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.
The interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and include the accounts of the Company and its wholly-owned or controlled subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The interim consolidated financial statements as of December 31, 2022 and for the three and nine months ended December 31, 2022 and December 25, 2021 are unaudited. The Company consolidates the results of its Versace business on a one-month lag, as consistent with prior periods. In addition, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The interim consolidated financial statements reflect all normal and recurring adjustments, which are, in the opinion of management, necessary for a fair presentation in conformity with U.S. GAAP. The interim consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended April 2, 2022, as filed with the Securities and Exchange Commission on June 1, 2022, in the Company’s Annual Report on Form 10-K. The results of operations for the interim periods should not be considered indicative of results to be expected for the full fiscal year.
The Company utilizes a 52- to 53-week fiscal year and the term “Fiscal Year” or “Fiscal” refers to that 52- or 53-week period. The results for the three and nine months ended December 31, 2022 and December 25, 2021 are based on 13-week and 39-week periods, respectively. The Company’s Fiscal Year 2023 is a 52-week period ending April 1, 2023.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to use judgment and make estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The level of uncertainty in estimates and assumptions increases with the length of time until the underlying transactions are completed. The most significant assumptions and estimates involved in preparing the financial statements include allowances for customer deductions, sales returns, sales discounts, credit losses, estimates of inventory net realizable value, the valuation of share-based compensation, the valuation of deferred taxes, goodwill, intangible assets, operating lease right-of-use assets and property and equipment, along with the estimated useful lives assigned to these assets. Actual results could differ from those estimates.
Seasonality
The Company experiences certain effects of seasonality with respect to its business. The Company generally experiences greater sales during its third fiscal quarter, primarily driven by holiday season sales, and the lowest sales during its first fiscal quarter.
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.
A reconciliation of cash, cash equivalents and restricted cash as of December 31, 2022 and April 2, 2022 from the consolidated balance sheets to the consolidated statements of cash flows is as follows (in millions):
| | | | | | | | | | | |
| | December 31,
2022 | | April 2,
2022 |
| Reconciliation of cash, cash equivalents and restricted cash | | | |
| Cash and cash equivalents | $ | 281 | | | $ | 169 | |
| Restricted cash included within prepaid expenses and other current assets | 3 | | | 3 | |
| Total cash, cash equivalents and restricted cash shown on the consolidated statements of cash flows | $ | 284 | | | $ | 172 | |
Inventories, net
Inventories primarily consist of finished goods with the exception of raw materials and work in process inventory. The combined total of raw materials and work in process inventory, net, recorded on the Company’s consolidated balance sheets was $46 million and $31 million as of December 31, 2022 and April 2, 2022, respectively.
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
statements of operations and comprehensive income. Upon discontinuation of a hedge, all previously recognized amounts remain in CTA until the net investment is sold, diluted or liquidated.
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.
The following table presents the Company’s supplemental cash flow information related to leases (in millions): | | | | | | | | | | | | | | | | | | | | |
| | | | 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 | | $ | 373 | | | $ | 413 | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
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.
Net Income per Share
The Company’s basic net income per ordinary share is calculated by dividing net income by the weighted average number of ordinary shares outstanding during the period. Diluted net income per ordinary share reflects the potential dilution that would occur if share option grants or any other potentially dilutive instruments, including restricted shares and restricted share units (“RSUs”), were exercised or converted into ordinary shares. These potentially dilutive securities are included in diluted shares to the extent they are dilutive under the treasury stock method for the applicable periods. Performance-based RSUs are included as diluted shares if the related performance conditions are considered satisfied as of the end of the reporting period and to the extent they are dilutive under the treasury stock method.
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 | $ | 225 | | | $ | 322 | | | $ | 650 | | | $ | 741 | |
| Denominator: | | | | | | | |
| Basic weighted average shares | 128,849,793 | | | 149,717,485 | | | 135,600,276 | | | 150,975,773 | |
| Weighted average dilutive share equivalents: | | | | | | | |
Share options and restricted shares/units, and performance restricted share units | 1,515,126 | | | 2,657,809 | | | 1,449,883 | | | 2,858,347 | |
| Diluted weighted average shares | 130,364,919 | | | 152,375,294 | | | 137,050,159 | | | 153,834,120 | |
| | | | | | | |
Basic net income per share (1) | $ | 1.74 | | | $ | 2.15 | | | $ | 4.79 | | | $ | 4.91 | |
Diluted net income per share (1) | $ | 1.72 | | | $ | 2.11 | | | $ | 4.74 | | | $ | 4.82 | |
(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
Supplier Finance Programs
In September 2022, the FASB issued ASU 2022-04, “Disclosure of Supplier Finance Program Obligations” which makes a number of changes. The amendments require a buyer in a supplier finance program to disclose sufficient information about the program to allow a user of financial statements to understand the program’s nature, activity during the period, changes from period to period and potential magnitude. The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for the amendment on roll forward information, which is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. The Company is currently evaluating the impact of adopting this standard on the Company's disclosures.
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.
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.
The Company recognizes royalty revenue and advertising contributions based on the percentage of sales made by the licensees. Generally, the Company’s guaranteed minimum royalty amounts due from licensees relate to contractual periods that do not exceed 12 months, however, certain guaranteed minimums for Versace are multi-year based.
As of December 31, 2022, contractually guaranteed minimum fees from the Company’s license agreements expected to be recognized as revenue during future periods were as follows (in millions): | | | | | |
| Contractually Guaranteed Minimum Fees |
|
| Remainder of Fiscal 2023 | $ | 8 | |
| Fiscal 2024 | 31 | |
| Fiscal 2025 | 31 | |
| Fiscal 2026 | 28 | |
| Fiscal 2027 | 24 | |
| Fiscal 2028 and thereafter | 44 | |
| Total | $ | 166 | |
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 material contract assets recorded as of December 31, 2022 and April 2, 2022.
There were no changes in historical variable consideration estimates that were materially different from actual results.
Disaggregation of Revenue
The following table presents the Company’s segment revenue disaggregated by geographic location (in millions): | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | December 31,
2022 | | December 25,
2021 | | December 31,
2022 | | December 25,
2021 |
| Versace revenue - the Americas | $ | 85 | | | $ | 89 | | | $ | 320 | | | $ | 283 | |
| Versace revenue - EMEA | 113 | | | 99 | | | 350 | | | 304 | |
| Versace revenue - Asia | 51 | | | 63 | | | 162 | | | 186 | |
| Total Versace | 249 | | | 251 | | | 832 | | | 773 | |
| | | | | | | |
| Jimmy Choo revenue - the Americas | 54 | | | 51 | | | 151 | | | 127 | |
| Jimmy Choo revenue - EMEA | 70 | | | 69 | | | 193 | | | 175 | |
| Jimmy Choo revenue - Asia | 44 | | | 58 | | | 138 | | | 155 | |
| Total Jimmy Choo | 168 | | | 178 | | | 482 | | | 457 | |
| | | | | | | |
| Michael Kors revenue - the Americas | 777 | | | 814 | | | 2,045 | | | 1,960 | |
| Michael Kors revenue - EMEA | 212 | | | 237 | | | 616 | | | 616 | |
| Michael Kors revenue - Asia | 106 | | | 129 | | | 309 | | | 356 | |
| Total Michael Kors | 1,095 | | | 1,180 | | | 2,970 | | | 2,932 | |
| | | | | | | |
| Total revenue - the Americas | 916 | | | 954 | | | 2,516 | | | 2,370 | |
| Total revenue - EMEA | 395 | | | 405 | | | 1,159 | | | 1,095 | |
| Total revenue - Asia | 201 | | | 250 | | | 609 | | | 697 | |
| Total revenue | $ | 1,512 | | | $ | 1,609 | | | $ | 4,284 | | | $ | 4,162 | |
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) | $ | 405 | | | $ | 461 | |
| Receivables due from licensees | 23 | | | 17 | |
| 428 | | | 478 | |
| Less: allowances | (56) | | | (44) | |
| Total receivables, net | $ | 372 | | | $ | 434 | |
(1)As of December 31, 2022 and April 2, 2022, $92 million and $83 million, respectively, of trade receivables were insured.
Receivables are presented net of allowances for discounts, markdowns, operational chargebacks and credit losses. Discounts are based on open invoices where trade discounts have been extended to customers. Markdowns are based on wholesale customers’ sales performance, seasonal negotiations with customers, historical deduction trends and an evaluation of current market conditions. Operational chargebacks are based on deductions taken by customers, net of expected recoveries. Such provisions, and related recoveries, are reflected in revenues.
The Company’s allowance for credit losses is determined through analysis of periodic aging of receivables and assessments of collectibility based on an evaluation of historic and anticipated trends, the financial condition of the Company’s customers and the impact of general economic conditions. The past due status of a receivable is based on its contractual terms. Amounts deemed uncollectible are written off against the allowance when it is probable the amounts will not be recovered. Allowance for credit losses was $6 million and $10 million as of December 31, 2022 and April 2, 2022, respectively. The Company had immaterial credit losses for the three months ended December 31, 2022 and $2 million for the nine months ended December 31, 2022. The Company had $3 million of credit losses for the three months ended December 25, 2021 and $2 million for the nine months ended December 25, 2021.
5. Property and Equipment, net
Property and equipment, net, consists of (in millions): | | | | | | | | | | | |
| December 31,
2022 | | April 2,
2022 |
| Leasehold improvements | $ | 568 | | | $ | 575 | |
| Computer equipment and software | 224 | | | 212 | |
| Furniture and fixtures | 213 | | | 218 | |
| Equipment | 100 | | | 81 | |
| Building | 47 | | | 48 | |
| In-store shops | 41 | | | 47 | |
| Land | 18 | | | 19 | |
| Total property and equipment, gross | 1,211 | | | 1,200 | |
| Less: accumulated depreciation and amortization | (756) | | | (790) | |
| Subtotal | 455 | | | 410 | |
| Construction-in-progress | 91 | | | 66 | |
| Total property and equipment, net | $ | 546 | | | $ | 476 | |
Depreciation and amortization of property and equipment for the three and nine months ended December 31, 2022 was $32 million and $97 million, respectively. Depreciation and amortization of property and equipment was $34 million and $109 million for the three and nine months ended December 25, 2021, respectively. The Company recorded no property and equipment impairment charges for the three months ended December 31, 2022 and $2 million in property and equipment impairment charges for the nine months ended December 31, 2022. The Company recorded no property and equipment impairment charges for the three months ended December 25, 2021 and $3 million for the nine months ended December 25, 2021.
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 | $ | 400 | | | $ | 400 | |
| Trademarks | 23 | | | 23 | |
| | | |
Customer relationships (1) | 391 | | | 414 | |
| Gross definite-lived intangible assets | 814 | | | 837 | |
| Less: accumulated amortization | (256) | | | (228) | |
| Net definite-lived intangible assets | 558 | | | 609 | |
| | | |
| Indefinite-lived intangible assets: | | | |
Jimmy Choo brand (2) | 297 | | | 321 | |
Versace brand (1) | 888 | | | 917 | |
| Net indefinite-lived intangible assets | 1,185 | | | 1,238 | |
| | | |
| Total intangible assets, excluding goodwill | $ | 1,743 | | | $ | 1,847 | |
| | | |
Goodwill (3) | $ | 1,358 | | | $ | 1,418 | |
(1)The change in the carrying value since April 2, 2022 reflects the impact of foreign currency translation.
(2)Includes accumulated impairment of $249 million as of December 31, 2022 and April 2, 2022. The change in the carrying value since April 2, 2022 reflects the impact of foreign currency translation.
(3)Includes accumulated impairment of $265 million related to the Jimmy Choo reporting units as of December 31, 2022 and April 2, 2022. The change in the carrying value since April 2, 2022 reflects the impact of foreign currency translation.
Amortization expense for the Company’s definite-lived intangible assets for the three and nine months ended December 31, 2022 was $11 million and $34 million, respectively. Amortization expense for the Company’s definite-lived intangible assets for the three and nine months ended December 25, 2021 was $13 million and $37 million, respectively.
7. Current Assets and Current Liabilities
Prepaid expenses and other current assets consist of the following (in millions): | | | | | | | | | | | |
| December 31,
2022 | | April 2,
2022 |
| Prepaid taxes | $ | 162 | | | $ | 86 | |
| Prepaid contracts | 24 | | | 15 | |
| Other accounts receivables | 9 | | | 17 | |
| | | |
| Interest receivable related to net investment hedges | 3 | | | 13 | |
| Other | 45 | | | 61 | |
| Total prepaid expenses and other current assets | $ | 243 | | | $ | 192 | |
Accrued expenses and other current liabilities consist of the following (in millions): | | | | | | | | | | | |
| December 31,
2022 | | April 2,
2022 |
| Other taxes payable | $ | 81 | | | $ | 61 | |
| Return liabilities | 64 | | | 52 | |
| Accrued capital expenditures | 51 | | | 39 | |
| Accrued advertising and marketing | 32 | | | 21 | |
Accrued rent (1) | 21 | | | 20 | |
| Professional services | 19 | | | 15 | |
| Gift cards and retail store credits | 15 | | | 17 | |
| Accrued litigation | 11 | | | 13 | |
| Accrued interest | 8 | | | 10 | |
| Accrued purchases and samples | 7 | | | 11 | |
| | | |
| | | |
| | | |
| | | |
Charitable donations (2) | — | | | 10 | |
| Other | 104 | | | 82 | |
| Total accrued expenses and other current liabilities | $ | 413 | | | $ | 351 | |
(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
During the three and nine months ended December 31, 2022, the Company recorded costs of $5 million and $11 million, respectively, primarily related to equity awards associated with the acquisition of Versace. During the three and nine months ended December 25, 2021, the Company recorded costs of $4 million and $19 million, respectively, primarily related to equity awards associated with the acquisition of Versace.
9. Debt Obligations
The following table presents the Company’s debt obligations (in millions): | | | | | | | | | | | |
| December 31,
2022 | | April 2,
2022 |
| Revolving Credit Facilities | $ | 580 | | | $ | 175 | |
| Versace Term Loan | 482 | | | — | |
| Senior Notes due 2024 | 450 | | | 450 | |
| 2018 Term Loan | — | | | 497 | |
| Other | 31 | | | 42 | |
| Total debt | 1,543 | | | 1,164 | |
| Less: Unamortized debt issuance costs | 2 | | | 3 | |
| Less: Unamortized discount on senior notes | 1 | | | 1 | |
| Total carrying value of debt | 1,540 | | | 1,160 | |
| Less: Short-term debt | 19 | | | 29 | |
Total long-term debt | $ | 1,521 | | | $ | 1,131 | |
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.
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.
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.
Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
At December 31, 2022 and April 2, 2022, the fair values of the Company’s derivative contracts were determined using broker quotations, which were calculations derived from observable market information: the applicable currency rates at the balance sheet date and those forward rates particular to the contract at inception. The Company makes no adjustments to these broker obtained quotes or prices, but assesses the credit risk of the counterparty and would adjust the provided valuations for counterparty credit risk when appropriate. The fair values of the forward contracts are included in prepaid expenses and other current assets, and in accrued expenses and other current liabilities in the consolidated balance sheets, depending on whether they represent assets or liabilities to the Company. The fair value of net investment hedges is included in other assets, and in other long-term liabilities in the consolidated balance sheets, depending on whether they represent assets or liabilities of the Company. See Note 12 for further detail.
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 | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 4 | | | $ | — | |
| Net investment hedges | — | | | — | | | — | | | — | | | 44 | | | — | |
| Undesignated derivative contracts | — | | | — | | | — | | | — | | | 4 | | | — | |
| Total derivative assets | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 52 | | | $ | — | |
| | | | | | | | | | | |
| Derivative liabilities: | | | | | | | | | | | |
| | | | | | | | | | | |
| Net investment hedges | $ | — | | | $ | 41 | | | $ | — | | | $ | — | | | $ | 37 | | | $ | — | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Total derivative liabilities | $ | — | | | $ | 41 | | | $ | — | | | $ | — | | | $ | 37 | | | $ | — | |
The Company’s long-term debt obligations are recorded in its consolidated balance sheets at carrying values, which may differ from the related fair values. The fair value of the Company’s long-term debt is estimated using external pricing data, including any available quoted market prices and based on other debt instruments with similar characteristics. Borrowings under revolving credit agreements, if outstanding, are recorded at carrying value, which approximates fair value due to the frequent nature of such borrowings and repayments. See Note 9 for detailed information related to carrying values of the Company’s outstanding debt. The following table summarizes the carrying values and estimated fair values of the Company’s short- and long-term debt, based on Level 2 measurements (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | April 2, 2022 |
| Carrying
Value | | Estimated
Fair Value | | Carrying
Value | | Estimated
Fair Value |
| Revolving Credit Facilities | $ | 580 | | | $ | 580 | | | $ | 175 | | | $ | 175 | |
| Versace Term Loan | $ | 481 | | | $ | 481 | | | $ | — | | | $ | — | |
| Senior Notes due 2024 | $ | 448 | | | $ | 429 | | | $ | 448 | | | $ | 451 | |
| 2018 Term Loan | — | | | — | | | $ | 495 | | | $ | 490 | |
| | | | | | | |
The Company’s cash and cash equivalents, accounts receivable and accounts payable are recorded at carrying value, which approximates fair value.
Non-Financial Assets and Liabilities
The Company’s non-financial assets include goodwill, intangible assets, operating lease right-of-use assets and property and equipment. Such assets are reported at their carrying values and are not subject to recurring fair value measurements. The Company’s goodwill and its indefinite-lived intangible assets (Versace and Jimmy Choo brands) are assessed for impairment at least annually, while its other long-lived assets, including operating lease right-of-use assets, property and equipment and definite-lived intangible assets, are assessed for impairment whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable. The Company determines the fair values of these assets based on Level 3 measurements using the Company’s best estimates of the amount and timing of future discounted cash flows, based on historical experience, market conditions, current trends and performance expectations.
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 | $ | 2 | | | $ | 1 | | | $ | 1 | |
| $ | 27 | | | $ | 17 | | | $ | 10 | | | |
| Property and Equipment | — | | | — | | | — | | | 3 | | | 1 | | | 2 | | | |
| Total | $ | 2 | | | $ | 1 | | | $ | 1 | | | $ | 30 | | | $ | 18 | | | $ | 12 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | $ | 10 | | | $ | — | | | $ | 10 | |
| $ | 93 | | | $ | 53 | | | $ | 40 | | | |
| Property and Equipment | — | | | — | | | — | | | 4 | | | 1 | | | 3 | | | |
| Total | $ | 10 | | | $ | — | | | $ | 10 | | | $ | 97 | | | $ | 54 | | | $ | 43 | | | |
(1) Includes $10 million of impairment charges that were recorded within restructuring and other charges related to the Capri Retail Store Optimization Program for both the three and nine months ended December 25, 2021.
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.
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 | $ | 18 | | | $ | 119 | | | $ | — | | | $ | 4 | | (1) | $ | — | | | $ | — | | | |
| Designated net investment hedges | 1,364 | | | 4,194 | | | — | | | 44 | | (2) | 41 | | (3) | 37 | | (3) | |
| | | | | | | | | | | | | |
| Total designated hedges | 1,382 | | | 4,313 | | | — | | | 48 | | | 41 | | | 37 | | | |
Undesignated derivative contracts (4) | — | | | 38 | | | — | | | 4 | | | — | | | — | | | |
| Total | $ | 1,382 | | | $ | 4,351 | | | $ | — | | | $ | 52 | | | $ | 41 | | | $ | 37 | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
(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.
(4)Represents undesignated hedges of inventory purchases.
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 | $ | — | | | $ | 8 | | | $ | — | | | $ | 44 | | | | | |
Liabilities subject to master netting arrangements | $ | — | | | $ | — | | | $ | 41 | | | $ | 37 | | | | | |
| Derivative assets, net | $ | — | | | $ | 8 | | | $ | — | | | $ | 42 | | | | | |
| Derivative liabilities, net | $ | — | | | $ | — | | | $ | 41 | | | $ | 35 | | | | | |
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.
The following table summarizes the pre-tax impact of the gains on the Company’s designated forward foreign currency exchange contracts and net investment hedges (in millions): | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | $ | (3) | | | $ | 5 | | | $ | 8 | | | $ | 7 | |
| Designated net investment hedges | $ | (33) | | | $ | 155 | | | $ | 332 | | | $ | 327 | |
| Designated interest rate swaps | $ | — | | | $ | 1 | | | $ | — | | | $ | 1 | |
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 | $ | (3) | | | $ | — | | | 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 | $ | (10) | | | $ | 2 | | | 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 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.
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.
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 | $ | 184 | | | $ | 10 | | | $ | 194 | | | | | |
| Other comprehensive (loss) income before reclassifications | (87) | | | 8 | | | (79) | | | | | |
Less: amounts reclassified from AOCI to earnings | — | | | 10 | | | 10 | | | | | |
| Other comprehensive (loss) income, net of tax | (87) | | | (2) | | | (89) | | | | | |
| Balance at December 31, 2022 | $ | 97 | | | $ | 8 | | | $ | 105 | | | | | |
| | | | | | | | | |
| Balance at March 27, 2021 | $ | 57 | | | $ | (1) | | | $ | 56 | | | | | |
| Other comprehensive income before reclassifications | 148 | | | 7 | | | 155 | | | | | |
Less: amounts reclassified from AOCI to earnings | — | | | (2) | | | (2) | | | | | |
| Other comprehensive income, net of tax | 148 | | | 9 | | | 157 | | | | | |
| Balance at December 25, 2021 | $ | 205 | | | $ | 8 | | | $ | 213 | | | | | |
(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.
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.
The following table summarizes the Company’s share-based compensation activity during the nine months ended December 31, 2022: | | | | | | | | | | | | | | | | | | | |
| | Options | | | | Service-Based RSUs | | Performance-Based RSUs |
Outstanding/Unvested at April 2, 2022 | 355,448 | | | | | 3,827,700 | | | 210,192 | |
| Granted | — | | | | | 1,783,479 | | | 152,921 | |
| Exercised/Vested | (120,873) | | | | | (1,527,843) | | | (197,874) | |
| | | | | | | |
| Canceled/Forfeited | (4,900) | | | | | (395,951) | | | — | |
Outstanding/Unvested at December 31, 2022 | 229,675 | | | | | 3,687,385 | | | 165,239 | |
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 | $ | 16 | | | $ | 13 | | | $ | 60 | | | $ | 69 | |
| Tax benefit related to share-based compensation expense | $ | 2 | | | $ | 1 | | | $ | 9 | | | $ | 12 | |
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
The Company’s effective tax rate for the three and nine months ended December 31, 2022 was 1.3% and 9.2%, respectively. For both periods, such rates differ from the United Kingdom (“U.K.”) federal statutory rate of 19% primarily due to the impact of global financing activities and the release of a valuation allowance on UK deferred tax assets.
The Company’s effective tax rate for the three and nine months ended December 25, 2021 was 5.6% and 6.8%, respectively. Such rates differ from the United Kingdom (“U.K.”) federal statutory rate of 19% primarily due to the favorable effect of a net operating loss carryback claim made in the United States as a result of COVID-19 related losses generated in the prior fiscal year and the impact of global financing activities partially offset by the increases in uncertain tax positions during the three and nine months ended December 25, 2021. The tax rate for the nine months ended December 25, 2021 also benefited from enacted tax legislation in Italy which allowed the Company to reduce its deferred tax liabilities by allowing a step up of certain intangible assets resulting in lower future cash taxes partially offset by the impact of tax rate changes in the United Kingdom on the Company’s net deferred tax liabilities.
The global financing activities are related to the Company’s 2014 move of its principal executive office from Hong Kong to the U.K. and decision to become a U.K. tax resident. In connection with this decision, the Company funded its international growth strategy through intercompany debt financing arrangements. These debt financing arrangements reside between certain of our U.S., U.K. and Hungarian subsidiaries. Due to the difference in the statutory income tax rates between these jurisdictions, the Company realized lower effective tax rates for the three and nine months ended December 31, 2022.
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.
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 | $ | 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.
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 | $ | 12 | | | $ | 13 | | | $ | 36 | | | $ | 39 | |
| Jimmy Choo | 7 | | | 8 | | | 21 | | | 23 | |
| Michael Kors | 22 | | | 26 | | | 70 | | | 84 | |
| Corporate | 2 | | | — | | | 4 | | | — | |
| Total depreciation and amortization | $ | 43 | | | $ | 47 | | | $ | 131 | | | $ | 146 | |
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) | $ | 916 | | | $ | 954 | | | $ | 2,516 | | | $ | 2,370 | |
| EMEA | 395 | | | 405 | | | 1,159 | | | 1,095 | |
| Asia | 201 | | | 250 | | | 609 | | | 697 | |
| Total revenue | $ | 1,512 | | | $ | 1,609 | | | $ | 4,284 | | | $ | 4,162 | |
(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.