10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 27, 2014

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 001-35368

 

 

Michael Kors Holdings Limited

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

British Virgin Islands   N/A

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

33 Kingsway

London, United Kingdom

WC2B 6UF

(Address of Principal Executive Offices)

(Registrant’s telephone number, including area code: 44 79 6437 8613

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange on which Registered

Ordinary Shares, no par value   New York Stock Exchange

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

As of February 2, 2015, Michael Kors Holdings Limited had 200,755,876 ordinary shares outstanding.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

         Page
No.
 
  PART I FINANCIAL INFORMATION   

Item 1.

 

Financial Statements

     3   
 

Condensed Consolidated Balance Sheets (unaudited) as of December 27, 2014 and March 29, 2014

     3   
 

Condensed Consolidated Statements Operations and Comprehensive Income (unaudited) for the three and nine months ended December 27, 2014 and December 28, 2013

     4   
 

Condensed Consolidated Statements of Shareholders’ Equity (unaudited) for the nine months ended December 27, 2014

     5   
 

Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended December 27, 2014 and December 28, 2013

     6   
 

Notes to Condensed Consolidated Financial Statements (unaudited)

     7   

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     21   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     36   

Item 4.

 

Controls and Procedures

     37   
  PART II OTHER INFORMATION   

Item 1.

 

Legal Proceedings

     37   

Item 1A.

 

Risk Factors

     37   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     38   

Item 6.

 

Exhibits

     38   

Signatures

     39   

 

EX 31.1
EX 31.2
EX 32.1
EX 32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

 

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MICHAEL KORS HOLDINGS LIMITED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

 

     December 27,
2014
    March 29,
2014
 
Assets     

Current assets

    

Cash and cash equivalents

   $ 949,846      $ 955,145   

Receivables, net

     364,070        314,055   

Inventories

     537,501        426,938   

Deferred tax assets

     21,555        30,539   

Prepaid expenses and other current assets

     110,347        50,492   
  

 

 

   

 

 

 

Total current assets

     1,983,319        1,777,169   

Property and equipment, net

     532,304        350,678   

Intangible assets, net

     63,644        48,034   

Goodwill

     14,005        14,005   

Deferred tax assets

     3,740        3,662   

Other assets

     33,576        23,425   
  

 

 

   

 

 

 

Total assets

   $ 2,630,588      $ 2,216,973   
  

 

 

   

 

 

 
Liabilities and Shareholders’ Equity     

Current liabilities

    

Accounts payable

   $ 175,197      $ 131,953   

Accrued payroll and payroll related expenses

     50,642        54,703   

Accrued income taxes

     29,757        47,385   

Accrued expenses and other current liabilities

     105,726        74,329   
  

 

 

   

 

 

 

Total current liabilities

     361,322        308,370   

Deferred rent

     94,926        76,785   

Deferred tax liabilities

     145        5,887   

Other long-term liabilities

     22,710        19,800   
  

 

 

   

 

 

 

Total liabilities

     479,103        410,842   

Commitments and contingencies

    

Shareholders’ equity

    

Ordinary shares, no par value; 650,000,000 shares authorized, and 201,029,249 shares issued and outstanding at December 27, 2014, and 204,291,345 shares issued and outstanding at March 29, 2014

     —          —     

Treasury shares, at cost (5,139,365 shares at December 27, 2014, and 29,765 at March 29, 2014)

     (405,702     (2,447

Additional paid-in capital

     610,938        527,213   

Accumulated other comprehensive loss

     (39,870     (6,373

Retained earnings

     1,986,119        1,287,738   
  

 

 

   

 

 

 

Total shareholders’ equity

     2,151,485        1,806,131   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 2,630,588      $ 2,216,973   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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MICHAEL KORS HOLDINGS LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(In thousands, except share and per share data)

(Unaudited)

 

     Three Months Ended     Nine Months Ended  
     December 27,
2014
    December 28,
2013
    December 27,
2014
    December 28,
2013
 

Net sales

   $ 1,263,226      $ 964,787      $ 3,159,932      $ 2,288,479   

Licensing revenue

     51,500        47,442        130,553        104,912   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     1,314,726        1,012,229        3,290,485        2,393,391   

Cost of goods sold

     514,583        392,731        1,273,682        926,747   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     800,143        619,498        2,016,803        1,466,644   

Selling, general and administrative expenses

     344,174        254,603        915,443        648,695   

Depreciation and amortization

     37,492        21,655        100,554        55,687   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     381,666        276,258        1,015,997        704,382   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     418,477        343,240        1,000,806        762,262   

Other expense (income)

     150        —          (1,396     —     

Interest expense, net

     116        109        147        409   

Foreign currency loss

     1,201        3        4,946        279   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     417,010        343,128        997,109        761,574   

Provision for income taxes

     113,335        113,485        298,728        261,127   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 303,675      $ 229,643      $ 698,381      $ 500,447   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average ordinary shares outstanding:

        

Basic

     202,668,541        203,175,380        203,627,688        202,314,813   

Diluted

     205,647,816        206,088,062        206,752,103        205,192,959   

Net income per ordinary share:

        

Basic

   $ 1.50      $ 1.13      $ 3.43      $ 2.47   

Diluted

   $ 1.48      $ 1.11      $ 3.38      $ 2.44   

Statements of Comprehensive Income:

        

Net income

   $ 303,675      $ 229,643      $ 698,381      $ 500,447   

Foreign currency translation adjustments

     (22,220     (1,745     (46,824     3,228   

Net realized and unrealized gains (losses) on derivatives

     2,769        (496     13,327        (3,709
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 284,224      $ 227,402      $ 664,884      $ 499,966   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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MICHAEL KORS HOLDINGS LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(In thousands, except share data)

(Unaudited)

 

                         Accumulated               
            Additional            Other               
     Ordinary Shares      Paid-in      Treasury     Comprehensive     Retained         
     Shares     Amounts      Capital      Shares     Loss     Earnings      Total  

Balance at March 29, 2014

     204,261,580      $ —         $ 527,213       $ (2,447   $ (6,373   $ 1,287,738       $ 1,806,131   

Net income

     —          —           —           —          —          698,381         698,381   

Foreign currency translation adjustment

     —          —           —           —          (46,824     —           (46,824

Net unrealized gain on derivatives (net of taxes of $1.7 million)

     —          —           —           —          13,327        —           13,327   
                 

 

 

 

Total comprehensive income

     —          —           —           —          —          —           664,884   

Issuance of restricted shares

     415,162        —           —           —          —          —           —     

Exercise of employee share options

     1,462,107        —           10,060         —          —          —           10,060   

Equity compensation expense

     —          —           33,445         —          —          —           33,445   

Tax benefits on exercise of share options

     —          —           40,220         —          —          —           40,220   

Purchase of Treasury Shares

     (5,109,600     —           —           (403,255     —          —           (403,255
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Balance at December 27, 2014

     201,029,249      $ —         $ 610,938       $ (405,702   $ (39,870   $ 1,986,119       $ 2,151,485   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

See accompanying notes to consolidated financial statements.

 

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MICHAEL KORS HOLDINGS LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

     Nine Months Ended  
     December 27,
2014
    December 28,
2013
 

Cash flows from operating activities

    

Net income

   $ 698,381      $ 500,447   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     100,554        55,687   

Loss on disposal of fixed assets

     1,802        2,135   

Unrealized foreign exchange loss

     165        279   

Loss (income) earned on joint venture

     242        (125

Amortization of deferred financing costs

     560        560   

Amortization of deferred rent

     3,933        5,116   

Deferred income taxes

     (8,636     2,507   

Equity compensation expense

     33,445        20,919   

Tax benefits on exercise of share options

     (40,220     (44,731

Change in assets and liabilities:

    

Receivables, net

     (59,483     (83,994

Inventories

     (125,251     (162,230

Prepaid expenses and other current assets

     (42,340     (5,250

Other assets

     (8,993     (6,063

Accounts payable

     46,491        62,028   

Accrued expenses and other current liabilities

     52,118        84,824   

Other long-term liabilities

     19,297        17,734   
  

 

 

   

 

 

 

Net cash provided by operating activities

     672,065        449,843   
  

 

 

   

 

 

 

Cash flows from investing activities

    

Capital expenditures

     (282,733     (126,942

Investment in joint venture

     (2,940     —     

Purchase of intangible assets

     (26,150     (21,962
  

 

 

   

 

 

 

Net cash used in investing activities

     (311,823     (148,904
  

 

 

   

 

 

 

Cash flows from financing activities

    

Repayments of borrowings under revolving credit agreement

     —          (21,120

Borrowings under revolving credit agreement

     —          21,120   

Exercise of employee share options

     10,060        13,535   

Purchase of Treasury Shares

     (403,255     (2,447

Tax benefits on exercise of share options

     40,220        44,731   

Payment of deferred financing costs

     —          (176
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (352,975     55,643   
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (12,566     (752
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (5,299     355,830   

Beginning of period

     955,145        472,511   
  

 

 

   

 

 

 

End of period

   $ 949,846      $ 828,341   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information

    

Cash paid for interest

   $ 537      $ 513   

Cash paid for income taxes

   $ 315,608      $ 206,552   

Supplemental disclosure of noncash investing and financing activities

    

Accrued capital expenditures

   $ 25,790      $ 18,635   

See accompanying notes to consolidated financial statements.

 

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MICHAEL KORS HOLDINGS LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Business and Basis of Presentation

Michael Kors Holdings Limited (“MKHL,” and together with its subsidiaries, the “Company”) was incorporated in the British Virgin Islands (“BVI”) on December 13, 2002. The Company is a leading designer, marketer, distributor and retailer of branded women’s apparel and accessories and men’s apparel bearing the Michael Kors tradename and related trademarks “MICHAEL KORS,” “MICHAEL MICHAEL KORS,” and various other related trademarks and logos. The Company’s business consists of retail, wholesale and licensing segments. Retail operations consist of collection stores, lifestyle stores, including concessions and outlet stores located primarily in the United States, Canada, Europe and Japan. Wholesale revenues are principally derived from major department and specialty stores located throughout the United States, Canada and Europe. The Company licenses its trademarks on products such as fragrances, cosmetics, eyewear, leather goods, jewelry, watches, coats, men’s suits, swimwear, furs and ties.

The interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The consolidated financial statements as of December 27, 2014, and for the three and nine months ended December 27, 2014 and December 28, 2013, are unaudited. In addition, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. The interim financial statements reflect all normal and recurring adjustments, which are, in the opinion of management, necessary for a fair presentation in conformity with GAAP. The interim financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended March 29, 2014, as filed with the Securities and Exchange Commission on May 28, 2014, 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 ending on the Saturday closest to March 31. As such, the term “Fiscal Year” or “Fiscal” refers to the 52-week or 53-week period, ending on that day. The results for the three and nine months ended December 27, 2014 and December 28, 2013, are based on a 13-week and 39-week period, respectively.

2. Share Repurchase Program

On November 14, 2014, the Company entered into a $355.0 million accelerated share repurchase program (the “ASR program”) with a major financial institution (the “ASR Counterparty”) to repurchase the Company’s ordinary shares. Under the ASR program, the Company paid $355.0 million to the ASR Counterparty and received 4,437,516 of its ordinary shares from the ASR Counterparty, which represents 100 percent of the shares expected to be purchased pursuant to the ASR program, based on an initial share price determination. However, additional shares may be delivered to the Company by January 29, 2015 (the settlement date), subject to the provisions of the ASR program, should the share price decline from that price, limited to a stated share price “floor”, and would not require any additional cash outlay by the Company. The total number of shares to be repurchased/acquired will be determined on final settlement, with any additional shares reacquired being based generally on the volume-weighted average price of the Company’s ordinary shares, less a discount, during the repurchase period, subject to aforementioned price floor. The ASR program is accounted for as treasury stock repurchase transactions, reducing the weighted average number of basic and diluted ordinary shares outstanding by the 4,437,516 shares initially repurchased, and as a forward contract indexed to the Company’s own ordinary shares for the future settlement provisions. The forward contract is accounted for as an equity instrument. In addition to shares purchased under the ASR, the Company, through open market transactions, purchased an additional 631,297 shares, under its’ current share-repurchase program.

3. Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States 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

 

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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 and doubtful accounts, estimates of inventory recovery, the valuation of share-based compensation, valuation of deferred taxes and the estimated useful lives used for amortization and depreciation of intangible assets and property and equipment. Actual results could differ from those estimates.

Store Pre-opening Costs

Costs associated with the opening of new retail stores and start up activities are expensed as incurred.

Property and Equipment

Property and equipment is stated at cost less accumulated depreciation and amortization (carrying value). Depreciation is provided on a straight-line basis over the expected remaining useful lives of the related assets. Equipment, furniture and fixtures are depreciated over five to seven years, computer hardware and software are depreciated over three to five years, and in-store shops are amortized over three to four years. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated remaining useful lives of the related assets or remaining lease term. The Company includes all amortization and depreciation expense as a component of total operating expenses, as the underlying long-lived assets are not directly or indirectly related to bringing the Company’s products to their existing location and condition.

Derivative Financial Instruments

The Company uses forward 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 these transactions. The Company employs these forward currency contracts to hedge the Company’s cash flows, as they relate to foreign currency transactions, of which certain of these contracts are designated as hedges for accounting purposes, while others are undesignated hedges for hedge accounting purposes. These derivative instruments are recorded on the Company’s consolidated balance sheets at fair value, regardless of if they are designated or undesignated as hedges.

The Company designates the majority of these forward currency contracts as hedges for hedge accounting purposes which are related to the purchase of inventory. Accordingly, the effective portion of changes in the fair value for contracts entered into during the nine months ended December 27, 2014, designated as hedges, are recorded in equity as a component of accumulated other comprehensive income, and to cost of goods sold for any portion of those contracts deemed ineffective. The Company will continue to record changes in the fair value of hedge designated contracts in this manner until their maturity, where the unrealized gain or loss will be recognized into earnings in that period. For those contracts that are entered into that are not designated as hedges, changes in the fair value, as of each balance sheet date and upon maturity, are recorded in other income, within the Company’s consolidated statements of operations. During the nine months ended December 27, 2014, a gain of approximately $0.2 million related to the change in fair value of these contracts was recorded in other income. In addition, the net unrealized gain related to contracts designated as hedges for $13.3 million, was charged to equity as a component of accumulated other comprehensive income during the nine months ended December 27, 2014. For the nine months ended December 27, 2014, amounts related to the ineffectiveness of these contracts were de minimis. The following table details the fair value of these contracts as of December 27, 2014, and March 29, 2014 (in thousands):

 

     December 27,
2014
     March 29,
2014
 

Prepaid expenses and other current assets

   $ 13,892       $ 12   

Accrued expenses and other current liabilities

   $ (476    $ (1,875

The Company expects the entirety of these balances to be reclassified into earnings within the next twelve months, subject to changes in the fair value of these contracts up to such time the related purchase of the underlying hedged item is completed.

The Company is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. In attempts to mitigate counterparty credit risk, the Company 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. The notional amount of these contracts outstanding at December 27, 2014 was approximately $176.2 million, which was comprised predominately of those designated as hedges.

 

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Net Income Per Share

The Company’s basic net income per share excludes the dilutive effect of share options and units, as well as unvested restricted shares. It is based upon the weighted average number of ordinary shares outstanding during the period divided into net income.

Diluted net income per share reflects the potential dilution that would occur if share option grants or any other dilutive equity instruments were exercised or converted into ordinary shares. These equity instruments are included as potential dilutive securities to the extent they are dilutive under the treasury stock method for the applicable periods.

The components of the calculation of basic net income per ordinary share and diluted net income per ordinary share are as follows (in thousands except share and per share data):

 

     Three Months Ended      Nine Months Ended  
     December 27,
2014
     December 28,
2013
     December 27,
2014
     December 28,
2013
 

Numerator:

           

Net Income

   $ 303,675       $ 229,643       $ 698,381       $ 500,447   

Denominator:

           

Basic weighted average ordinary shares

     202,668,541        203,175,380        203,627,688        202,314,813  

Weighted average dilutive share equivalents:

           

Share options and restricted shares/units

     2,979,275        2,912,682        3,124,415        2,878,146  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted weighted average ordinary shares

  205,647,816     206,088,062     206,752,103     205,192,959  

Basic net income per ordinary share

$ 1.50    $ 1.13    $ 3.43    $ 2.47   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted net income per ordinary share

$ 1.48    $ 1.11    $ 3.38    $ 2.44   
  

 

 

    

 

 

    

 

 

    

 

 

 

Share equivalents for the three and nine months ended December 27, 2014 for 284,344 shares and 185,261 shares, respectively, have been excluded from the above calculation as they were anti-dilutive. Share equivalents for the three and nine months ended December 28, 2013 for 22,283 shares and 57,505 shares, respectively, have been excluded from the above calculation as they were anti-dilutive.

Recent Accounting Pronouncements—The Company has considered all new accounting pronouncements and, and with the exception of the below, has concluded that there are no new pronouncements that have a material impact on results of operations, financial condition, or cash flows, based on current information.

In May, 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers, which amends how an entity is currently required to recognize revenue from contracts with its customers. The ASU will replace the existing revenue recognition guidance in GAAP when it becomes effective for entities in January 2017. Early application is not permitted. The Company is currently evaluating the impact that ASU 2014-09 will have on its consolidated financial statements and related disclosures.

 

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4. Receivables, net

Receivables, net consist of (in thousands):

 

     December 27,
2014
    March 29,
2014
 

Trade receivables:

    

Credit risk assumed by factors/insured

   $ 317,559      $ 261,900   

Credit risk retained by Company

     116,415        109,094   

Receivables due from licensees

     37,291        11,302   
  

 

 

   

 

 

 
     471,265        382,296   

Less allowances:

     (107,195     (68,241
  

 

 

   

 

 

 
   $ 364,070      $ 314,055   
  

 

 

   

 

 

 

The Company has historically assigned a substantial portion of its trade receivables to factors in the United States and Europe whereby the factors assumed credit risk with respect to such receivables assigned. Under the factor agreements, factors bear the risk of loss from the financial inability of the customer to pay the trade receivable when due, up to such amounts as accepted by the factor; but not the risk of non-payment of such trade receivable for any other reason. Beginning in July 2012, the Company assumed responsibility for a large portion of previously factored accounts receivable balances the majority of which were insured at December 27, 2014. The Company provides an allowance for such non-payment risk at the time of sale, which is recorded as an offset to revenue.

Receivables are presented net of allowances for sales returns, discounts, markdowns, operational chargebacks and doubtful accounts. Sales returns are determined based on an evaluation of current market conditions and historical returns experience. Discounts are based on open invoices where trade discounts have been extended to customers. Markdowns are based on retail 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 net sales.

The allowance for doubtful accounts is determined through analysis of periodic aging of receivables for which credit risk is not assumed by the factors, or which are not covered under insurance, and assessments of collectability based on an evaluation of historic and anticipated trends, the financial conditions 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. Allowances for doubtful accounts were $1.1 million and $1.5 million, at December 27, 2014 and March 29, 2014, respectively.

 

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Table of Contents

5. Property and Equipment, net

Property and equipment, net consist of (in thousands):

 

     December 27,
2014
    March 29,
2014
 

Furniture and fixtures

   $ 149,405      $ 108,757   

Equipment

     70,719        31,683   

Computer equipment and software

     94,788        50,646   

In-store shops

     176,105        123,637   

Leasehold improvements

     271,773        216,451   
  

 

 

   

 

 

 
     762,790        531,174   

Less: accumulated depreciation and amortization

     (310,623     (234,381
  

 

 

   

 

 

 
     452,167        296,793   

Construction-in-progress

     80,137        53,885   
  

 

 

   

 

 

 
   $ 532,304      $ 350,678   
  

 

 

   

 

 

 

Depreciation and amortization of property and equipment for the three and nine months ended December 27, 2014, was $35.7 million and $95.2 million, respectively, and for the three and nine months ended December 28, 2013, was $20.7 million and $53.8 million, respectively.

6. Intangible Assets and Goodwill

The following table discloses the carrying values of intangible assets and goodwill (in thousands):

 

     December 27, 2014      March 29, 2014  
     Gross
Carrying
Amount
     Accumulated
Amortization
     Net      Gross
Carrying
Amount
     Accumulated
Amortization
     Net  

Trademarks

   $ 23,000       $ 13,707       $ 9,293       $ 23,000       $ 12,845       $ 10,155   

Lease Rights

     62,112         7,761         54,351         41,748         3,869         37,879   

Goodwill

     14,005         —           14,005         14,005         —           14,005   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 99,117       $ 21,468       $ 77,649       $ 78,753       $ 16,714       $ 62,039   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The trademarks relate to the Company’s brand name and are amortized over twenty years. Lease rights are amortized over the respective terms of the underlying lease. Amortization expense was $1.8 million and $5.3 million, respectively, for the three and nine months ended December 27, 2014, and $1.0 million and $1.9 million, respectively, for the three and nine months ended December 28, 2013.

Goodwill is not amortized but will be evaluated for impairment in the last quarter of Fiscal 2015, or whenever impairment indicators exist. There were no charges related to the impairment of goodwill in the periods presented.

 

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Table of Contents

Estimated amortization expense for each of the next five years is as follows (in thousands):

 

Remainder of Fiscal 2015

   $ 2,005   

Fiscal 2016

     9,825   

Fiscal 2017

     9,824   

Fiscal 2018

     9,790   

Fiscal 2019

     8,862   

Thereafter

     23,338   
  

 

 

 
   $ 63,644   
  

 

 

 

7. Credit Facilities

Senior Unsecured Revolving Credit Facility

On February 8, 2013, the Company entered into a senior unsecured credit facility (“2013 Credit Facility”). Pursuant to the agreement the 2013 Credit Facility provides for up to $200.0 million of borrowings, and expires on February 8, 2018. The agreement also provides for loans and letters of credit to the Company’s European subsidiaries of up to $100.0 million. The 2013 Credit Facility contains financial covenants such as requiring an adjusted leverage ratio of 3.5 to 1.0 (with the ratio being total consolidated indebtedness plus 8.0 times consolidated rent expense to EBITDA plus consolidated rent expense) and a fixed charge coverage ratio of 2.0 to 1.0 (with the ratio being EBITDA plus consolidated rent expense to the sum of fixed charges plus consolidated rent expense), restricts and limits additional indebtedness, and restricts the incurrence of additional liens and cash dividends. As of December 27, 2014, the Company was in compliance with all covenants related to this agreement.

Borrowings under the 2013 Credit Facility accrue interest at the rate per annum announced from time to time by the agent at a rate based on the rates applicable for deposits in the London interbank market for U.S. Dollars or the applicable currency in which the loans are made (the “Adjusted LIBOR”) plus an applicable margin. The applicable margin may range from 1.25% to 1.75%, and is based, or dependent upon, a particular threshold related to the adjusted leverage ratio calculated during the period of borrowing. The 2013 Credit Facility requires an annual facility fee of $0.1 million, and an annual commitment fee of 0.25% to 0.35% on the unused portion of the available credit under the facility.

As of December 27, 2014, there were no amounts outstanding under the 2013 Credit Facility, and there were no amounts borrowed during the nine months ended December 27, 2014. The amount available for future borrowings under this agreement was $188.6 million at December 27, 2014. At December 27, 2014, there were stand-by letters of credit of $11.4 million.

8. Commitments and Contingencies

In the ordinary course of business, the Company is party to various legal proceedings and claims. Although the outcome of such items cannot be determined with certainty, the Company’s management does not believe that the outcome of all pending legal proceedings in the aggregate will have a material adverse effect on its cash flow, results of operations or financial position.

9. Fair Value of Financial Instruments

Financial assets and liabilities are measured at fair value using a 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 developed based on market data obtained from independent sources. Unobservable inputs are inputs based on a company’s own assumptions about market participant assumptions developed 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.

 

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Table of Contents

Level 2 – Valuations based on quoted inputs other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly through corroboration with observable market data.

Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

The Company has historically entered into forward exchange contracts to hedge the foreign currency exposure for certain inventory purchases from its manufacturers in Europe and Asia, as well as commitments for certain services. The forward contracts that are used for these purposes mature in twelve months or less, consistent with the related planned purchases or services. The Company attempts to hedge the majority of its total anticipated European and Asian purchase and service contracts. Realized gains and losses applicable to derivatives used for inventory purchases are recognized in cost of sales, and those applicable to other services are recognized in selling, general and administrative expenses (see Note 3, Summary of Significant Accounting Policies- Derivative Financial Instruments, for further detail regarding hedge accounting treatment as it relates to gains and losses). At December 27, 2014, the fair value of the Company’s foreign currency forward contracts, the Company’s only derivatives, were valued using broker quotations which were calculations derived from observable market information: the applicable currency forward 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 does assess the credit risk of the counterparty and would adjust the provided valuations for counterparty credit risk when appropriate. The fair value 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. All contracts are categorized in Level 2 of the fair value hierarchy as shown in the following table:

 

     Total     Fair value at December 27, 2014, using:  
(In thousands)      Quoted prices in
active markets for
identical assets
(Level 1)
     Significant other
observable inputs
(Level 2)
    Significant
unobservable
inputs
(Level 3)
 

Foreign currency forward contracts- Euro to U.S. Dollar

   $ 13,604      $ —         $ 13,604      $ —     

Foreign currency forward contracts- Canadian Dollar to U.S. Dollar

     288        —           288        —     

Foreign currency forward contracts- U.S. Dollar to Euro

     (476     —           (476     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 13,416      $ —         $ 13,416      $ —     
  

 

 

   

 

 

    

 

 

   

 

 

 

The Company’s cash and cash equivalents, accounts receivable and accounts payable, are recorded at carrying value, which approximates fair value. Borrowings under the Credit Facility are recorded at face value as the fair value of the Credit Facility is synonymous with its recorded value as it is a short-term debt facility due to its revolving nature.

10. Other Comprehensive Income- Hedging Instruments

The Company designates certain forward currency exchange contracts as hedges for hedge accounting purposes (see Note 3, Summary of Significant Accounting Policies- Derivative Financial Instruments). The Company employs forward currency contracts to hedge the Company’s exposures, as they relate to certain forecasted inventory purchases in foreign currencies, and as such are regarded as cash flow hedges up to such time the forecasted transaction occurs.

Changes in the fair value of the effective portion of these contracts are recorded in equity as a component of accumulated other comprehensive income, as of each balance sheet date, 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 sales within the Company’s consolidated statements of operations.

 

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Table of Contents

The following table summarizes the impact of the effective portion of gains and losses of the forward contracts designated as hedges for the three and nine months ended December 27, 2014 (in thousands):

 

     Three Months Ended December 27, 2014      Nine Months Ended December 27, 2014  
     Pre-Tax
Gain
Recognized
in OCI
(Effective Portion)
     Gain
Reclassified from
Accumulated OCI
into Earnings
(Effective Portion)
     Pre-Tax
Gain
Recognized
in OCI
(Effective Portion)
     Gain
Reclassified from
Accumulated OCI
into Earnings
(Effective Portion)
 

Forward currency exchange contracts

   $  3,139       $  1,956       $  15,034       $  573   

The following table summarizes the impact of the effective portion of gains and losses of the forward contracts designated as hedges for the three and nine months ended December 28, 2013:

 

     Three Months Ended December 28, 2013      Nine Months Ended December 28, 2013  
     Pre-Tax
(Loss)
Recognized
in OCI
(Effective Portion)
     (Loss)
Reclassified from
Accumulated OCI
into Earnings
(Effective Portion)
     Pre-Tax
(Loss)
Recognized
in OCI
(Effective Portion)
     Gain
Reclassified from
Accumulated OCI
into Earnings
(Effective Portion)
 

Forward currency exchange contracts

   $ (695    $ (422    $ (4,208    $ 133   

11. Share-Based Compensation

The Company issues equity grants to certain employees and directors of the Company at the discretion of the Company’s Compensation Committee. The Company has two equity plans, one adopted in Fiscal 2008, the Michael Kors (USA), Inc. Stock Option Plan (as amended and restated, the “2008 Plan”), and the other adopted in the third fiscal quarter of Fiscal 2012, the Michael Kors Holdings Limited Omnibus Incentive Plan (the “2012 Plan”). The 2008 Plan provided for the granting of share options only and was authorized to issue up to 23,980,823 ordinary shares. Subsequent to the adoption of the 2012 Plan, there were no shares available for the granting of equity awards under the 2008 Plan. The 2012 Plan allows for the granting of share options, restricted shares and restricted share units, and other equity awards, and authorizes a total issuance of up to 15,246,000 ordinary shares. At December 27, 2014, there were 10,642,111 ordinary shares available for the granting of equity awards under the 2012 Plan. Option grants issued from the 2008 Plan generally expire ten years from the date of the grant, and those issued under the 2012 Plan generally expire seven years from the date of the grant.

Share Options

Share options are generally exercisable at no less than the fair market value on the date of grant. The Company has issued two types of option grants, those that vest based on the attainment of a performance target and those that vest based on the passage of time. Performance based share options may vest based upon the attainment of one of two performance measures. One performance measure is an individual performance target, which is based upon certain performance targets unique to the individual grantee, and the other measure is a company-wide performance target, which is based on a cumulative minimum growth requirement in consolidated net equity. The individual performance target vests 20% of the total option grant each year the target is satisfied. The individual has ten years in which to achieve five individual performance vesting tranches. The company-wide performance target must be achieved over the ten-year term. Performance is measured at the end of the term, and any unvested options under the grant vest if the target is achieved. The Company-wide performance target is established at the time of the grant. The target metrics underlying individual performance vesting requirements are established for each recipient each year up until such time as the grant is fully vested. Options subject to time based vesting requirements generally become vested in four equal increments on each of the first, second, third and fourth anniversaries of the date on which such options were awarded.

 

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Table of Contents

The following table summarizes the share option activity during the nine months ended December 27, 2014, and information about options outstanding at December 27, 2014:

 

     Number of
Options
    Weighted
Average
Exercise price
     Weighted
Average
Remaining
Contractual
Life (years)
     Aggregate
Intrinsic
Value
(in thousands)
 

Outstanding at March 29, 2014

     8,377,928      $ 13.69         

Granted

     795,255      $ 90.95         

Exercised

     (1,462,107   $ 6.88         

Canceled/forfeited

     (177,845   $ 29.14         
  

 

 

         

Outstanding at December 27, 2014

     7,533,231      $ 22.79         5.59       $ 407,380   
  

 

 

   

 

 

    

 

 

    

 

 

 

Vested or expected to vest at December 27, 2014

     7,382,566      $ 22.79         5.59      
  

 

 

   

 

 

    

 

 

    

 

 

 

Vested and exercisable at December 27, 2014

     3,504,844      $ 11.92         5.17       $ 221,824   
  

 

 

   

 

 

    

 

 

    

 

 

 

There were 4,028,387 non-vested and 3,504,844 vested outstanding options at December 27, 2014. The total intrinsic value of options exercised during the nine months ended December 27, 2014 was $114.4 million, and the cash received from options exercised during this period was $10.1 million. The total intrinsic value of options exercised during the nine months ended December 28, 2013 was $133.3 million, and the cash received from options exercised during this period was $13.5 million. As of December 27, 2014, the remaining unrecognized share-based compensation expense for non-vested share options to be expensed in future periods is $35.1 million, and the related weighted-average period over which it is expected to be recognized is approximately 2.95 years.

The weighted average grant date fair value for options granted during the three and nine months ended December 27, 2014 was $22.25 and $28.09, respectively, and for the three and nine months ended December 28, 2013 was $26.36 and $24.94, respectively. The following table represents assumptions used to estimate the fair value of options:

 

     Three Months Ended     Nine Months Ended  
     December 27,
2014
    December 28,
2013
    December 27,
2014
    December 28,
2013
 

Expected dividend yield

     0.0     0.0     0.0     0.0

Volatility factor

     32.8     38.4     33.2     46.1

Weighted average risk-free interest rate

     1.5     1.3     1.5     1.0

Expected life of option

     4.75 years        4.75 years        4.75 years        4.75 years   

Restricted Shares and Restricted Share Units

The Company grants restricted shares and restricted share units at the fair market value at the date of the grant. Expense for restricted share grants is calculated based on the intrinsic value of the grant, which is the difference between the cost to the recipient and the fair market value of the underlying share (grants are generally issued at no cost to the recipient). Expense is recognized ratably over the vesting period which is generally three to four years from the date of the grant. Similar to share options, restricted share grants generally vest in four equal increments on each of the first, second, third and fourth anniversaries of the date on which such grants were awarded. With respect to restricted share units, there are two types: performance based vesting grants and time based vesting grants. Share units whose vesting is based on meeting certain performance criteria, vest in full, three years from their anniversary date only if certain cumulative performance targets are met at the end of the three year period. Expense related to these grants is recognized ratably over the three year performance period subject to the probability of the attainment of the related performance targets. Share units that vest based on time generally vest in full either on the first or fourth anniversary of the date of the grant, and are expensed accordingly.

 

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Table of Contents

The following table summarizes restricted shares under the 2012 Plan as of December 27, 2014 and changes during the fiscal period then ended:

 

     Number of Unvested
Restricted Shares
    Weighted
Average Grant
Date Fair Value
 

Unvested at March 29, 2014

     657,853      $ 38.38   

Granted

     433,126      $ 90.57   

Vested

     (212,853   $ 32.12   

Canceled/forfeited

     (29,734   $ 68.37   
  

 

 

   

Unvested at December 27, 2014

     848,392      $ 65.68   
  

 

 

   

The total fair value of restricted shares vested during the nine months ended December 27, 2014 was $18.7 million. The total fair value of restricted shares vested during the nine months ended December 28, 2013 was $14.0 million. As of December 27, 2014, the remaining unrecognized share-based compensation expense for non-vested restricted share grants to be expensed in future periods is $45.7 million, and the related weighted-average period over which it is expected to be recognized is approximately 3.05 years.

 

16


Table of Contents

The following table summarizes restricted share units under the 2012 Plan as of December 27, 2014 and changes during the fiscal period then ended:

 

     Number of Unvested
Restricted Units
    Weighted
Average Grant
Date Fair Value
 

Unvested at March 29, 2014

     199,779      $ 58.31   

Granted

     245,591      $ 81.61   

Vested

     (11,770   $ 30.04   

Canceled/forfeited

     (10,846   $ 62.24   
  

 

 

   

Unvested at December 27, 2014

     422,754      $ 73.25   
  

 

 

   

As of December 27, 2014, the remaining unrecognized share-based compensation expense for non-vested restricted share units to be expensed in future periods is $19.4 million, and the related weighted-average period over which it is expected to be recognized is approximately 2.06 years.

Compensation expense attributable to share-based compensation for the three and nine months ended December 27, 2014 was approximately $12.1 million and $33.4 million, respectively. Compensation expense attributable to share-based compensation for the three and nine months ended December 28, 2013 was approximately $7.8 million and $20.9 million, respectively. 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 its historical forfeiture rate since the inception of stock option granting. The estimated value of future forfeitures for equity grants as of December 27, 2014 is approximately $1.4 million.

12. Segment Information

The Company operates its business through three operating segments—Retail, Wholesale and Licensing—which are based on its business activities and organization. The operating segments are segments of the Company for which separate financial information is available and for which operating results are evaluated regularly by executive management in deciding how to allocate resources, as well as in assessing performance. The primary key performance indicators are net sales or revenue (in the case of Licensing) and operating income for each segment. The Company’s reportable segments represent channels of distribution that offer similar merchandise, customer experience and sales/marketing strategies. Sales of the Company’s products through Company owned stores for the Retail segment include “Collection,” “Lifestyle” including “concessions,” and outlet stores located throughout North America, Europe, and Japan. Products sold through the Retail segment include women’s apparel, accessories (which include handbags and small leather goods such as wallets), footwear and licensed products, such as watches, jewelry, fragrances and eyewear. The Wholesale segment includes sales primarily to major department stores and specialty shops throughout North America and Europe. Products sold through the Wholesale segment include accessories (which include handbags and small leather goods such as wallets), footwear and women’s and men’s apparel. The Licensing segment includes royalties earned on licensed products and use of the Company’s trademarks, and rights granted to third parties for the right to sell the Company’s products in certain geographical regions such as the Middle East, Eastern Europe, Latin America and the Caribbean, throughout all of Asia (excluding Japan), as well as Australia. All intercompany revenues are eliminated in consolidation and are not reviewed when evaluating segment performance. Corporate overhead expenses are allocated to the segments based upon specific usage or other allocation methods.

 

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Table of Contents

The Company has allocated $12.1 million and $1.9 million of its recorded goodwill to its Wholesale and Licensing segments, respectively. The Company does not have identifiable assets separated by segment. The following table presents the key performance information of the Company’s reportable segments (in thousands):

 

         Three Months Ended      Nine Months Ended  
         December 27,
2014
     December 28,
2013
     December 27,
2014
     December 28,
2013
 

Revenue:

             

Net sales:

 

Retail

   $ 689,388       $ 503,380       $ 1,665,209       $ 1,184,625   
 

Wholesale

     573,838         461,407         1,494,723         1,103,854   

Licensing

       51,500         47,442         130,553         104,912   
    

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

   $ 1,314,726       $ 1,012,229       $ 3,290,485       $ 2,393,391   
    

 

 

    

 

 

    

 

 

    

 

 

 

Income from operations:

  

Retail

   $ 214,928       $ 171,281       $ 484,951       $ 377,528   

Wholesale

     170,487         140,685         444,811         320,262   

Licensing

     33,062         31,274         71,044         64,472   
    

 

 

    

 

 

    

 

 

    

 

 

 

Income from operations

   $ 418,477       $ 343,240       $ 1,000,806       $ 762,262   
    

 

 

    

 

 

    

 

 

    

 

 

 

Depreciation and amortization expense for each segment are as follows (in thousands):

 

     Three Months Ended      Nine Months Ended  
     December 27,
2014
     December 28,
2013
     December 27,
2014
     December 28,
2013
 

Depreciation and amortization:

           

Retail

   $ 22,414       $ 12,316       $ 62,401       $ 32,749   

Wholesale

     15,007         9,145         37,505         22,519   

Licensing

     71         194         648         419   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total depreciation and amortization

   $ 37,492       $ 21,655       $ 100,554       $ 55,687   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue (as recognized based on country of origin), and long-lived assets by geographic location of the consolidated Company are as follows (in thousands):

 

     Three Months Ended      Nine Months Ended  
     December 27,
2014
     December 28,
2013
     December 27,
2014
     December 28,
2013
 

Revenue:

           

North America (U.S. and Canada)

   $ 1,057,281       $ 862,619       $ 2,578,396       $ 2,032,450   

Europe

     241,415         140,294         664,836         335,822   

Japan

     16,030         9,316         47,253         25,119   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

   $ 1,314,726       $ 1,012,229       $ 3,290,485       $ 2,393,391   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     December 27,
2014
     March 29,
2014
 

Long-lived assets:

     

North America (U.S. and Canada)

   $ 411,669       $ 283,162   

Europe

     173,010         108,074   

Japan

     11,269         7,476   
  

 

 

    

 

 

 

Total Long-lived assets:

   $ 595,948       $ 398,712   
  

 

 

    

 

 

 

13. Other expense (income)

Other expense (income) consists of the following (in thousands):

 

    Three Months Ended     Nine Months Ended  
    December 27,
2014
    December 27,
2014
 

Losses related to joint venture

  $ 553      $ 242   

Income related to anti-counterfeit program

    (365     (1,403

Net unrealized gains on foreign currency forward contracts

    (38     (235
 

 

 

   

 

 

 

Total Other expense (income)

  $ 150      $ (1,396
 

 

 

   

 

 

 

There were no amounts related to Other expense (income) during the three and nine months ended December 28, 2013.

14. Agreements with Shareholders and Related Party Transactions

On October 24, 2014, the Company purchased an aircraft from a former board member (who resigned on September 10, 2014) in the amount of $16.5 million. The purchase price was the fair market value of the aircraft at the purchase date and was no less favorable to the Company than it would have received in an arm’s-length transaction. The aircraft was purchased for purposes of business travel for the Company’s executives, and was recorded as a fixed asset in the Company’s consolidated balance sheets. Prior to the purchase of this plane the Company or its chief executive officer arranged for a plane owned by Sportswear Holdings Limited or its affiliates which was used for the Company’s directors and senior management for purposes of business travel on terms and conditions not less favorable to the Company than it would receive in an arm’s-length transaction with a third party. To the extent the Company’s chief executive officer entered into such an arrangement for business travel, the Company reimbursed him for the actual market price paid for the use of such plane. During the nine months ended December 27, 2014, and December 28, 2013, the Company chartered this plane from Sportswear Holdings Limited for business purposes, the amounts of which were paid in cash and charged to operating expenses. Amounts charged to the Company in connection with these services were approximately $1.4 million and $1.0 million, for the nine months ended December 27, 2014, and December 28, 2013, respectively.

The Company’s Chief Creative Officer, Michael Kors, and the Company’s Chief Executive Officer, John Idol, and certain of the Company’s former shareholders, including Sportswear Holdings Limited, jointly own Michael Kors Far East Holdings Limited, a BVI company. During Fiscal 2012, the Company entered into certain licensing agreements with certain subsidiaries of Michael Kors Far East Holdings Limited (the “Licensees”) which provide the Licensees with certain exclusive rights for use of the Company’s trademarks within China, Hong Kong, Macau and Taiwan, and to import, sell, advertise and promote certain of the Company’s products in these regions, as well as to own and operate stores which bear the Company’s tradenames. The agreements between the Company and subsidiaries of Michael Kors Far East Holdings Limited expire on March 31, 2041, and may be terminated by the Company at certain intervals if certain minimum sales benchmarks are not met. For the nine months ended December 27, 2014 and December 28, 2013, there were approximately $3.1 million and $0.8 million, respectively, of royalties earned under these agreements. These royalties were driven by Licensee sales (of the Company’s goods) to their customers of approximately $70.2 million, and $19.0 million, for the nine months ended December 27, 2014 and December 28, 2013, respectively. In addition, the Company sells certain inventory items to the Licensees

 

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through its wholesale segment at terms consistent with those of similar licensees in the region. During the nine months ended December 27, 2014 and December 28, 2013, amounts recognized as net sales in the Company’s consolidated statements of operations and other comprehensive income, related to these sales, were approximately $24.8 million and $7.8 million, respectively.

The Company routinely purchases certain inventory from a manufacturer owned by one of its former directors. Amounts purchased during the nine months ended December 27, 2014, and December 28, 2013, were $9.1 million and $6.1 million, respectively.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis of 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. This report contains forward-looking statements that are based upon current expectations. We sometimes identify forward-looking statements with such words as “may,” “expect,” “anticipate,” “estimate,” “seek,” “intend,” “believe” or similar words concerning future events. The forward-looking statements contained herein, include, without limitation, statements concerning future revenue sources and concentration, gross profit margins, selling and marketing expenses, capital expenditures, general and administrative expenses, capital resources, new stores, additional financings or borrowings and additional losses and are subject to risks and uncertainties including, but not limited to, those discussed in this report that could cause actual results to differ materially from the results contemplated by these forward-looking statements. We also urge you to carefully review the risk factors set forth under “Risk Factors” in our Annual report on Form 10-K (File No. 001-35368), filed on May 28, 2014, with the Securities and Exchange Commission.

Overview

Our Business

We are a rapidly growing global luxury lifestyle brand led by a world-class management team and a renowned, award-winning designer. Since launching his namesake brand over 30 years ago, Michael Kors has featured distinctive designs, materials and craftsmanship with a jet-set aesthetic that combines stylish elegance and a sporty attitude. Mr. Kors’ vision has taken the Company from its beginnings as an American luxury sportswear house to a global accessories, footwear and apparel company with a presence in approximately 100 countries. As a highly recognized luxury lifestyle brand in North America, with accelerating awareness in targeted international markets, we have experienced exceptional sales momentum and intend to continue along this course as we grow our business.

We operate our business in three segments—retail, wholesale and licensing—and we have a strategically controlled global distribution network focused on company-operated retail stores, leading department stores, specialty stores and select licensing partners. As of December 27, 2014, our retail segment included 337 North American retail stores, including concessions, and 172 international retail stores, including concessions, in Europe and Japan. As of December 27, 2014, our wholesale segment included wholesale sales through approximately 2,530 department store and specialty store doors in North America and wholesale sales through approximately 1,450 department store and specialty store doors internationally. Our remaining revenue is generated through our licensing segment, through which we license to third parties certain production, sales and/or distribution rights. During the nine months ended December 27, 2014, our licensing segment accounted for approximately 4.0% of our total revenue and consisted of royalties earned on licensed products and our geographic licenses.

We offer two primary collections: the Michael Kors luxury collection and the MICHAEL Michael Kors accessible luxury collection. The Michael Kors collection establishes the aesthetic authority of our entire brand and is carried in many of our retail stores as well as in the finest luxury department stores in the world. In 2004, we introduced the MICHAEL Michael Kors collection, which has a strong focus on accessories, in addition to offering footwear and apparel, and addresses the significant demand opportunity in accessible luxury goods. Taken together, our two collections target a broad customer base while retaining a premium luxury image.

Certain Factors Affecting Financial Condition and Results of Operations

Currency fluctuation and the Strengthening U.S. Dollar. Our consolidated operations are impacted by the relationships between our reporting currency, the U.S. dollar, and those of our non-U.S. subsidiaries whose functional/local currency is other than the U.S. dollar. The recent decline in value of the Euro relative to the U.S. dollar has impacted the conversion of the results of our European operations, as they are reported, which represents approximately 20% of our consolidated revenue. At December 27, 2014, the Euro experienced approximately a 10% decline in value relative to the U.S. dollar compared to same time last year, and we believe that this trend may continue, albeit somewhat less dramatically, at least in the near term.

Costs of Manufacturing. 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. These fluctuations may have a material impact on our sales, results of operations and cash flows to the extent they occur. We use commercially reasonable efforts to

 

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mitigate these effects by sourcing our products as efficiently as possible. 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.

Establishing brand identity and enhancing global presence. We intend to continue to increase our international presence and global brand recognition through the formation of various joint ventures with international partners, and continuing with our international licensing arrangements. We feel this is an efficient method for continued penetration into the global luxury goods market, especially for markets we have yet to establish a substantial presence.

Demand for Our Accessories and Related Merchandise. Our performance is affected by trends in the luxury goods industry, as well as shifts in demographics and changes in lifestyle preferences. Currently, demand for our products is predicted to grow. According to the Altagamma Studies*, demand for the worldwide luxury goods industry is predicted to grow from approximately $277.7 billion in 2012 to between $295.6 billion and $301.3 billion in 2014. We believe that we are well positioned to capitalize on the continued growth of the accessories product category, as it is one of our primary product category focuses.

 

* Comprised of: the Worldwide Luxury Markets Monitor, Spring 2014 update, Worldwide Luxury Markets Monitor, Spring 2013 update, Luxury Goods Worldwide Market Study, 2012, the Luxury Goods Worldwide Market Monitor, Spring 2012 Update, Luxury Goods Worldwide Market Study, 2011, Luxury Goods Worldwide Market Study Spring 2011 Update, the Luxury Goods Worldwide Market Study, and the Altagamma 2006 Worldwide Markets Monitor (together, the “Altagamma Studies”). These studies were prepared by the Altagamma Foundation in cooperation with Bain & Company and can be obtained free of charge or at a nominal cost by contacting Bain & Company’s media contacts at cheryl.krauss@bain.com or frank.pinto@bain.com. While we believe that each of these studies and publications is reliable, we have not independently verified market and industry data from third-party sources. The Altagamma Studies analyze the global luxury goods market, including the market and financial performance of more than 230 of the world’s leading luxury goods companies and brands. All figures derived from the Altagamma Studies are based on an exchange rate of $1.31 to €1.00.

Segment Information

We generate revenue through three business segments: retail, wholesale and licensing. The following table presents our revenue and income from operations by segment for the three and nine months ended December 27, 2014 and December 28, 2013 (in thousands):

 

         Three Months Ended      Nine Months Ended  
         December 27,
2014
     December 28,
2013
     December 27,
2014
     December 28,
2013
 

Revenue:

             

Net sales:

 

Retail

   $ 689,388       $ 503,380       $ 1,665,209       $ 1,184,625   
 

Wholesale

     573,838         461,407         1,494,723         1,103,854   

Licensing

       51,500         47,442         130,553         104,912   
    

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

   $ 1,314,726       $ 1,012,229       $ 3,290,485       $ 2,393,391   
    

 

 

    

 

 

    

 

 

    

 

 

 

Income from operations:

           

Retail

   $ 214,928       $ 171,281       $ 484,951       $ 377,528   

Wholesale

     170,487         140,685         444,811         320,262   

Licensing

     33,062         31,274         71,044         64,472   
    

 

 

    

 

 

    

 

 

    

 

 

 

Income from operations

   $ 418,477       $ 343,240       $ 1,000,806       $ 762,262   
    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Retail

We sell our products, as well as licensed products bearing our name, directly to the end consumer through our retail stores and concessions throughout North America, Europe, and Japan. We have three primary retail store formats: collection stores, lifestyle stores and outlet stores. Our collection stores are located in highly prestigious shopping areas, while our lifestyle stores are located in well-populated commercial shopping locations and leading regional shopping centers. Our outlet stores, which are generally in outlet centers, extend our reach to additional consumer groups. In addition to these three retail store formats, we operate concessions in a select number of department stores in North America, Europe and Japan. The following table presents the growth in our network of retail stores for the three and nine months ended December 27, 2014 and December 28, 2013:

 

     Three Months Ended     Nine Months Ended  
     December 27,
2014
    December 28,
2013
    December 27,
2014
    December 28,
2013
 

Full price retail stores including concessions:

        

Number of stores

     359        272        359        272   

Increase during period

     30        35        80        71   

Percentage increase vs. prior year

     32.0     39.5     32.0     39.5

Total gross square footage

     806,612        551,710        806,612        551,710   

Average square footage per store

     2,247        2,028        2,247        2,028   

Outlet stores:

        

Number of stores

     150        123        150        123   

Increase during period

     6        8        24        20   

Percentage increase vs. prior year

     22.0     20.6     22.0     20.6

Total gross square footage

     495,057        366,271        495,057        366,271   

Average square footage per store

     3,300        2,978        3,300        2,978   

The following table presents the geographic locations of our retail stores at the periods then ended:

 

     December 27,
2014
     December 28,
2013
 

Store Count By Region:

     

North America

     337         284   

Europe

     125         76   

Japan

     47         35   
  

 

 

    

 

 

 

Total

  509      395   
  

 

 

    

 

 

 

Wholesale

We sell our products directly to department stores across North America and Europe to accommodate consumers who prefer to shop at major department stores. In addition, we sell to specialty stores for those consumers who enjoy the boutique experience afforded by such stores. We continue to focus our sales efforts and drive sales in existing locations by enhancing presentation, primarily through the creation of more shop-in-shops with our proprietary fixtures that effectively communicate our brand and create a more personalized shopping experience for consumers. We tailor our assortments through wholesale product planning and allocation processes to better match the demands of our department store customers in each local market.

 

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The following table presents the growth in our network of full-price wholesale doors during the three and nine months ended December 27, 2014 and December 28, 2013:

 

     Three Months Ended     Nine Months Ended  
     December 27,
2014
    December 28,
2013
    December 27,
2014
    December 28,
2013
 

Number of full-price wholesale doors

     3,980        3,600        3,980        3,600   

Increase during period

     20        109        252        351   

Percentage increase vs . prior year

     10.6     22.2     10.6     22.2

Licensing

We generate revenue through product and geographic licensing arrangements. Our product license agreements allow third parties to use our brand name and trademarks in connection with the manufacturing and sale of a variety of products, including watches, fragrances, eyewear and jewelry. In our product licensing arrangements, we take an active role in the design process, marketing and distribution of products under our brands. Our geographic licensing arrangements allow third parties to use our tradenames in connection with the retail and/or wholesale sales of our branded products in specific geographic regions.

 

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Key Performance Indicators and Statistics

We use a number of key indicators of operating results to evaluate our performance, including the following (dollars in thousands):

 

     Three Months Ended     Nine Months Ended  
     December 27,
2014
    December 28,
2013
    December 27,
2014
    December 28,
2013
 

Total revenue

   $ 1,314,726      $ 1,012,229      $ 3,290,485      $ 2,393,391   

Gross profit as a percent of total revenue

     60.9     61.2     61.3     61.3

Income from operations

   $ 418,477      $ 343,240      $ 1,000,806      $ 762,262   

Retail net sales- North America

   $ 551,840      $ 423,724      $ 1,296,398      $ 993,462   

Retail net sales- Europe

   $ 121,518      $ 70,340      $ 321,558      $ 166,044   

Retail net sales- Japan

   $ 16,030      $ 9,316      $ 47,253      $ 25,119   

Increase in comparable store net sales- North America

     6.0     23.9     11.1     23.1

Increase in comparable store net sales- Europe

     21.2     72.7     36.8     58.9

Increase in comparable store net sales- Japan

     35.4     18.2     45.3     18.5

Wholesale net sales- North America

   $ 476,239      $ 397,599      $ 1,203,960      $ 940,222   

Wholesale net sales- Europe

   $ 97,599      $ 63,808      $ 290,763      $ 163,632   

General Definitions for Operating Results

Net sales consist of sales from comparable retail stores and non-comparable retail stores, net of returns and markdowns, as well as those made to our wholesale customers, net of returns, discounts, markdowns and allowances.

Comparable store sales include sales from a store that has been opened for one full year after the end of the first month of its operations. For stores that are closed, sales that were made in the final month of their operations (assuming closure prior to the fiscal months end), are excluded from the calculation of comparable store sales. Additionally, sales for stores that are either relocated, or expanded by a square footage of 25% or greater, in any given fiscal year, are also excluded from the calculation of comparable store sales at the time of their move or interruption, until such stores have been in their new location, or are operating under their new size/capacity, for at least one full year after the end of the first month of their relocation or expansion. All comparable store sales are presented on a 52-week basis.

Licensing revenue consists of fees charged on sales of licensed products to our licensees as well as contractual royalty rates for the use of our trademarks in certain geographic territories.

Cost of goods sold includes the cost of inventory sold, freight-in on merchandise and foreign currency exchange gains/losses related to forward contracts for purchase commitments. All retail store operating and occupancy costs are included in Selling, general and administrative expenses (see below), and as a result our cost of goods sold may not be comparable to that of other entities that have chosen to include some or all of those expenses as a component of their cost of goods sold.

Gross profit is total revenue (net sales plus licensing revenue) minus cost of goods sold. As a result of retail store operating and occupancy costs being excluded from our cost of goods, our gross profit may not be comparable to that of other entities that have chosen to include some or all of those expenses as a component of their gross profit.

Selling, general and administrative expenses consist of warehousing and distribution costs, rent for our distribution centers, store payroll, store occupancy costs (such as rent, common area maintenance, store pre-opening, real estate taxes and utilities), information technology and systems costs, corporate payroll and related benefits, advertising and promotion expense and other general expenses.

Depreciation and amortization includes depreciation and amortization of fixed and definite-lived intangible assets.

Income from operations consists of gross profit minus total operating expenses.

 

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Other expense (income) includes unrealized gains or losses related to the mark-to-market (fair value) on our forward currency contracts not designated as hedges, income or loss earned on our joint venture, and proceeds received related to our anti-counterfeiting efforts. Future amounts may include any miscellaneous activities not directly related to our operations.

Interest expense, net represents interest and fees on our revolving credit facilities and letters of credit (see “Liquidity and Capital Resources” for further detail on our credit facilities), as well as amortization of deferred financing costs, offset by interest earned on highly liquid investments (investments purchased with an original maturity of six months or less, classified as cash equivalents), as well as interest income earned on the loan to our joint venture.

Foreign currency loss represents unrealized income or loss from the re-measurement of monetary assets and liabilities denominated in currencies other than the functional currencies of our subsidiaries.

Results of Operations

Comparison of the three months ended December 27, 2014 with the three months ended December 28, 2013

The following table details the results of our operations for the three months ended December 27, 2014 and for the three months ended December 28, 2013, and expresses the relationship of certain line items to total revenue as a percentage (dollars in thousands):

 

     Three Months Ended      $ Change     % Change    

% of Total
Revenue for

the three

    % of Total
Revenue for
the three
 
     December 27,
2014
     December 28,
2013
         months ended
December 27, 2014
    months ended
December 28, 2013
 

Statements of Operations Data:

              

Net sales

   $ 1,263,226       $ 964,787       $ 298,439        30.9    

Licensing revenue

     51,500         47,442         4,058        8.6    
  

 

 

    

 

 

    

 

 

       

Total revenue

  1,314,726      1,012,229      302,497      29.9

Cost of goods sold

  514,583      392,731      121,852      31.0   39.1   38.8
  

 

 

    

 

 

    

 

 

       

Gross profit

  800,143      619,498      180,645      29.2   60.9   61.2

Selling, general and administrative expenses

  344,174      254,603      89,571      35.2   26.2   25.2

Depreciation and amortization

  37,492      21,655      15,837      73.1   2.9   2.1
  

 

 

    

 

 

    

 

 

       

Total operating expenses

  381,666      276,258      105,408      38.2   29.0   27.3
  

 

 

    

 

 

    

 

 

       

Income from operations

  418,477      343,240      75,237      21.9   31.8   33.9

Other expense

  150      —        150      —        0.0   0.0

Interest expense, net

  116      109      7      6.4   0.0   0.0

Foreign currency loss

  1,201      3      1,198      —        0.1   0.0
  

 

 

    

 

 

    

 

 

       

Income before provision for income taxes

  417,010      343,128      73,882      21.5   31.7   33.9

Provision for income taxes

  113,335      113,485      (150   -0.1   8.6   11.2
  

 

 

    

 

 

    

 

 

       

Net income

$ 303,675    $ 229,643    $ 74,032      32.2
  

 

 

    

 

 

    

 

 

       

Total Revenue

Total revenue increased $302.5 million, or 29.9%, to $1,314.7 million for the three months ended December 27, 2014, compared to $1,012.2 million for the three months ended December 28, 2013. The increase was the result of an increase in our comparable and non-comparable retail store sales and wholesale sales, as well as increases in our licensing revenue.

 

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The following table details revenues for our three business segments (dollars in thousands):

 

     Three Months Ended      $ Change      % Change    

% of Total
Revenue for

the three

   

% of Total
Revenue for

the three

 
     December 27,
2014
     December 28,
2013
          months ended
December 27, 2014
    months ended
December 28, 2013
 

Revenue:

               

Net sales:   Retail

   $ 689,388       $ 503,380       $ 186,008         37.0     52.4     49.7

  Wholesale

     573,838         461,407         112,431         24.4     43.6     45.6

Licensing

     51,500         47,442         4,058         8.6     3.9     4.7
  

 

 

    

 

 

    

 

 

        

Total revenue

   $ 1,314,726       $ 1,012,229       $ 302,497          
  

 

 

    

 

 

    

 

 

        

Retail

Net sales from our retail stores increased $186.0 million, or 37.0%, to $689.4 million for the three months ended December 27, 2014, compared to $503.4 million for the three months ended December 28, 2013. We operated 509 retail stores, including concessions, as of December 27, 2014, compared to 395 retail stores, including concessions, as of December 28, 2013. During the three months ended December 27, 2014, our comparable store sales growth increased $37.6 million, or 8.6%, from the three months ended December 28, 2013. The growth in our comparable store sales was primarily due to an increase in sales of our accessories product line during the three months ended December 27, 2014. In addition, the change to our non-comparable store sales were $148.4 million during the three months ended December 27, 2014, which was primarily the result of operating 114 additional stores since December 28, 2013.

Wholesale

Net sales to our wholesale customers increased $112.4 million, or 24.4%, to $573.8 million for the three months ended December 27, 2014, compared to $461.4 million for the three months ended December 28, 2013. The increase in our wholesale net sales occurred primarily as a result of increased sales of our accessories line as well as footwear during the three months ended December 27, 2014, as we continue to enhance our presence in department and specialty stores by converting more doors to shop-in-shops, and in continuing our expansion of our European operations.

Licensing

Revenues earned on our licensing agreements increased $4.1 million, or 8.6%, to $51.5 million for the three months ended December 27, 2014, compared to $47.4 million for the three months ended December 28, 2013. The increase in licensing revenue was primarily due to royalties earned on licensing agreements related to sales of jewelry, as well as those related to sales of winter outerwear and watches.

Gross Profit

Gross profit increased $180.6 million, or 29.2%, to $800.1 million during the three months ended December 27, 2014, compared to $619.5 million for the three months ended December 28, 2013. Gross profit as a percentage of total revenue decreased to 60.9% during the three months ended December 27, 2014, compared to 61.2% during the three months ended December 28, 2013. The decrease in profit margin resulted primarily from decreases in gross profit margin of 74 basis points and 40 basis points from our wholesale segment and retail segments, respectively. The decrease in profit margin on our wholesale segment was primarily the result of an increase in discounts given during the three months ended December 27, 2014, as compared to the three months ended December 28, 2013. The decrease in profit margin in our retail segment resulted primarily from an increase in markdowns, offset in part, by a more favorable product mix experienced during the three months ended December 27, 2014 as compared to the three months ended December 28, 2013.

Total Operating Expenses

Total operating expenses increased $105.4 million, or 38.2%, to $381.7 million during the three months ended December 27, 2014, compared to $276.3 million for the three months ended December 28, 2013. Total operating expenses increased to 29.0% as a percentage of total revenue for the three months ended December 27, 2014, compared to 27.3% for the three months ended December 28, 2013. The components that comprise total operating expenses are explained below.

 

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Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $89.6 million, or 35.2%, to $344.2 million during the three months ended December 27, 2014, compared to $254.6 million for the three months ended December 28, 2013. Selling, general and administrative expenses increased primarily due to the following: increases in our retail occupancy and salary costs of $51.7 million, an increase in corporate employee-related costs of $19.9 million, an increase in promotional costs (which consist of advertising, marketing and various promotional costs) of $3.9 million, and an increase in professional fees of $7.4 million. The increases were offset with a decrease in distribution expenses of $3.7 million. The increase in our retail occupancy and payroll costs was due to operating 509 retail stores versus 395 retail stores in the prior period. The increase in our corporate employee-related costs was due primarily to an increase in our corporate staff to accommodate our North American and international growth. Advertising costs increased primarily due to our continuing expansion into new markets, as well as social media during the three months ended December 27, 2014. Professional fees increased primarily as a result of fees incurred in connection with the relocation of our principal executive offices, which were comprised of legal and consulting fees, as well as fees related to our new customer service call center. The decrease to our distribution expenses was primarily due to expenses related to disruptions to our shipping facility during the three months ended December 28, 2013, which did not occur during the three months ended December 27, 2014. Selling, general and administrative expenses as a percentage of total revenue increased to 26.2% during the three months ended December 27, 2014, compared to 25.2% for the three months ended December 28, 2013. The increase as a percentage of total revenue was primarily due to the increase in our retail occupancy and salary costs as well as professional fees incurred during the three months ended December 27, 2014, as compared to the three months ended December 28, 2013.

Depreciation and Amortization

Depreciation and amortization increased $15.8 million, or 73.1%, to $37.5 million during the three months ended December 27, 2014, compared to $21.7 million for the three months ended December 28, 2013. Increases in depreciation and amortization were primarily due to an increase in the build-out of our new retail locations, new shop-in-shop locations, increase in lease rights purchased for our new European stores, and investments made in our information systems infrastructure to accommodate our growth. Depreciation and amortization increased to 2.9% as a percentage of total revenue during the three months ended December 27, 2014, compared to 2.1% for the three months ended December 28, 2013.

Income from Operations

As a result of the foregoing, income from operations increased $75.2 million, or 21.9%, to $418.5 million during the three months ended December 27, 2014, compared to $343.2 million for the three months ended December 28, 2013. Income from operations as a percentage of total revenue decreased to 31.8% during the three months ended December 27, 2014, compared to 33.9% for the three months ended December 28, 2013.

The following table details income from operations for our three business segments (dollars in thousands):

 

     Three Months Ended      $ Change      % Change    

% of Net Sales/
Revenue for

the three

    % of Net Sales/
Revenue for
the three
 
     December 27,
2014
     December 28,
2013
          months ended
December 27, 2014
    months ended
December 28, 2013
 

Income from operations:

               

Retail

   $ 214,928       $ 171,281       $ 43,647         25.5     31.2     34.0

Wholesale

     170,487         140,685         29,802         21.2     29.7     30.5

Licensing

     33,062         31,274         1,788         5.7     64.2     65.9
  

 

 

    

 

 

    

 

 

        

Income from operations

   $ 418,477       $ 343,240       $ 75,237          
  

 

 

    

 

 

    

 

 

        

Retail

Income from operations for our retail segment increased $43.6 million, or 25.5%, to $214.9 million during the three months ended December 27, 2014, compared to $171.3 million for the three months ended December 28, 2013. Income from operations as a percentage of net retail sales for the retail segment decreased 2.8% as a percentage of net retail sales to 31.2% during the three months ended December 27, 2014. The decrease in retail

 

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income from operations as a percentage of net retail sales was primarily due to an increase in operating costs as a percentage of net retail sales of approximately 2.4% during the three months ended December 27, 2014, as compared to the three months ended December 28, 2013, as well as to the decrease in gross profit margin, as described above in the gross profit discussion The increase in operating expense as a percentage of net retail sales was largely due to an increase in general corporate operating costs and increase in depreciation and amortization, which primarily relates to new stores and lease rights (key money).

Wholesale

Income from operations for our wholesale segment increased $29.8 million, or 21.2%, to $170.5 million during the three months ended December 27, 2014, compared to $140.7 million for the three months ended December 28, 2013. Income from operations as a percentage of net wholesale sales for the wholesale segment decreased 0.8% as a percentage of net wholesale sales to 29.7% during the three months ended December 27, 2014. This decrease as a percentage of net sales was primarily the result of the decrease in gross profit margin, described above in the gross profit discussion.

Licensing

Income from operations for our licensing segment increased $1.8 million, or 5.7%, to $33.1 million during the three months ended December 27, 2014, compared to $31.3 million for the three months ended December 28, 2013. Income from operations as a percentage of licensing revenue for the licensing segment decreased 1.7% as a percentage of licensing revenue to 64.2% during the three months ended December 27, 2014. This decrease as a percentage of licensing revenue was the result of an increase in operating expenses as a percentage of licensing revenue during the three months ended December 27, 2014, as compared to the three months ended December 28, 2013. The increase in operating expenses as a percent of licensing revenue was largely the result of an increase in advertising costs and professional fees.

Other expense

Other expense was $0.2 million for the three months ended December 27, 2014, and was comprised of the following: losses related to our joint venture of $0.6 million, and $0.4 million in income related to our anti-counterfeiting efforts. There were no amounts related to this activity during the period ended December 28, 2013.

Foreign Currency Loss

Foreign currency loss during the three months ended December 27, 2014 was $1.2 million. The loss during the three months ended December 27, 2014 was primarily due to the settling of certain of our accounts payable in currencies other than the functional currency of the applicable reporting units, which were impacted by the greater volatility of exchange rates during the three months ended December 27, 2014, as compared to the three months ended December 28, 2013.

Provision for Income Taxes

We recognized $113.3 million of income tax expense during the three months ended December 27, 2014, compared with $113.5 million for the three months ended December 28, 2013. Our effective tax rate for the three months ended December 27, 2014, was 27.2%, compared to 33.1% for the three months ended December 28, 2013. The decrease in our effective tax rate during the three months ended December 27, 2014, as compared to the three months ended December 28, 2013, was primarily due to the settlement of certain instruments in connection with our international income tax structuring. In addition, we expect the effects of this settlement to have a beneficial impact on our combined, consolidated income tax rate, albeit to a lesser degree, in our forth fiscal 2015 quarter.

Our effective tax rate may fluctuate from time to time due to the effects of changes in U.S. state and local taxes, tax rates in foreign jurisdictions, and certain other nondeductible expenses and income earned in certain non-U.S. entities with significant net operating loss carryforwards. 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.

 

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Net Income

As a result of the foregoing, our net income increased $74.0 million, or 32.2%, to $303.7 million during the three months ended December 27, 2014, compared to $229.6 million for the three months ended December 28, 2013.

Comparison of the nine months ended December 27, 2014 with the nine months ended December 28, 2013

The following table details the results of our operations for the nine months ended December 27, 2014 and for the nine months ended December 28, 2013, and expresses the relationship of certain line items to total revenue as a percentage (dollars in thousands):

 

     Nine Months Ended      $ Change     % Change    

% of Total
Revenue for

the nine

   

% of Total
Revenue for

the nine

 
     December 27,
2014
    December 28,
2013
         months ended
December 27, 2014
    months ended
December 28, 2013
 

Statements of Operations Data:

             

Net sales

   $ 3,159,932      $ 2,288,479       $ 871,453        38.1    

Licensing revenue

     130,553        104,912         25,641        24.4    
  

 

 

   

 

 

    

 

 

       

Total revenue

  3,290,485      2,393,391      897,094      37.5

Cost of goods sold

  1,273,682      926,747      346,935      37.4   38.7   38.7
  

 

 

   

 

 

    

 

 

       

Gross profit

  2,016,803      1,466,644      550,159      37.5   61.3   61.3

Selling, general and administrative expenses

  915,443      648,695      266,748      41.1   27.8   27.1

Depreciation and amortization

  100,554      55,687      44,867      80.6   3.1   2.3
  

 

 

   

 

 

    

 

 

       

Total operating expenses

  1,015,997      704,382      311,615      44.2   30.9   29.4
  

 

 

   

 

 

    

 

 

       

Income from operations

  1,000,806      762,262      238,544      31.3   30.4   31.8

Other income

  (1,396   —        (1,396   —        0.0   0.0

Interest expense, net

  147      409      (262   -64.1   0.0   0.0

Foreign currency loss

  4,946      279      4,667      —        0.2   0.0
  

 

 

   

 

 

    

 

 

       

Income before provision for income taxes

  997,109      761,574      235,535      30.9   30.3   31.8

Provision for income taxes

  298,728      261,127      37,601      14.4   9.1   10.9
  

 

 

   

 

 

    

 

 

       

Net income

$ 698,381    $ 500,447    $ 197,934      39.6
  

 

 

   

 

 

    

 

 

       

Total Revenue

Total revenue increased $897.1 million, or 37.5%, to $3,290.5 million for the nine months ended December 27, 2014, compared to $2,393.4 million for the nine months ended December 28, 2013. The increase was the result of an increase in our comparable and non-comparable retail store sales and wholesale sales, as well as increases in our licensing revenue.

The following table details revenues for our three business segments (dollars in thousands):

 

     Nine Months Ended      $ Change      % Change     % of Total
Revenue for
    % of Total
Revenue for
 
     December 27,
2014
     December 28,
2013
          the nine months
December 27, 2014
    the nine months
December 28, 2013
 

Revenue:

               

Net sales: Retail

   $ 1,665,209       $ 1,184,625       $ 480,584         40.6     50.6     49.5

        Wholesale

     1,494,723         1,103,854         390,869         35.4     45.4     46.1

Licensing

     130,553         104,912         25,641         24.4     4.0     4.4
  

 

 

    

 

 

    

 

 

        

Total revenue

$ 3,290,485    $ 2,393,391    $ 897,094   
  

 

 

    

 

 

    

 

 

        

Retail

Net sales from our retail stores increased $480.6 million, or 40.6%, to $1,665.2 million for the nine months ended December 27, 2014, compared to $1,184.6 million for the nine months ended December 28, 2013. We operated 509 retail stores, including concessions, as of December 27, 2014, compared to 395 retail stores, including concessions, as of December 28, 2013. During the nine months ended December 27, 2014, our comparable store

 

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sales growth increased $163.7 million, or 15.4%, from the nine months ended December 28, 2013. The growth in our comparable store sales was primarily due to an increase in sales of our accessories product line during the nine months ended December 27, 2014. In addition, the change to our non-comparable store sales were $316.8 million during the nine months ended December 27, 2014, which was primarily the result of operating 114 additional stores since December 28, 2013.

Wholesale

Net sales to our wholesale customers increased $390.9 million, or 35.4%, to $1,494.7 million for the nine months ended December 27, 2014, compared to $1,103.9 million for the nine months ended December 28, 2013. The increase in our wholesale net sales occurred primarily as a result of increased sales of our accessories line as well as footwear during the nine months ended December 27, 2014, as we continue to enhance our presence in department and specialty stores by converting more doors to shop-in-shops, and in continuing our expansion of our European operations.

Licensing

Revenues earned on our licensing agreements increased $25.6 million, or 24.4%, to $130.6 million for the nine months ended December 27, 2014, compared to $104.9 million for the nine months ended December 28, 2013. The increase in licensing revenue was primarily due to royalties earned on licensing agreements related to sales of watches, as well as those related to sales of jewelry and winter outerwear.

Gross Profit

Gross profit increased $550.2 million, or 37.5%, to $2,016.8 million during the nine months ended December 27, 2014, compared to $1,466.6 million for the nine months ended December 28, 2013. Gross profit as a percentage of total revenue remained level at 61.3% for both the nine months ended December 27, 2014 and the nine months ended December 28, 2013. This resulted from an increase in gross profit margin of 41 basis points from our wholesale segment offset with a decrease of 43 basis points in gross profit margin from our retail segment. The increase in profit margin on our wholesale segment was primarily the result of an increase in our European wholesale sales increasing in proportion to our total wholesale sales during the nine months ended December 27, 2014, as compared to the nine months ended December 28, 2013. This increase was offset in part by an increase in discounts and allowances given during the nine months ended December 27, 2014 as compared to the nine months ended December 28, 2013. The decrease in profit margin in our retail segment resulted primarily from an increase in markdowns, offset in part, by a more favorable product mix experienced during the nine months ended December 27, 2014 as compared to the nine months ended December 28, 2013.

Total Operating Expenses

Total operating expenses increased $311.6 million, or 44.2%, to $1,016.0 million during the nine months ended December 27, 2014, compared to $704.4 million for the nine months ended December 28, 2013. Total operating expenses increased to 30.9% as a percentage of total revenue for the nine months ended December 27, 2014, compared to 29.4% for the nine months ended December 28, 2013. The components that comprise total operating expenses are explained below.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $266.7 million, or 41.1%, to $915.4 million during the nine months ended December 27, 2014, compared to $648.7 million for the nine months ended December 28, 2013. Selling, general and administrative expenses increased primarily due to the following: increases in our retail occupancy and salary costs of $150.4 million, an increase in corporate employee-related costs of $59.8 million, an increase in distribution costs of approximately $14.7 million, an increase in promotional costs (which consist of advertising, marketing and various promotional costs) of $21.4 million, and an increase in professional fees of $12.5 million. The increase in our retail occupancy and payroll costs was due to operating 509 retail stores versus 395 retail stores in the prior period. The increase in our corporate employee-related costs was due primarily to an increase in our corporate staff to accommodate our North American and international growth. The increase to our distribution expenses was primarily due to our increase in our sales, which drove our shipping volume. Advertising costs increased primarily due to our continuing expansion into new markets, as well as social media during the nine months ended December 27, 2014. Professional fees increased primarily as a result of fees incurred in connection with the relocation of our principal executive offices, which were comprised of legal and consulting fees, as well as fees related to our new customer service call center incurred during the nine months ended December 27, 2014.

 

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Selling, general and administrative expenses as a percentage of total revenue increased to 27.8% during the nine months ended December 27, 2014, compared to 27.1% for the nine months ended December 28, 2013. The increase as a percentage of total revenue was primarily due to the aforementioned retail overhead costs as well as various corporate operating expenses incurred during the nine months ended December 27, 2014, as compared to the nine months ended December 28, 2013.

Depreciation and Amortization

Depreciation and amortization increased $44.9 million, or 80.6%, to $100.6 million during the nine months ended December 27, 2014, compared to $55.7 million for the nine months ended December 28, 2013. Increases in depreciation and amortization were primarily due to an increase in the build-out of our new retail locations, new shop-in-shop locations, increase in lease rights purchased for our new European stores, and investments made in our information systems infrastructure to accommodate our growth. Depreciation and amortization increased to 3.1% as a percentage of total revenue during the nine months ended December 27, 2014, compared to 2.3% for the nine months ended December 28, 2013.

Income from Operations

As a result of the foregoing, income from operations increased $238.5 million, or 31.3%, to $1,000.8 million during the nine months ended December 27, 2014, compared to $762.3 million for the nine months ended December 28, 2013. Income from operations as a percentage of total revenue decreased to 30.4% during the nine months ended December 27, 2014, compared to 31.8% for the nine months ended December 28, 2013.

The following table details income from operations for our three business segments (dollars in thousands):

 

     Nine Months Ended      $ Change      % Change     % of Net Sales/
Revenue for
   

% of Net Sales/
Revenue for

 
     December 27,
2014
     December 28,
2013
          the nine months
December 27, 2014
    the nine months
December 28, 2013
 

Income from operations:

               

Retail

   $ 484,951       $ 377,528       $ 107,423         28.5     29.1     31.9

Wholesale

     444,811         320,262         124,549         38.9     29.8     29.0

Licensing

     71,044         64,472         6,572         10.2     54.4     61.5
  

 

 

    

 

 

    

 

 

        

Income from operations

$ 1,000,806    $ 762,262    $ 238,544   
  

 

 

    

 

 

    

 

 

        

Retail

Income from operations for our retail segment increased $107.4 million, or 28.5%, to $485.0 million during the nine months ended December 27, 2014, compared to $377.5 million for the nine months ended December 28, 2013. Income from operations as a percentage of net retail sales for the retail segment decreased 2.8% as a percentage of net retail sales to 29.1% during the nine months ended December 27, 2014. The decrease in retail income from operations as a percentage of net retail sales was primarily due to an increase in operating costs as a percentage of net retail sales of approximately 2.3% as well as to the decrease in gross profit margin, as described above in the gross profit discussion, during the nine months ended December 27, 2014, as compared to the nine months ended December 28, 2013. The increase in operating expense as a percentage of net retail sales was largely due to an increase in depreciation and amortization expense, which primarily relates to new stores and lease rights (key money), as well as certain retail overhead costs.

Wholesale

Income from operations for our wholesale segment increased $124.5 million, or 38.9%, to $444.8 million during the nine months ended December 27, 2014, compared to $320.3 million for the nine months ended December 28, 2013. Income from operations as a percentage of net wholesale sales for the wholesale segment increased 0.8% as a percentage of net wholesale sales to 29.8% during the nine months ended December 27, 2014. This increase as a percentage of net sales was primarily the result of the increase in gross profit margin, described above in the gross profit discussion, as well as a nominal decrease in operating expenses as a percent of net wholesale sales during the nine months ended December 27, 2014, as compared to the nine months ended December 28, 2013.

 

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Licensing

Income from operations for our licensing segment increased $6.6 million, or 10.2%, to $71.0 million during the nine months ended December 27, 2014, compared to $64.5 million for the nine months ended December 28, 2013. Income from operations as a percentage of licensing revenue for the licensing segment decreased 7.1% as a percentage of licensing revenue to 54.4% during the nine months ended December 27, 2014. This decrease as a percentage of licensing revenue was the result of an increase in operating expenses as a percentage of licensing revenue during the nine months ended December 27, 2014, as compared to the nine months ended December 28, 2013. The increase in operating expenses as a percent of licensing revenue was largely the result of an increase in advertising expenses as well as certain administrative expenses incurred in connection with the formation of our new licensing operations within Europe during the nine months ended December 27, 2014.

Other income

Other income was $1.4 million for the nine months ended December 27, 2014, and was comprised of the following: a loss of $0.2 million earned on our joint venture, a $1.4 million in income related to our anti-counterfeiting efforts and an unrealized gain of $0.2 million related to mark-to-market of our non-hedge designated forward currency contracts. There were no amounts related to this activity during the period ended December 28, 2013.

Foreign Currency Loss

Foreign currency loss during the nine months ended December 27, 2014 was $4.9 million as compared to foreign currency loss of $0.3 million during the nine months ended December 28, 2013. The loss during the nine months ended December 27, 2014 was primarily due to the settling of certain of our accounts payable in currencies other than the functional currency of the applicable reporting units, as well as the strengthening of the U.S. dollar relative to the Euro, which impacted the re-measurement of dollar-denominated intercompany loans with certain of our subsidiaries. There were no balances on these notes during the nine months ended December 28, 2013, and the $0.3 million loss for the nine months then ended was primarily due to the settling of certain of our accounts payable in currencies other than the functional currency of the applicable reporting units.

Provision for Income Taxes

We recognized $298.7 million of income tax expense during the nine months ended December 27, 2014, compared with $261.1 million for the nine months ended December 28, 2013. Our effective tax rate for the nine months ended December 27, 2014, was 30.0%, compared to 34.3% for the nine months ended December 28, 2013. The decrease in our effective tax rate was primarily due to the increase in taxable income in certain of our non-U.S. subsidiaries (predominantly European operations) during the nine months ended December 27, 2014, which are subject to lower statutory income tax rates. Given that certain of our non-U.S. operations have become consistently profitable, we expect this impact on our combined, consolidated effective rate to continue. Also impacting our effective tax rate favorably during the nine months ended December 27, 2014, was the settlement of certain instruments in connection with our international income tax structuring.

Our effective tax rate may fluctuate from time to time due to the effects of changes in U.S. state and local taxes, tax rates in foreign jurisdictions, and certain other nondeductible expenses and income earned in certain non-U.S. entities with significant net operating loss carryforwards. 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

As a result of the foregoing, our net income increased $197.9 million, or 39.6%, to $698.4 million during the nine months ended December 27, 2014, compared to $500.4 million for the nine months ended December 28, 2013.

Liquidity and Capital Resources

Liquidity

Our primary sources of liquidity are the cash flows generated from our operations, along with borrowings available under our 2013 Credit Facility (see below discussion regarding “Senior Unsecured Revolving Credit Facility”) and available cash and cash equivalents. Our primary use of this liquidity is to fund our ongoing cash requirements, including working capital requirements, global retail store expansion and renovation, construction and renovation of shop-in-shops, investment in information systems infrastructure and expansion of our distribution and corporate facilities. We believe that the cash generated from our operations, together with borrowings available under our revolving credit facility and available cash and cash equivalents, will be sufficient to meet our working

 

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capital needs for the remainder of Fiscal 2015, including investments made and expenses incurred in connection with our store growth plans, shop-in shop growth, continued systems development, as well as web based sales and marketing initiatives. We spent approximately $282.7 million on capital expenditures during the nine months ended December 27, 2014, and expect to spend approximately $118.0 million on capital expenditures during the remainder of Fiscal 2015. The majority of these expected expenditures relate to new retail store openings planned for the year, with the remainder being used for investments in connection with developing new shop-in-shops, distribution facilities, build-out of our corporate offices and enhancing our information systems infrastructure.

During the quarter ended December 27, 2014, we also completed the repurchasing of 5,068,813 of our ordinary shares related to our share repurchase program approved by our Board of Directors on October 30, 2014. The total expenditures related to these repurchases were $399.9 million. Depending on prevailing market conditions, and other business factors, we may make additional expenditures related to the share repurchase program during the remainder of Fiscal 2015, albeit to a lesser degree than those made during the quarter ended December 27, 2014.

The following table sets forth key indicators of our liquidity and capital resources (in thousands):

 

                                             
     As of  
     December 27,
2014
     March 29,
2014
 

Balance Sheet Data:

     

Cash and cash equivalents

   $ 949,846       $ 955,145   

Working capital

   $ 1,621,997       $ 1,468,799   

Total assets

   $ 2,630,588       $ 2,216,973   

 

                                             
     Nine Months Ended  
     December 27,
2014
     December 28,
2013
 

Cash Flows Provided By (Used In):

     

Operating activities

   $ 672,065       $ 449,843   

Investing activities

     (311,823      (148,904

Financing activities

     (352,975      55,643   

Effect of exchange rate changes

     (12,566      (752
  

 

 

    

 

 

 

Net (decrease) increase in cash and cash equivalents

$ (5,299 $ 355,830   
  

 

 

    

 

 

 

Cash Provided by Operating Activities

Cash provided by operating activities increased $222.2 million to $672.1 million during the nine months ended December 27, 2014, as compared to $449.8 million for the nine months ended December 28, 2013. The increase in cash flows from operating activities is primarily due to increases in our net income, as well as an increase in cash inflows on our accounts receivables and a decreases in cash outflows on our inventory. These increases are offset, in part, by an increases in cash outflows on our prepaid expenses and other current assets, and accrued expenses and other current liabilities, during the nine months ended December 27, 2014 as compared to the nine months ended December 28, 2013. The decrease in cash outflows on our inventory occurred primarily due to the sell through of our inventory relative to purchases made during the nine months ended December 27, 2015. The increase in cash outflows on our prepaid expenses and current assets was primarily due to estimated income taxes which were paid during the nine months ended December 27, 2014. The decrease in cash outflows on our accrued expenses and other current liabilities was largely due to the payment of certain non-U.S. current income tax liabilities.

Cash Used in Investing Activities

Net cash used in investing activities increased $162.9 million to $311.8 million during the nine months ended December 27, 2014, as compared to $148.9 million during the nine months ended December 28, 2013. The increase in cash used in investing activities is primarily the result of the build-out of our new retail stores, which were constructed during the nine months ended December 27, 2014, shop-in-shops we installed during the nine months ended December 27, 2014, as well as certain technology initiatives undertaken during the nine months ended December 27, 2014, which related to distribution system enhancements and various other improvements to our infrastructure.

 

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Cash (used in) Provided by Financing Activities

Net cash used in financing activities was $353.0 million for the nine months ended December 27, 2014, as compared to cash provided by financing activities of $55.6 million for the nine months ended December 28, 2013. The cash flows from financing activities during the nine months ended December 27, 2014, were primarily comprised of cash payments of $403.3 million related to the repurchase of our ordinary shares, offset in part, by proceeds related to the exercise of employee share options of approximately $10.1 million. Cash flows from financing activities related to the nine months ended December 28, 2013, were comprised of proceeds received from the exercise of employee share options of approximately $13.5 million, offset in part by the purchase of treasury shares of $2.4 million.

Revolving Credit Facility

Senior Unsecured Revolving Credit Facility

On February 8, 2013, we entered into a senior unsecured credit facility (“2013 Credit Facility”). Pursuant to the agreement the 2013 Credit Facility provides for up to $200.0 million of borrowings, and expires on February 8, 2018. The agreement also provides for loans and letters of credit to our European subsidiaries of up to $100.0 million. The 2013 Credit Facility contains financial covenants such as requiring an adjusted leverage ratio of 3.5 to 1.0 (with the ratio being total consolidated indebtedness plus 8.0 times consolidated rent expense to EBITDA plus consolidated rent expense) and a fixed charge coverage ratio of 2.0 to 1.0 (with the ratio being EBITDA plus consolidated rent expense to the sum of fixed charges plus consolidated rent expense), restricts and limits additional indebtedness, and restricts the incurrence of additional liens and cash dividends. As of December 27, 2014, we were in compliance with all of our covenants covered under this agreement.

Borrowings under the 2013 Credit Facility accrue interest at the rate per annum announced from time to time by the agent a rate based on the rates applicable for deposits in the London interbank market for U.S. Dollars or the applicable currency in which the loans are made (the “Adjusted LIBOR”) plus an applicable margin. The applicable margin may range from 1.25% to 1.75%, and is based, or dependent upon, a particular threshold related to the adjusted leverage ratio calculated during the period of borrowing. The 2013 Credit Facility requires an annual facility fee of $0.1 million, and an annual commitment fee of 0.25% to 0.35% on the unused portion of the available credit under the facility.

As of December 27, 2014, there were no amounts outstanding under the 2013 Credit Facility, and the amount available for future borrowings was $188.6 million. There were no amounts borrowed during the nine months ended December 27, 2014. At December 27, 2014, there were stand-by letters of credit of $11.4 million.

Contractual Obligations and Commercial Commitments

As of December 27, 2014, our lease commitments and contractual obligations were as follows (in thousands):

 

Fiscal year ending

   Remainder of
Fiscal

2015
     Fiscal
2016-2017
     Fiscal
2018-2019
     Fiscal
2020 and
Thereafter
     Total  

Operating leases

   $ 42,638       $ 343,396       $ 337,174       $ 711,537       $ 1,434,745   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Operating lease obligations represent the minimum lease rental payments under non-cancelable operating leases for our real estate locations globally. In addition to the above amounts, we are typically required to pay real estate taxes, contingent rent based on sales volume and other occupancy costs relating to our leased properties for our retail stores.

Excluded from the above commitments is $21.9 million of long-term liabilities related to uncertain tax positions, due to the uncertainty of the time and nature of resolution.

The above table also excludes amounts included in current liabilities in our consolidated balance sheet as of December 27, 2014, as these items will be paid within one year, and non-current liabilities that have no cash outflows associated with them (e.g., deferred taxes).

 

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We do not have any long-term purchase obligations that represent firm commitments at December 27, 2014.

Research and Development, Patents and Licenses, etc.

We do not conduct research and development activities.

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. We do not have any 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, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.

Recent Accounting Pronouncements

We have considered all new accounting pronouncements and, with the exception of the below, have concluded that there are no new pronouncements that have a material impact on our results of operations, financial condition or cash flows based on current information.

In May, 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers, which amends how an entity is currently required to recognize revenue from contracts with its customers. The ASU will replace the existing revenue recognition guidance when it becomes effective for entities in January 2017. Early application is not permitted. We are currently evaluating the impact that ASU 2014-09 will have on our consolidated financial statements and related disclosures.

Quantitative and Qualitative Disclosures about Market Risk

We are exposed to certain market risks during the normal course of our business, such as risk arising from fluctuations in foreign currency exchange rates, as well as fluctuations in interest rates. In attempts to manage these risks, we employ certain strategies to mitigate the effect of these fluctuations. Currently we enter into foreign currency forward contracts to manage our foreign currency exposure to the fluctuations of certain foreign currencies. The use of these instruments helps to manage our exposure to our foreign purchase commitments and better control our product costs. Other than these purchase commitments, we do not use these foreign exchange contracts for any other purposes. In addition, we do not use derivatives for speculative purposes.

Foreign Currency Exchange Risk

We are exposed to risks on certain purchase commitments to foreign suppliers based on the value of our purchasing subsidiaries local currency relative to the currency requirement of the supplier on the date of the commitment. As such, we enter into forward currency contracts that generally mature in 12 months or less and are consistent with the related purchase commitments. These contracts are recorded at fair value in our consolidated balance sheets as either an asset or liability, and are derivative contracts to hedge cash flow risks. The majority of these contracts are designated as hedges for hedge accounting purposes, while certain of these contracts, currently a relatively small portion, are not designated as hedges for accounting purposes. Accordingly, the changes in the fair value of the majority of these contracts at the balance sheet date are recorded in our equity as a component of accumulated other comprehensive income, and upon maturity (settlement) are recorded in, or reclassified into, our cost of sales or operating expenses, in our consolidated statement of operations, as applicable to the transactions for which the forward exchange contracts were established. For those contracts which are designated as hedges for accounting purposes, any portion of those contracts deemed ineffective would be charged to earnings, in the period the ineffectiveness was determined.

 

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We perform a sensitivity analysis on our forward currency contracts, both designated and not designated as hedges for accounting purposes, to determine the effects of fluctuations in foreign currency exchange rates. For this sensitivity analysis, we assume a hypothetical change in U.S. dollar against foreign exchange rates. Based on all foreign currency exchange contracts outstanding as of December 27, 2014, a 10% appreciation or devaluation of the U.S. dollar compared to the level of foreign currency exchange rates for currencies under contract as of December 27, 2014, would result in a net increase or decrease of approximately $16.0 million in the fair value of these contracts.

Interest Rate Risk

We are exposed to interest rate risk in relation to our 2013 Credit Facility. Our 2013 Credit Facility carries interest rates that are tied to LIBOR and the prime rate, among other institutional lending rates (depending on the particular origination of borrowing), and therefore our statements of operations and cash flows are exposed to changes in those interest rates. At December 27, 2014, there was no outstanding balance on our 2013 Credit Facility. The balance of our 2013 Credit Facility at December 27, 2014, is not indicative of future balances that may be subject to fluctuations in interest rates. Any increases in the applicable interest rate(s) would cause an increase to the interest expense on our 2013 Credit Facility relative to any outstanding balance at that date.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of December 27, 2014. Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and is accumulated and communicated to our management, including our CEO and CFO, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the three months ended December 27, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

None

 

ITEM 1A. RISK FACTORS

Please refer to our Annual Report on Form 10-K for the fiscal year ended March 29, 2014, for a detailed discussion of certain risk factors that could materially adversely affect the Company’s business, operating results and/or financial condition. There are no material changes to the risk factors previously disclosed, nor has the Company identified any previously undisclosed risks that could materially adversely affect the Company’s business, operating results and/or financial condition.

 

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(c) Issuer Purchases of Equity Securities

The following table provides information of the Company’s ordinary shares repurchased during the three months ended December 27, 2014:

 

     Total Number
of Shares
Purchased
     Average Price
Paid per Share
     Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs
     Maximum Number (or
Approximated Dollar
Value) of Shares (or
Units) that may yet be
Purchased Under the
Plans or Programs
 

September 28 - October 25

     —           —           —           —     

October 26 - November 22

     5,068,813      $ 78.90         5,068,813      $  600,072,713   

November 23 - December 27

     29,765      $ 76.97         —           —     
  

 

 

       

 

 

    
  5,098,578   $ 78.89      5,068,813  
  

 

 

       

 

 

    

On October 30, 2014, the Company’s Board of Directors authorized a $1.0 billion share repurchase program, which authorized the repurchase of Company shares for a period of two years. All shares reacquired during the second fiscal month ended November 22, 2014, represent ordinary shares of the Company purchased under this program. All shares reacquired during the third fiscal month ended December 27, 2014, represent ordinary shares of the Company withheld from certain executive officers to satisfy minimum tax withholding obligations relating to the vesting of restricted share awards.

ITEM 6. EXHIBITS

a. Exhibits

See accompanying Exhibit Index included after the signature page of this report for a list of exhibits filed or furnished with this report.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on February 5, 2015.

 

MICHAEL KORS HOLDINGS LIMITED
By:  

/s/ John D. Idol

Name:   John D. Idol
Title:   Chairman & Chief Executive Officer
By:  

/s/ Joseph B. Parsons

Name:   Joseph B. Parsons
Title:   Executive Vice President, Chief Financial Officer, Chief Operating Officer and Treasurer

 

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INDEX TO EXHIBITS

 

Exhibit

No.

  

Description

  31.1    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Chief Executive Officer.
  32.2    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Chief Financial Officer.
101.1    The following financial information from the Company’s Quarterly Report on Form 10-Q, for the period ended December 27, 2014, formatted in eXtensible Business Reporting Language: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations and Comprehensive Income, (iii) Condensed Consolidated Statements of Shareholders’ Equity (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements. (1)

 

(1) Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101.1 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

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