taxes For the six months endedOctober 1, 2022 , we recognized$63 million of income tax expense compared to$35 million for the six months endedSeptember 25, 2021 . Our effective tax rate was 12.9% and 7.7% for the six months endedOctober 1, 2022 andSeptember 25, 2021 , respectively. The increase in our effective rate was primarily due to a net benefit recognized in the prior year due to newly enacted tax legislation inItaly , partially offset by the impact of the tax rate change in theUnited Kingdom during the prior year. Our effective tax rate may fluctuate from time to time due to the effects of changes inUnited 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 increased
Segment Information
Versace
Six Months Ended % Change
October 1, September 25, As Constant
(dollars in millions) 2022 2021 $ Change Reported Currency
Revenues $ 583 $ 522 $ 61 11.7 % 28.5 %
Income from operations $ 114 $ 103 $ 11 10.7 %
Operating margin 19.6 % 19.7 %
Revenues
Versace revenues increased $61 million , or 11.7%, to $583 million for the six
months ended October 1, 2022 , compared to $522 million for the six months ended
September 25, 2021 , which included unfavorable foreign currency effects of $88
million . On a constant currency basis, revenue increased $149 million , or 28.5%,
primarily attributable to increased retail revenue and higher 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 six months endedOctober 1, 2022 , Versace recorded income from operations of$114 million , compared to$103 million for the six months endedSeptember 25, 2021 . Operating margin decreased from 19.7% for the six months endedSeptember 25, 2021 , to 19.6% for the six months endedOctober 1, 2022 , primarily due to unfavorable channel mix offset by higher average unit price. 43 --------------------------------------------------------------------------------
Jimmy Choo
Six Months Ended % Change
October 1, September 25, As Constant
(dollars in millions) 2022 2021 $ Change Reported Currency
Revenues $ 314 $ 279 $ 35 12.5 % 22.9 %
Income from operations $ 27 $ 12 $ 15 NM
Operating margin 8.6 % 4.3 %
NM Not meaningful
Revenues
Jimmy Choo revenues increased $35 million , or 12.5%, to $314 million for the six
months ended October 1, 2022 , compared to $279 million for the six months ended
September 25, 2021 , which included unfavorable foreign currency effects of $29
million . On a constant currency basis, revenue increased $64 million , or 22.9%,
primarily attributable to increased retail revenue and higher 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 six months ended
Michael Kors
Six Months Ended % Change
October 1, September 25, As Constant
(dollars in millions) 2022 2021 $ Change Reported Currency
Revenues $ 1,875 $ 1,752 $ 123 7.0 % 11.7 %
Income from operations $ 470 $ 460 $ 10 2.2 %
Operating margin 25.1 % 26.3 %
Revenues
Michael Kors revenues increased $123 million , or 7.0%, to $1.875 billion for
the six months ended October 1, 2022 , compared to $1.752 billion for the six
months ended September 25, 2021 , which included unfavorable foreign currency
effects of $82 million . On a constant currency basis, revenue increased $205
million , or 11.7%, 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 six months endedOctober 1, 2022 , Michael Kors recorded income from operations of$470 million , compared to$460 million for the six months endedSeptember 25, 2021 . Operating margin decreased from 26.3% for the six months endedSeptember 25, 2021 , to 25.1% for the six months endedOctober 1, 2022 , primarily due to increased supply chain costs. 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$86 million on capital expenditures during the six months endedOctober 1, 2022 . The following table sets forth key indicators of our liquidity and capital resources (in millions): As of October 1, April 2, 2022 2022 Balance Sheet Data: Cash and cash equivalents$ 215 $ 169 Working capital$ 807 $ 325 Total assets$ 7,202 $ 7,480 Short-term debt$ 15 $ 29 Long-term debt$ 1,585 $ 1,131 Six Months Ended October 1, September 25, 2022 2021
Cash Flows Provided By (Used In):
Operating activities $ 39 $ 396
Investing activities $ 323 $ (48)
Financing activities $ (209) $ (342)
Effect of exchange rate changes $ (106) $ (3)
Net increase in cash and cash equivalents $ 47 $ 3
Cash Provided by Operating Activities
Net cash provided by operating activities decreased$357 million to$39 million during the six months endedOctober 1, 2022 , as compared to$396 million for the six months endedSeptember 25, 2021 , as a result of a decrease in our net income after non-cash adjustments and decreases related to changes in our working capital. The decreases related to the changes in our working capital are primarily attributable to fluctuations in the timing of payments and receipts when compared to the prior year.
Cash Provided by (Used in) Investing Activities
Net cash provided by investing activities was$323 million during the six months endedOctober 1, 2022 , as compared to net cash used in investing activities of$48 million during the six months endedSeptember 25, 2021 . The increase in net cash provided by investing activities were primarily attributable to the settlement of certain net investment hedges of$409 million during the six months endedOctober 1, 2022 partially offset by higher capital expenditures of$38 million compared to prior year.
Cash Used in Financing Activities
Net cash used in financing activities was$209 million during the six months endedOctober 1, 2022 , as compared to$342 million during the six months endedSeptember 25, 2021 . The decrease of cash used in financing activities of$133 million was primarily attributable to an increase in net debt borrowing of$653 million , partially offset by a$503 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
As of
October 1, April 2,
2022 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) 1,126 175
Letter of credit outstanding 22 21
Remaining availability $ 352 $ 804
Term Loan Facility ($1.6 billion )
Borrowings outstanding, net of debt issuance costs (3) $
-
Senior Notes due 2024 Borrowings outstanding, net of debt issuance costs and discount amortization (2)$ 448 $ 448 Other Borrowings (4)$ 26 $ 42 Hong Kong Uncommitted Credit Facility: Total availability (100 million and80 million Hong Kong Dollars ) (5)$ 13 $ 10 Borrowings outstanding - -
Remaining availability (100 million and
$
13
China Uncommitted Credit Facility: Total availability (75 million and 45 million Chinese Yuan) (5)$ 11 $ 7 Borrowings outstanding - -
Total and remaining availability (75 million and 45 million Chinese Yuan)
$
11
Japan Credit Facility: Total availability (1.0 billion Japanese Yen ) $ 7$ 8 Borrowings outstanding - - Remaining availability (1.0 billion Japanese Yen ) $
7
Versace Uncommitted Credit Facilities: Total availability (48 million Euro ) (5)$ 47 $ 52 Borrowings outstanding - - Remaining availability (48 million Euro ) $
47
Total borrowings outstanding (1)$ 1,600 $ 1,160 Total remaining availability$ 430 $ 881 (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 ofOctober 1, 2022 andApril 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 ofOctober 1, 2022 andApril 2, 2022 , all amounts are recorded as long-term debt in our consolidated balance sheets. (3)As ofOctober 1, 2022 , we no longer had a Term Loan Facility under our 2022 Credit Facility as it was fully repaid. As ofApril 2, 2022 , all amounts are recorded as long-term debt in our consolidated balance sheets. 46 -------------------------------------------------------------------------------- (4)The balance as ofOctober 1, 2022 consists of$14 million related to our supplier financing program recorded within short-term debt in our consolidated balance sheets,$10 million related to the sale of certain Versace tax receivables, with$1 million and$9 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 ofApril 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. (5)The balance as ofOctober 1, 2022 andApril 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 ofOctober 1, 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 six
months ended
Six Months Ended
October 1, September 25,
2022 2021
Cost of shares repurchased under share repurchase program $ 650 $ 150
Fair value of shares withheld to cover tax obligations for vested restricted share awards
13 10
Total cost of ordinary shares repurchased $ 663 $ 160
Shares repurchased under share repurchase program 13,183,355 2,712,275
Shares withheld to cover tax withholding obligations 273,197 193,322
13,456,552 2,905,597
During the first quarter of Fiscal 2022, we reinstated our $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 , we announced that our Board of Directors had
terminated our existing $500 million share repurchase program (the "Prior
Plan"), with $250 million of availability remaining, and authorized a new share
repurchase program (the "Fiscal 2022 Plan") pursuant to which we may, from time
to time, repurchase up to $1.0 billion of our outstanding ordinary shares within
a period of two years from the effective date of the program.
On June 1, 2022 , we announced that our Board of Directors had terminated our
Fiscal 2022 Plan, with $500 million of availability remaining, and authorized a
new share repurchase program (the "Existing Share Repurchase Plan") pursuant to
which we may, from time to time, repurchase up to $1.0 billion of our
outstanding ordinary shares within period of two years from the effective date
of the program. 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.
Subsequent to October 1, 2022 , we purchased 2,295,845 shares for a total cost of
approximately $100 million , including commissions, under the Existing Share
Repurchase Plan pursuant to a Rule 10b5-1 trading plan. On November 9, 2022 , we
terminated the Existing Share Repurchase Plan and implemented a new share
repurchase plan. See Note 17 to the accompanying consolidated financial
statements for additional information.
47
--------------------------------------------------------------------------------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 ofApril 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$34 million atOctober 1, 2022 , including$12 million in letters of credit issued outside of the 2022 Credit Facility. In addition, as ofOctober 1, 2022 , bank guarantees of approximately$32 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.
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