424B4 1 d232021d424b4.htm FINAL PROSPECTUS Final Prospectus
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Filed Pursuant to Rule 424(b)(4)
Registration Nos. 333-178282 and 333-178498

 

PROSPECTUS

47,200,000 Ordinary Shares

LOGO

Michael Kors Holdings Limited

This is an initial public offering of Michael Kors Holdings Limited. The selling shareholders, including certain members of our management, are offering all of the ordinary shares under this prospectus. We will not receive any proceeds from the sale of ordinary shares by the selling shareholders.

Prior to this offering, there has been no public market for our ordinary shares. The initial public offering price per share is $20.00. We have been approved to list our ordinary shares on the New York Stock Exchange (the “NYSE”) under the symbol “KORS.”

 

 

Investing in our ordinary shares involves risks. See “Risk Factors” beginning on page 11 to read about factors you should consider before buying our ordinary shares.

 

 

 

Price $20.00 Per Ordinary Share

 

 

 

     Price to Public      Underwriting
Discounts and
Commissions
     Proceeds, before
Expenses, to
Selling
Shareholders
 

Per Ordinary Share

     $20.00         $1.00        $19.00  

Total

   $ 944,000,000       $ 47,200,000       $ 896,800,000   

To the extent that the underwriters sell more than 47,200,000 ordinary shares, the underwriters have a 30-day option to purchase up to an additional 7,080,000 ordinary shares from the selling shareholders identified in this prospectus on the same terms as set forth above. See the section of this prospectus entitled “Underwriting.”

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the ordinary shares against payment in New York, New York on or about December 20, 2011.

 

Morgan Stanley   J.P. Morgan   Goldman, Sachs & Co.

 

 

 

Baird   Jefferies   Nomura   Piper Jaffray

December 14, 2011


Table of Contents

LOGO


Table of Contents

TABLE OF CONTENTS

 

     Page  

Certain Relationships and Related Party Transactions

     92   

Description of Share Capital

     98   

Shares Eligible for Future Sale

     110   

Tax Considerations

     112   

Underwriting

     116   

Expenses Related to the Offering

     122   

Service of Process and Enforcement of Liabilities

     123   

Legal Matters

     124   

Experts

     124   

Available Information

     124   

Index to Consolidated Financial Statements

     F-1   
 

 

 

Neither we, the selling shareholders nor the underwriters have authorized any other person to provide you with different or additional information other than that contained in this prospectus. We, the selling shareholders and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may provide. We and the selling shareholders are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. The information contained in this prospectus is accurate only as of the date of this prospectus or such other date stated in this prospectus, and our business, financial condition, results of operations and/or prospects may have changed since those dates.

The laws of certain jurisdictions may restrict the distribution of this prospectus and the offer and sale of the ordinary shares. Persons into whose possession this prospectus or any ordinary shares may come must inform themselves about, and observe, any such restrictions on the distribution of this prospectus and the offering and sale of the ordinary shares. In particular, there are restrictions on the distribution of this prospectus and the offer or sale of the ordinary shares in the United States and the European Economic Area. Neither we, the selling shareholders nor our respective representatives are making any representation to any offeree or any purchaser of the ordinary shares regarding the legality of any investment in the ordinary shares by such offeree or purchaser under applicable legal investment or similar laws or regulations. Accordingly, no ordinary shares may be offered or sold, directly or indirectly, and neither this prospectus nor any advertisement or other offering material may be distributed or published in any jurisdiction, except under circumstances that will result in compliance with any applicable laws and regulations.

INDUSTRY AND MARKET DATA

We obtained the industry, market and competitive position data throughout this prospectus from our own internal estimates and research as well as from industry and general publications and research, surveys and studies conducted by third parties, including the Luxury Goods Worldwide Market Study, 2011 (dated October 2011), Luxury Goods Worldwide Market Study Spring 2011 Update (dated May 2011), the Luxury Goods Worldwide Market Study (dated October 2008) and the Altagamma 2006 Worldwide Markets Monitor (dated October 2006), each of which was 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 (together, the “Altagamma Studies”). Industry publications, studies and surveys generally state that they have been prepared from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. While we believe that each of these

 

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studies and publications is reliable, we have not independently verified market and industry data from third-party sources. While we believe our internal company research is reliable and the definitions of our market and industry are appropriate, neither this research nor these definitions have been verified by any independent source. Further, while we believe the market opportunity information included in this prospectus is generally reliable, such information is inherently imprecise. In addition, projections, assumptions and estimates of the future performance of the industry in which we operate and our future performance are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors.” These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us. See “Cautionary Note Regarding Forward-Looking Statements.”

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 $1.33 to €1.00.

TRADEMARKS

We operate under a number of trademarks, including, among others, “Michael Kors,” “MICHAEL Michael Kors” and “KORS Michael Kors,” all of which are registered under applicable intellectual property laws. This prospectus contains references to our trademarks and service marks and to those belonging to other entities. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent possible under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements in this prospectus constitute forward-looking statements that do not directly or exclusively relate to historical facts. You should not place undue reliance on such statements because they are subject to numerous uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. Forward-looking statements include information concerning our possible or assumed future results of operations, including descriptions of our business strategy. These statements often include words such as “may,” “will,” “should,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate” or similar expressions.

The forward-looking statements contained in this prospectus are based on assumptions that we have made in light of our management’s experience in the industry as well as our perceptions of historical trends, current conditions, expected future developments and other factors that we believe are appropriate under the circumstances. As you read and consider this prospectus, you should understand that these statements are not guarantees of performance or results. They involve known and unknown risks, uncertainties and assumptions. Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect our actual financial results or results of operations and could cause actual results to differ materially from those in these forward-looking statements. These factors include but are not limited to:

 

   

general economic cycles that affect consumer spending and overall consumer spending on accessories, footwear and apparel;

 

   

our ability to respond to changing fashion and retail trends;

 

   

our ability to respond to market competition;

 

   

our dependence on members of our executive management and other key employees, including, among others, Mr. Kors and Mr. Idol;

 

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our ability to execute our growth strategies, including increasing brand awareness and global comparable store sales growth and opening new retail stores, including concessions, and “shop-in-shops” in North America and internationally;

 

   

our ability to manage our operations at our current size and to manage any future growth;

 

   

our ability to maintain historical levels of comparable store sales and average sales per square foot as we expand our store base;

 

   

risks associated with leasing retail space under long-term, non-cancelable leases and our substantial operating lease obligations;

 

   

the success of our current and future licensing arrangements with third parties over whom we have limited control;

 

   

our ability to maintain our relationships with our significant wholesale customers;

 

   

our ability to maintain adequate information technology systems and to effectively track inventory, manage our supply chain, record and process transactions, summarize results and manage our business;

 

   

direct privacy breaches and third-party operation of our e-commerce website;

 

   

fluctuations in the costs of raw materials;

 

   

our ability to effectively operate our distribution facilities and transition into a new distribution facility and implement a new warehouse management system;

 

   

our dependence on foreign manufacturing contractors and independent third-party agents to source our finished goods, which poses legal, regulatory, political and economic risks;

 

   

our manufacturing contractors’ failure to use acceptable ethical business practices;

 

   

our ability to maintain compliance with restrictive covenants in the documents governing our debt;

 

   

our ability to protect our trademarks and other intellectual property rights, including our brand image and reputation, and the possibility that others may allege that we infringe upon their intellectual property rights; and

 

   

fluctuations in foreign currency exchange rates.

These and other factors are more fully discussed in the “Risk Factors” section and elsewhere in this prospectus. These risks could cause actual results to differ materially from those implied by forward-looking statements in this prospectus.

All information contained in this prospectus is materially accurate and complete as of the date of this prospectus. You should keep in mind, however, that any forward-looking statement made by us in this prospectus, or elsewhere, speaks only as of the date on which we make it. New risks and uncertainties come up from time to time, and it is impossible for us to predict these events or how they may affect us. We do not undertake any obligation to update or revise any forward-looking statements after the date of this prospectus, whether as a result of new information, future events or otherwise, except as required by law. In light of these risks and uncertainties, you should keep in mind that any event described in a forward-looking statement made in this prospectus or elsewhere might not occur.

 

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PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our ordinary shares. Before making an investment decision, you should read this entire prospectus carefully, especially the “Risk Factors” section of this prospectus and our consolidated financial statements and related notes appearing at the end of this prospectus. Some of the statements in this prospectus constitute forward-looking statements that involve risks and uncertainties. See “Cautionary Note Regarding Forward-Looking Statements” for more information.

Except where the context otherwise requires or where otherwise indicated, (i) the terms “Michael Kors,” “we,” “us,” “our,” “the Company,” “our Company” and “our business” refer to Michael Kors Holdings Limited and its consolidated subsidiaries as a combined entity, (ii) references to our stores, retail stores and retail segment include all of our full-price retail stores (including concessions) and outlet stores and (iii) the term “Fiscal,” with respect to any year, refers to the 52-week period ending on the Saturday closest to March 31 of such year, except for “Fiscal 2010,” which refers to the 53-week period ended April 3, 2010, and “Fiscal 2008” and “Fiscal 2007,” which refer to the fiscal years ended March 31, 2008 and 2007, respectively. As further described in this prospectus, the Company and certain of its affiliates completed a corporate reorganization in July 2011 (the “Reorganization”). See “Certain Relationships and Related Party Transactions—Reorganization Transactions and Preference Share Sale” for more information on the Reorganization. Some differences in the numbers in the tables and text throughout this prospectus may exist due to rounding. All comparable store sales are presented on a 52-week basis.

Our Company

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 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 74 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 have a clear trajectory for significant future growth. Over the years, we have successfully expanded beyond apparel into accessories (including handbags, small leather goods, eyewear, jewelry and watches) and footwear, which together now account for the majority of our wholesale and retail sales. We have also expanded our distribution capabilities beyond wholesale into retail, which accounted for approximately 42.8%, 36.7% and 28.7% of our total revenue in Fiscal 2011, Fiscal 2010 and Fiscal 2009, respectively. Our total revenue was $803.3 million in Fiscal 2011 as compared to $508.1 million in Fiscal 2010, representing a 58.1% year-over-year increase. Our net income was $72.5 million in Fiscal 2011 as compared to $39.2 million in Fiscal 2010, representing a 84.7% year-over-year increase.

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. In Fiscal 2011, our retail segment accounted for approximately 42.8% of our total revenue. As of October 1, 2011, our retail segment included:

 

   

169 North American retail stores, including concessions; and

 

   

34 international retail stores, including concessions, in Europe and Japan.

 

 

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In Fiscal 2011, our wholesale segment accounted for approximately 51.5% of our total revenue. As of October 1, 2011, our wholesale segment included:

 

   

wholesale sales through approximately 1,801 department store and specialty store doors in North America; and

 

   

wholesale sales through approximately 549 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. In Fiscal 2011, our licensing segment accounted for approximately 5.7% of our total revenue and consisted primarily 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, including, among others, Bergdorf Goodman, Saks Fifth Avenue, Neiman Marcus, Holt Renfrew, Harrods, Harvey Nichols, Selfridges, Le Bon Marché and Printemps. In 2004, we saw an opportunity to capitalize on the brand strength of the Michael Kors collection and address the significant demand opportunity in accessible luxury goods, and we introduced the MICHAEL Michael Kors collection, which has a strong focus on accessories, in addition to offering footwear and apparel. The MICHAEL Michael Kors collection is carried in all of our lifestyle stores as well as leading department stores throughout the world, including, among others, Bloomingdale’s, Nordstrom, Macy’s, Harrod’s, Harvey Nichols, Selfridges, Printemps, Lotte, Hyundai, Isetan and Lane Crawford. Taken together, our two primary collections target a broad customer base while retaining a premium luxury image. In addition to these two primary collections, we also offer select footwear and outerwear through our KORS Michael Kors accessible luxury collection, which is not material to our net sales.

Our Market Opportunity

We operate in the growing global luxury goods industry, which, according to the Altagamma Studies, is predicted to grow from $230.1 billion in 2010 to between $299.3 billion and $305.9 billion in 2014, representing a 7% compound annual growth rate (“CAGR”). While apparel makes up an important part of our business, we have a growing focus on luxury accessories and footwear, positioning us to participate in what was the most resilient and fastest growing product category within the global luxury goods industry from 2005 to 2010. In 2010, the accessories product category generated sales of approximately $57.5 billion, representing 25% of total sales for the industry. The majority of our current sales come from North America, and we have built, and continue to build, our business and brand awareness in Europe and Asia.

Our Competitive Strengths

We believe that the following strengths differentiate us from our competitors:

Rapidly Growing Luxury Lifestyle Brand with Best-in-Class Growth Metrics. We believe that the Michael Kors name has become synonymous with luxurious fashion that is timeless and elegant, expressed through sophisticated accessory and ready-to-wear collections. Each of our collections exemplifies the jet-set lifestyle and features high quality designs, materials and craftsmanship. Some of the most widely recognized global trendsetters—including celebrities such as Angelina Jolie, Heidi Klum, Blake Lively, Penelope Cruz, Gwyneth Paltrow and Catherine Zeta-Jones—walk the red carpet in our collections. We have built a solid foundation for continued long-term global growth and currently enjoy best-in-class growth metrics. For instance:

 

   

we experienced year-over-year total revenue growth of 58.1% and 28.0% in Fiscal 2011 and Fiscal 2010, respectively;

 

 

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our global comparable store sales increased 48.2%, 19.2% and 6.3% in Fiscal 2011, Fiscal 2010 and Fiscal 2009, respectively, and we have had positive comparable store sales growth in every quarter in the last five fiscal years; and

 

   

our global retail store count grew from 48 at the beginning of Fiscal 2009 to 166 through the end of Fiscal 2011, representing a 51.2% CAGR.

Design Vision Led by World-Renowned, Award-Winning Designer. Michael Kors, a world-renowned designer, personally leads our experienced design team. Mr. Kors and his team are responsible for conceptualizing and directing the design of all of our products, and their design leadership is a unique advantage that we possess. Mr. Kors has received a number of awards, including the Council of Fashion Designers of America (“CFDA”) Women’s Fashion Designer of the Year (1999), the CFDA Men’s Fashion Designer of the Year (2003), the ACE Accessory Designer of the Year (2006) and the CFDA Lifetime Achievement Award (2010). These and other awards recognize the contribution Mr. Kors and his team have made to the fashion industry and our Company. Our brand image has been further enhanced since 2004 by Mr. Kors’ position as a judge on the six-time Emmy-nominated reality show Project Runway.

Poised to Take Share in the Growing Global Accessories Product Category. According to the Altagamma Studies, from 2005 to 2010, the accessories product category was the fastest growing product category in the global luxury goods industry, increasing at a 9% CAGR, and in 2010 the accessories product category generated sales of approximately $57.5 billion, representing 25% of total luxury goods sales. In 2004, we saw the opportunity to capitalize on growing accessories demand by leveraging the strength of the Michael Kors luxury collection, and we introduced the accessible luxury MICHAEL Michael Kors collection. Since launching the MICHAEL Michael Kors collection, awareness of our brand within the United States has grown exponentially, increasing from 11% in 2004 to 71% in 2011, according to a study we commissioned. In turn, our sales of accessories have grown at an approximately 57.6% CAGR over the last three years, outperforming industry growth. Net sales of accessories and related merchandise (including handbags, small leather goods, footwear, watches, jewelry, eyewear and fragrance) in our retail and wholesale segments accounted for approximately 62.3% of our total revenue in Fiscal 2011. We anticipate that sales of our accessories and related merchandise will continue to grow and will become an increasingly important driver of global comparable store sales growth.

Proven Multi-Format Retail Segment with Significant Growth Opportunity. In Fiscal 2011, our retail segment reported total revenue of $344.2 million and an industry-best 48.2% increase in year-over-year comparable store sales from Fiscal 2010. Within our retail segment we have three primary retail store formats: collection stores, lifestyle stores and outlet stores. Our collection stores are located in some of the world’s most prestigious shopping areas, such as Madison Avenue in New York and Bond Street in London, and are generally 3,100 square feet in size. Our lifestyle stores are located in some of the world’s most frequented metropolitan shopping locations and leading regional shopping centers, and are generally 2,100 square feet in size. We also extend our reach to additional consumer groups through our outlet stores, which are generally 2,700 square feet in size. In addition to these three retail store formats, we operate concessions in a select number of department stores in North America and internationally.

Strong Relationships with Premier Wholesale Customers. We partner with leading wholesale customers, such as Bergdorf Goodman, Saks Fifth Avenue, Neiman Marcus, Holt Renfrew, Bloomingdale’s, Nordstrom and Macy’s in North America; and Harrods, Harvey Nichols, Selfridges and Galeries Lafayette in Europe. These relationships enable us to access large numbers of our key consumers in a targeted manner. In addition, we are engaged in wholesale growth initiatives that are designed to transform the Michael Kors displays at select department stores into branded “shop-in-shops.” By installing customized freestanding fixtures, wall casings and components, decorative items and flooring, as well as deploying specially trained staff, we believe that our shop-in-shops provide department store consumers with a more personalized shopping experience than traditional

 

 

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retail department store configurations. These initiatives, among others, have helped increase total revenue for our wholesale segment from $296.9 million in Fiscal 2010 to $413.6 million in Fiscal 2011, representing a 39.3% year-over-year increase.

Growing Licensing Segment. The strength of our global brand has been instrumental in helping us build our licensing business. We collaborate with a select number of product licensees who produce and sell what we believe are products requiring specialized expertise that are enhanced by our brand strength. Our relationship with Fossil Partners, LP. (“Fossil”), for instance, has helped us create a line of watches that we believe have become, and will continue to be, status items for young fashion-conscious consumers. Other product licensees include, among others, the Aramis and Designer Fragrances division of The Estée Lauder Companies Inc. (“Estée Lauder”) for fragrances and Marchon Eyewear Inc. (“Marchon”) for eyewear. Our relationships with our product licensees have helped us leverage our success across demographics and categories by taking advantage of their unique expertise, resulting in total revenue for licensed products increasing from $24.6 million in Fiscal 2010 to $45.5 million in Fiscal 2011, representing a 84.8% year-over-year increase. In addition, we have entered into agreements with non-manufacturing licensees who we believe have particular expertise in the distribution of fashion accessories, footwear and apparel in specific geographic territories, such as Korea, the Philippines, Singapore, Malaysia, greater China, the Middle East and Turkey.

Proven and Experienced Management Team. Our senior management team has extensive experience across a broad range of disciplines in the retail industry, including design, sales, marketing, public relations, merchandising, real estate, supply chain and finance. With an average of 25 years of experience in the retail industry, including at a number of public companies, and an average of eight years with Michael Kors, our senior management team has strong creative and operational experience and a successful track record. This extensive experience extends beyond our senior management team and deep into our organization. For example, we have a 50-person design team, the senior staff of which has an average of 19 years of experience in the industry.

Our Growth Strategy

Our goal is to increase our revenue and profits and strengthen our global brand. Our growth strategy includes the following:

Increase Our Brand Awareness. We intend to continue increasing brand awareness and customer loyalty in North America and internationally in a number of ways, including by:

 

   

continuing to open new retail stores in preeminent, high-visibility locations;

 

   

maintaining our strong advertising position in global fashion publications, growing our online advertising exposure and internet presence and continuing to distribute our store catalog featuring our new collections;

 

   

holding our semi-annual runway shows that reinforce Mr. Kors’ designer status and high-fashion image, creating excitement around the Michael Kors and MICHAEL Michael Kors collections and generating global multimedia press coverage; and

 

   

leveraging Mr. Kors’ global prestige and popularity through a variety of press activities and personal appearances.

Expand Our Retail Store Base in North America. We expanded our retail store base in North America by 30 stores in Fiscal 2010 and by 40 stores in Fiscal 2011. We believe that there is significant opportunity to continue expanding our retail store base in North America and to increase our North American retail store base to approximately 400 locations in the long term. We will look to open new stores predominately in high traffic areas of street and mall locations in high-income demographic areas and will adhere to our already successful retail store formats, which we believe reinforce our brand image and generate strong sales per square foot.

 

 

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Expand North American Shop-in-Shop Footprint at Select Department Stores. In Fiscal 2011, we achieved a 33.7% year-over-year increase in our North American wholesale sales through substantially the same number of department store wholesale doors, primarily due to an increase in shop-in-shops. We believe that our proprietary shop-in-shop fixtures effectively communicate our brand image within the department store, enhance the presentation of our merchandise and create a more personalized shopping experience for department store customers. We plan to grow our North American shop-in-shop footprint at select department stores by continuing to convert existing wholesale door space into shop-in-shops and expanding the size of existing shop-in-shops.

Increase Global Comparable Store Sales. In Fiscal 2011, we reported a 48.2% year-over-year increase in global comparable store sales. We expect to continue to increase global comparable store sales with a number of initiatives already under way to increase the size and frequency of purchases by our existing customers and to attract new customers. Such initiatives include, among others, increasing the size of existing stores, creating compelling store environments and offering new products, including logo products, small leather goods, active footwear and fashion jewelry.

Grow International Retail and Wholesale Businesses. Given the growing worldwide demand for accessible luxury goods, continued international expansion in select regions represents a compelling opportunity for additional growth. As of October 1, 2011, we operated 34 retail stores, including concessions, internationally, and our products are sold through approximately 549 department store and specialty store wholesale doors internationally. We plan to leverage our existing operations in London, Lugano, Madrid, Milan, Munich, Paris and Tokyo to drive continued retail and wholesale expansion in Europe and Japan. In the long term, we believe that we can increase our international retail store base, including concessions, to approximately 100 locations in Europe and approximately 100 locations in Japan. In addition, we plan to expand our shop-in-shop footprint at select department stores throughout Europe and our concession footprint at select department stores in Japan.

Recent Developments

As of November 26, 2011, we had 184 North American retail stores, including concessions, and 37 international retail stores, including concessions, in Europe and Japan. For the period from October 2, 2011, the first day of our third fiscal quarter of Fiscal 2012, to November 26, 2011, our comparable store sales increased by approximately 31.2% for this period. This reflects only the first two months of our third fiscal quarter. Accordingly, we have not begun our normal quarter-end closing and review procedures and there can be no assurance that final results for the thirteen-week period ended December 31, 2011 will not differ from the results for this two-month period, including as a result of the third month of our third fiscal quarter. The results for this two-month period are not for an entire fiscal period, will be subject to quarter-end closing procedures and/or adjustments and should not be viewed as a substitute for full interim financial statements prepared in accordance with generally accepted accounting principles in the United States. These preliminary results could change materially and are not necessarily indicative of the results to be achieved for the thirteen-week period ended December 31, 2011, the remainder of Fiscal 2012 or any future period.

Summary Risk Factors

Investing in our ordinary shares entails a high degree of risk as more fully described in the “Risk Factors” section of this prospectus. You should carefully consider such risks before deciding to invest in our ordinary shares. These risks include, among others, that:

 

   

The accessories, footwear and apparel industries are heavily influenced by general macroeconomic cycles that affect consumer spending, and a prolonged period of depressed consumer spending could have a material adverse effect on our business, financial condition and operating results.

 

 

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We may not be able to respond to changing fashion and retail trends in a timely manner, which could have a material adverse effect on our brand, business, financial condition and operating results.

 

   

The markets in which we operate are highly competitive, both within North America and internationally, and increased competition based on a number of factors could cause our profitability to decline.

 

   

The departure of our founder, members of our executive management and other key employees could have a material adverse effect on our business.

 

   

The growth of our business depends on the successful execution of our growth strategies, including our efforts to open and operate new retail stores and increase the number of department stores and specialty stores that sell our products.

Corporate and Other Information

Including our predecessors, we have been in business since 1981. Michael Kors Holdings Limited was incorporated on December 13, 2002 as a limited liability company under the laws of the British Virgin Islands and is registered at the Registry of Corporate Affairs of the British Virgin Islands under number 524407. In 2003, Sportswear Holdings Limited, an affiliate of two of our directors, Silas K. F. Chou and Lawrence S. Stroll, acquired a majority interest in the Company. See “Principal and Selling Shareholders.”

Our principal executive offices are located at c/o Michael Kors Limited, Unit 1001, 10/F, Miramar Tower, 132 Nathan Road, Tsim Sha Tsui, Hong Kong, our telephone number is (852) 3928-5563 and our fax number is (852) 3928-5697. We maintain a website at www.michaelkors.com. We do not incorporate the information contained on, or accessible through, our website into this prospectus, and you should not consider it a part of this prospectus.

 

 

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SUMMARY TERMS OF THE OFFERING

The summary below describes the principal terms of this offering. The “Description of Share Capital” section of this prospectus contains a more detailed description of the ordinary shares.

 

Ordinary shares offered by us

We are not selling any ordinary shares in this offering.

 

Ordinary shares offered by the selling shareholders

47,200,000 ordinary shares.

 

Ordinary shares to be outstanding immediately after this offering

Immediately after this offering, we will have 190,792,868 ordinary shares issued and outstanding.

 

Over-allotment Option

The selling shareholders have granted the underwriters the right to purchase an additional 7,080,000 ordinary shares within 30 days from the date of this prospectus to cover over-allotments, if any.

 

Use of Proceeds

The selling shareholders will receive all of the net proceeds from the sale of the ordinary shares offered under this prospectus. Accordingly, we will not receive any proceeds from the sale of ordinary shares in this offering.

 

Voting Rights

Holders of our ordinary shares are entitled to one vote per ordinary share in all shareholder meetings. See “Description of Share Capital—Ordinary Shares.”

 

Dividend Policy

We do not expect to pay any dividends or other distributions on our ordinary shares in the foreseeable future. We currently intend to retain future earnings. See “Dividend Policy.”

 

Listing

We have been approved to list our ordinary shares on the NYSE under the symbol “KORS.”

 

Risk Factors

Investing in our ordinary shares involves substantial risks. See “Risk Factors” for a description of certain of the risks you should consider before investing in our ordinary shares.

The number of ordinary shares outstanding immediately after this offering excludes 19,240,284 stock options granted and outstanding pursuant to the Amended and Restated Michael Kors (USA), Inc. Stock Option Plan (the “Stock Option Plan”) at a weighted average exercise price of $4.48 per ordinary share, 2,516,184 ordinary shares subject to grants of stock options, restricted shares and restricted stock units under the Amended and Restated Michael Kors Holdings Limited Omnibus Incentive Plan (the “Equity Plan”) (in the case of stock options, at an exercise price equal to the initial public offering price) and 12,729,816 ordinary shares reserved for future issuance under the Equity Plan. See “Management—Compensation of Executive Officers and Directors.”

Unless we indicate otherwise, all information in this prospectus:

 

   

assumes that the underwriters do not exercise their option to purchase from the selling shareholders up to 7,080,000 ordinary shares to cover over-allotments, if any; and

 

   

gives effect to (i) the Reorganization, (ii) a 3.8-to-1 split of our ordinary shares (the “Share Split”) that occurred on November 30, 2011, (iii) the conversion of all outstanding preference shares of the Company into 41,256,025 ordinary shares immediately prior to the completion of this offering and (iv) the exercise of stock options to acquire 1,736,567 ordinary shares prior to the completion of this offering.

 

 

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Summary Historical Consolidated Financial and Other Data

Our fiscal year ends on the Saturday closest to March 31 of the respective calendar year. Results for the periods presented represent the results of Michael Kors Holdings Limited and its consolidated subsidiaries.

The following table sets forth summary historical consolidated financial and other data for Michael Kors Holdings Limited and its consolidated subsidiaries for the periods presented. The statements of operations data for Fiscal 2011, 2010 and 2009 and the balance sheet data as of the end of Fiscal 2011 and 2010 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The statements of operations data for the six months ended October 1, 2011 and October 2, 2010 and the balance sheet data at October 1, 2011 have been derived from our unaudited interim consolidated financial statements included elsewhere in this prospectus. Our results of operations for the first six months ended October 1, 2011 are not necessarily indicative of the results that can be expected for the full year or any future period. The balance sheet data as of the end of Fiscal 2009 and as of October 2, 2010 have been derived from our unaudited consolidated financial statements, which are not included in this prospectus.

The summary historical consolidated financial data below should be read in conjunction with “Capitalization,” “Selected Historical Consolidated Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes included elsewhere in this prospectus.

 

 

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    Six Months Ended     Fiscal Years Ended  
    October 1,
2011
    October 2,
2010
    April 2,
2011
    April 3,
2010
    March 28,
2009
 
    (data presented in thousands, except for shares and per share data)  

Statements of Operations Data:

         

Net sales

  $ 520,207      $ 322,440      $ 757,800      $ 483,452      $ 377,058   

Royalty revenue

    28,451        18,444        45,539        24,647        20,016   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    548,658        340,884        803,339        508,099        397,074   

Cost of goods sold

    236,589        155,704        357,274        241,365        208,283   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross Profit

    312,069        185,180        446,065        266,734        188,791   

Selling, general and administrative expenses

    190,799        121,361        279,822        191,717        147,490   

Depreciation and amortization

    17,016        11,680        25,543        18,843        14,020   

Impairment of long-lived assets

    —          2,838        3,834        —          3,043   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    207,815        135,879        309,199        210,560        164,553   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    104,254        49,301        136,866        56,174        24,238   

Interest expense

    660        1,230        1,861        2,057        1,600   

Foreign currency loss (income)

    (1,729     (387     1,786        (830     391   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

    105,323        48,458        133,219        54,947        22,247   

Provision for income taxes

    40,602        21,115        60,713        15,699        9,208   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    64,721        27,343        72,506        39,248        13,039   

Net income applicable to preference shareholders

    14,173        5,894        15,629        8,460        2,811   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income available for ordinary shareholders

  $ 50,548      $ 21,449      $ 56,877      $ 30,788      $ 10,228   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average ordinary shares outstanding(1):

         

Basic

    143,554,974        140,554,377        140,554,377        140,554,377        140,554,377   

Diluted

    183,378,696        179,177,268        179,177,268        179,177,268        179,177,268   

Net income per ordinary share(2):

         

Basic

  $ 0.35      $ 0.15      $ 0.40      $ 0.22      $ 0.07   

Diluted

  $ 0.35      $ 0.15      $ 0.40      $ 0.22      $ 0.07   

Pro forma net income(3)(4):

  $ 61,624        $ 69,410       

Pro forma weighted average ordinary shares outstanding(4):

         

Basic

    183,378,696          179,177,251       

Diluted

    188,203,675          183,129,385       

Pro forma net income per ordinary share(3)(4):

         

Basic

  $ 0.34        $ 0.39       

Diluted

  $ 0.33        $ 0.38       

 

(1)

Gives effect to the Reorganization and the Share Split. See “Certain Relationships and Related Party Transactions—Reorganization Transactions and Preference Share Sale.”

(2)

Basic net income per ordinary share is computed by dividing net income available to ordinary shareholders by basic weighted average ordinary shares outstanding. Diluted net income per ordinary share assumes the conversion of preference shares to ordinary shares and is computed by dividing net income by diluted weighted average ordinary shares outstanding.

(3)

See “Unaudited Pro Forma Financial Data.”

(4)

Gives effect to the Reorganization, the Share Split and the conversion of all outstanding preference shares of the Company into ordinary shares immediately prior to the completion of this offering.

 

 

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     Six Months Ended     Fiscal Years Ended  
     October 1, 2011     October 2, 2010     April 2,
2011
    April 3,
2010
    March 28, 2009  
     (dollars in thousands)  

Operating Data:

          

Comparable retail store sales growth

     42.3     39.5     48.2     19.2     6.3

Gross profit as a percentage of total revenue

     56.9     54.3     55.5     52.5     47.5

Retail net sales

   $ 255,377      $ 139,639      $ 344,195      $ 186,538      $ 114,031   

Retail stores at end of period

     203        140        166        106        74   

Total retail stores gross square footage

     462,758        314,345        370,713        263,468        186,362   

Wholesale doors at end of period

     2,350        1,775        2,032        1,600        1,313   

Balance Sheet Data (as of the end of period dated above):

  

   

Working capital

   $ 181,800      $ 52,348      $ 117,673      $ 51,263      $ 13,739   

Total assets

   $ 479,216      $ 324,418      $ 399,495      $ 281,852      $ 218,463   

Revolving line of credit

   $ 16,218      $ 25,955      $ 12,765      $ 43,980      $ 39,440   

Note payable to parent

   $ —        $ 103,500      $ 101,650      $ 103,500      $ 103,500   

Shareholders’ equity

   $ 302,293      $ 84,508      $ 125,320      $ 49,011      $ 11,475   

Number of ordinary shares

     147,134,033        140,554,377        140,554,377        140,554,377        140,554,377   

Number of preference shares

     10,856,853        10,163,920        10,163,920        10,163,920        10,163,920   

 

 

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RISK FACTORS

An investment in our ordinary shares involves a high degree of risk. Prior to investing in our ordinary shares, we encourage each prospective investor to carefully read this entire prospectus, including, without limitation, the following risk factors and the section of this prospectus entitled “Cautionary Notice Regarding Forward-Looking Statements.” Any of the following factors could materially adversely affect our business, financial condition and operating results. Additional risks and uncertainties not currently known to us or that we currently view as immaterial may also materially adversely affect our business, financial condition and operating results. If any of these risks occur, the value of our ordinary shares could decline, and you could lose all or part of your original investment.

Risks Related to Our Business

The accessories, footwear and apparel industries are heavily influenced by general macroeconomic cycles that affect consumer spending, and a prolonged period of depressed consumer spending could have a material adverse effect on our business, financial condition and operating results.

The accessories, footwear and apparel industries have historically been subject to cyclical variations, recessions in the general economy and uncertainties regarding future economic prospects that affect consumer spending habits. Purchases of discretionary luxury items, such as our products, tend to decline during recessionary periods, when disposable income is lower. The success of our operations depends on a number of factors impacting discretionary consumer spending, including general economic conditions, consumer confidence, wages and unemployment, housing prices, consumer debt, interest rates, fuel and energy costs, taxation and political conditions. A continuation or worsening of the current weakness in the economy may negatively affect consumer and wholesale purchases of our products and could have a material adverse effect on our business, financial condition and operating results.

We may not be able to respond to changing fashion and retail trends in a timely manner, which could have a material adverse effect on our brand, business, financial condition and operating results.

The accessories, footwear and apparel industries have historically been subject to rapidly changing fashion trends and consumer preferences. We believe that our success is largely dependent on our brand image and ability to anticipate and respond promptly to changing consumer demands and fashion trends in the design, styling, production, merchandising and pricing of products. If we do not correctly gauge consumer needs and fashion trends and respond appropriately, consumers may not purchase our products and our brand name and brand image may be impaired. Even if we react appropriately to changes in fashion trends and consumer preferences, consumers may consider our brand image to be outdated or associate our brand with styles that are no longer popular or trend-setting. Any of these outcomes could have a material adverse effect on our brand, business, financial condition and operating results.

The markets in which we operate are highly competitive, both within North America and internationally, and increased competition based on a number of factors could cause our profitability to decline.

We face intense competition from other domestic and foreign accessories, footwear and apparel producers and retailers, including, among others, Coach, Burberry, Ralph Lauren, Hermès, Louis Vuitton, Gucci, Marc Jacobs, Chloé and Prada. Competition is based on a number of factors, including, without limitation, the following:

 

   

anticipating and responding to changing consumer demands in a timely manner;

 

   

establishing and maintaining favorable brand-name recognition;

 

   

determining and maintaining product quality;

 

   

maintaining key employees;

 

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maintaining and growing market share;

 

   

developing quality and differentiated products that appeal to consumers;

 

   

establishing and maintaining acceptable relationships with retail customers;

 

   

pricing products appropriately;

 

   

providing appropriate service and support to retailers;

 

   

optimizing retail and supply chain capabilities;

 

   

determining size and location of retail and department store selling space; and

 

   

protecting intellectual property.

In addition, some of our competitors may be significantly larger and more diversified than us and may have significantly greater financial, technological, manufacturing, sales, marketing and distribution resources than we do. Their greater capabilities in these areas may enable them to better withstand periodic downturns in the accessories, footwear and apparel industries, compete more effectively on the basis of price and production and more quickly develop new products. The general availability of manufacturing contractors and agents also allows new entrants easy access to the markets in which we compete, which may increase the number of our competitors and adversely affect our competitive position and our business. Any increased competition, or our failure to adequately address any of these competitive factors, could result in reduced sales, which could adversely affect our business, financial condition and operating results.

Competition, along with such other factors as consolidation and changes in consumer spending patterns, could also result in significant pricing pressure. These factors may cause us to reduce our sales prices to our wholesale customers and retail consumers, which could cause our gross margins to decline if we are unable to appropriately manage inventory levels and/or otherwise offset price reductions with comparable reductions in our operating costs. If our sales prices decline and we fail to sufficiently reduce our product costs or operating expenses, our profitability may decline, which could have a material adverse effect on our business, financial condition and operating results.

The departure of our founder, members of our executive management and other key employees could have a material adverse effect on our business.

We depend on the services and management experience of our founder and executive officers, who have substantial experience and expertise in our business. In particular, Mr. Kors, our Honorary Chairman and Chief Creative Officer, has provided design and executive leadership to the Company since its inception. He is instrumental to our marketing and publicity strategy and is closely identified with both the brand that bears his name and our Company in general. Our ability to maintain our brand image and leverage the goodwill associated with Mr. Kors’ name may be damaged if we were to lose his services. Mr. Kors has the right to terminate his employment with us without cause. In addition, the leadership of John D. Idol, our Chairman and Chief Executive Officer, and Joseph B. Parsons, our Executive Vice President, Chief Financial Officer and Chief Operating Officer, has been a critical element of our success. We also depend on other key employees involved in our licensing, design and advertising operations. Competition for qualified personnel in the apparel industry is intense, and competitors may use aggressive tactics to recruit our executive officers and key employees. Although we have entered into employment agreements with Mr. Kors and certain of our other executive officers, including Mr. Idol and Mr. Parsons, we may not be able to retain the services of such individuals in the future. The loss of services of one or more of these individuals or any negative public perception with respect to, or relating to, the loss of one or more of these individuals could have a material adverse effect on our business, financial condition and operating results.

 

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The growth of our business depends on the successful execution of our growth strategies, including our efforts to open and operate new retail stores and increase the number of department stores and specialty stores that sell our products.

As part of our growth strategy, we intend to open and operate new retail stores and shop-in-shops within select department stores, both domestically and internationally. Our ability to successfully open and operate new retail stores, including concessions, and shop-in-shops depends on many factors, including, among others, our ability to:

 

   

identify new markets where our products and brand image will be accepted or the performance of our retail stores, including concessions, and shop-in-shops will be considered successful;

 

   

negotiate acceptable lease terms, including desired tenant improvement allowances, to secure suitable store locations;

 

   

hire, train and retain personnel and field management;

 

   

assimilate new personnel and field management into our corporate culture;

 

   

source sufficient inventory levels; and

 

   

successfully integrate new retail stores, including concessions, and shop-in-shops into our existing operations and information technology systems.

We will encounter pre-operating costs and we may encounter initial losses when new retail stores, including concessions, and shop-in-shops commence operations. While we expect to open a number of additional retail stores, including concessions, and shop-in-shops in Fiscal 2012, there can be no assurance that we will open the planned number, that we will recover the expenditure costs associated with opening these new retail stores, including concessions, and shop-in-shops or that the operation of these new venues will be successful or profitable. Any such failure could have a material adverse effect on our business, financial condition and operating results.

We face additional risks with respect to our strategy to expand internationally, including our efforts to further expand our operations in European countries and in Japan as well as other Asian countries. In some of these countries we do not yet have significant operating experience, and in most of these countries we face established competitors with significantly more operating experience in those locations. Many of these countries have different operational characteristics, including, but not limited to, employment and labor, transportation, logistics, real estate (including lease terms) and local reporting or legal requirements. Furthermore, consumer demand and behavior, as well as tastes and purchasing trends may differ in these countries and, as a result, sales of our product may not be successful, or the margins on those sales may not be in line with those we currently anticipate. In addition, in many of these countries there is significant competition to attract and retain experienced and talented employees. If our international expansion plans are unsuccessful, it could have a material adverse effect on our business, financial condition and operating results.

We have grown rapidly in recent years and we have limited operating experience at our current scale of operations; if we are unable to manage our operations at our current size or are unable to manage any future growth effectively, our brand image and financial performance may suffer.

We have expanded our operations rapidly and have limited operating experience at our current size. Our total revenue increased from $397.1 million in Fiscal 2009 to $803.3 million in Fiscal 2011. If our operations continue to grow, we will be required to continue to expand our sales and marketing, product development and distribution functions, to upgrade our management information systems and other processes and to obtain more space for our expanding administrative support and other headquarter personnel. Our continued growth could strain our existing resources, and we could experience operating difficulties, including the availability of desirable locations and the negotiation of acceptable lease terms, difficulties in hiring, training and managing an

 

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increasing number of employees, difficulties in obtaining sufficient raw materials and manufacturing capacity to produce our products and delays in production and shipments. These difficulties could result in the erosion of our brand image and could have a material adverse effect on our business, financial condition and operating results.

As we expand our store base, we may be unable to maintain the same comparable store sales or average sales per square foot that we have in the past, which could cause our share price to decline.

As we expand our store base, we may not be able to maintain the levels of comparable store sales that we have experienced historically. In addition, we may not be able to maintain our historic average sales per square foot as we move into new markets. If our future comparable store sales or average sales per square foot decline or fail to meet market expectations, the price of our ordinary shares could decline. In addition, the aggregate results of operations of our stores have fluctuated in the past and can be expected to continue to fluctuate in the future. A variety of factors affect both comparable store sales and average sales per square foot, including, among others, fashion trends, competition, current economic conditions, pricing, inflation, the timing of the release of new merchandise and promotional events, changes in our merchandise mix, the success of marketing programs and weather conditions. If we misjudge the market for our products, we may incur excess inventory for some of our products and miss opportunities for other products. These factors may cause our comparable store sales results and average sales per square foot in the future to be materially lower than recent periods and our expectations, which could harm our results of operations and result in a decline in the price of our ordinary shares.

We are subject to risks associated with leasing retail space under long-term, non-cancelable leases and are required to make substantial lease payments under our operating leases; any failure to make these lease payments when due could materially adversely affect our business, financial condition and operating results.

We do not own any of our store facilities; instead, we lease all of our stores under operating leases. Our leases generally have terms of 10 years with no renewal options. Our leases generally require a fixed annual rent, and most require the payment of additional rent if store sales exceed a negotiated amount. Generally, our leases are “net” leases, which require us to pay all of the costs of insurance, taxes, maintenance and utilities. We generally cannot cancel these leases at our option. Payments under these operating leases account for a significant portion of our operating costs. For example, as of October 1, 2011, we were party to operating leases associated with our stores as well as other corporate facilities requiring future minimum lease payments aggregating $248.1 million through Fiscal 2016 and approximately $234.1 million thereafter through Fiscal 2028. We expect that we will also lease any new stores we open under operating leases with terms similar to those contained in leases we have entered previously, which will further increase our operating lease expenses.

Our substantial operating lease obligations could have significant negative consequences, including, among others:

 

   

increasing our vulnerability to general adverse economic and industry conditions;

 

   

limiting our ability to obtain additional financing;

 

   

requiring a substantial portion of our available cash to pay our rental obligations, thus reducing cash available for other purposes;

 

   

limiting our flexibility in planning for or reacting to changes in our business or in the industry in which we compete; and

 

   

placing us at a disadvantage with respect to some of our competitors.

We depend on cash flow from operations to pay our lease expenses and to fulfill our other cash needs. If our business does not generate sufficient cash flow from operating activities, and sufficient funds are not otherwise available to us, we may not be able to service our operating lease expenses, grow our business, respond to competitive challenges or fund our other liquidity and capital needs.

 

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Our current and future licensing arrangements may not be successful and may make us susceptible to the actions of third parties over whom we have limited control.

We have entered into a select number of product licensing agreements with companies that produce and sell, under our trademarks, products requiring specialized expertise. We have also entered into a number of select licensing agreements pursuant to which we have granted third parties the right to distribute and sell our products in certain geographical areas, including, among others, Korea, the Philippines, Singapore, Malaysia, the Middle East and Turkey. Our operations in China, Hong Kong, Macau and Taiwan are conducted pursuant to similar licensing agreements that we have entered into with entities that are indirectly owned by certain of our current shareholders, including Mr. Kors, Mr. Idol and Sportswear Holdings Limited. See “Certain Relationships and Related Party Transactions—Michael Kors Far East Holdings Limited.” In the future, we may enter into additional licensing arrangements. Although we take steps to carefully select our licensing partners, such arrangements may not be successful. Our licensing partners may fail to fulfill their obligations under their license agreements or have interests that differ from or conflict with our own, such as the timing of new store openings, the pricing of our products and the offering of competitive products. In addition, the risks applicable to the business of our licensing partners may be different than the risks applicable to our business, including risks associated with each such partner’s ability to:

 

   

obtain capital;

 

   

exercise operational and financial control over its business;

 

   

manage its labor relations;

 

   

maintain relationships with suppliers;

 

   

manage its credit and bankruptcy risks; and

 

   

maintain customer relationships.

Any of the foregoing risks, or the inability of any of our licensing partners to successfully market our products or otherwise conduct its business, may result in loss of revenue and competitive harm to our operations in regions or product categories where we have entered into such licensing arrangements.

We rely on our licensing partners to preserve the value of our brands. Although we attempt to protect our brands through, among other things, approval rights over store location and design, product design, production quality, packaging, merchandising, distribution, advertising and promotion of our stores and products, we may not be able to control the use by our licensing partners of each of our licensed brands. The misuse of our brands by a licensing partner could have a material adverse effect on our business, financial condition and operating results.

A substantial portion of our revenue is derived from a small number of large wholesale customers, and the loss of any of these wholesale customers could substantially reduce our total revenue.

A small number of our wholesale customers account for a significant portion of our net sales. Net sales to our five largest wholesale customers were 30.4% of our total revenue for Fiscal 2011 and 35.7% of our total revenue for Fiscal 2010. Our largest wholesale customer, a large, nationally recognized U.S. department store, accounted for 13.8% of our total revenue for Fiscal 2011 and 14.5% of our total revenue for Fiscal 2010. We do not have written agreements with any of our wholesale customers, and purchases generally occur on an order-by-order basis. A decision by any of our major wholesale customers, whether motivated by marketing strategy, competitive conditions, financial difficulties or otherwise, to decrease significantly the amount of merchandise purchased from us or our licensing partners, or to change their manner of doing business with us or our licensing partners, could substantially reduce our revenue and have a material adverse effect on our profitability. During the past several years, the retail industry has experienced a great deal of consolidation and other ownership changes, and we expect such changes will continue. In addition, store closings by our wholesale customers decrease the number of stores carrying our products, while the remaining stores may purchase a

 

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smaller amount of our products and may reduce the retail floor space designated for our brands. In the future, retailers may further consolidate, undergo restructurings or reorganizations, realign their affiliations or reposition their stores’ target markets. Any of these types of actions could decrease the number of stores that carry our products or increase the ownership concentration within the retail industry. These changes could decrease our opportunities in the market, increase our reliance on a smaller number of large wholesale customers and decrease our negotiating strength with our wholesale customers. These factors could have a material adverse effect on our business, financial condition and operating results.

A material disruption in our information technology systems could have a material adverse effect on our business, financial condition and results of operations.

We rely extensively on our information technology (“IT”) systems to track inventory, manage our supply chain, record and process transactions, summarize results and manage our business. The failure of our IT systems to operate effectively, problems with transitioning to upgraded or replacement systems or difficulty in integrating new systems could adversely affect our business. In addition, our IT systems may be subject to damage and/or interruption from power outages, computer, network and telecommunications failures, computer viruses, security breaches and usage errors by our employees. If our IT systems are damaged or cease to function properly, we may have to make a significant investment to fix or replace them, and we may suffer loss of critical data and interruptions or delays in our operations in the interim. Any significant disruption in our IT systems could have a material adverse effect on our business, financial condition and operating results.

Direct privacy breaches and the engagement of third parties to operate our e-commerce business could negatively affect our reputation, credibility and business.

We are responsible for storing data relating to our customers and employees and rely on third parties for the operation of our e-commerce website, michaelkors.com, and for the various social media tools and websites we use as part of our marketing strategy. Consumers are increasingly concerned over the security of personal information transmitted over the internet, consumer identity theft and user privacy. In addition to taking the necessary precautions ourselves, we require that third-party service providers implement reasonable security measures to protect our customers’ identity and privacy. We do not, however, control these third-party service providers and cannot guarantee that no electronic or physical computer break-ins and security breaches will occur in the future. Any perceived or actual unauthorized disclosure of personally identifiable information regarding our customers or website visitors could harm our reputation and credibility, reduce our e-commerce net sales, impair our ability to attract website visitors and reduce our ability to attract and retain customers. Finally, we could incur significant costs in complying with the multitude of state, federal and foreign laws regarding unauthorized disclosure of personal information, to the extent they are applicable.

Increases in the cost of raw materials could increase our production costs and cause our operating results and financial condition to suffer.

The costs of raw materials used in our products are affected by, among other things, weather, consumer demand, speculation on the commodities market, the relative valuations and fluctuations of the currencies of producer versus consumer countries and other factors that are generally unpredictable and beyond our control. We are not always successful in our efforts to protect our business from the volatility of the market price of raw materials, and our business can be materially affected by dramatic movements in prices of raw materials. The ultimate effect of this change on our earnings cannot be quantified, as the effect of movements in raw materials prices on industry selling prices are uncertain, but any significant increase in these prices could have a material adverse effect on our business, financial condition and operating results.

We are dependent on a limited number of distribution facilities. If one or more of our distribution facilities becomes inoperable, our business, financial condition and operating results could be negatively affected.

We operate a limited number of distribution facilities. Our ability to meet the needs of our customers and our own retail stores depends on the proper operation of these distribution facilities. If any of these distribution

 

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facilities were to shut down or otherwise become inoperable or inaccessible for any reason, we could suffer a substantial loss of inventory and/or disruptions of deliveries to our customers and retail stores. In addition, we could incur significantly higher costs and longer lead times associated with the distribution of our products during the time it takes to reopen or replace the damaged facility. In addition, we currently operate our California distribution from three separate warehouses totaling approximately 350,000 square feet. The leases for these three facilities expire on March 31, 2012. We have executed a lease for an approximately 500,000 square foot distribution center in Whittier, California, which we believe will allow us to significantly increase our distribution capabilities and efficiency. We took possession of the new distribution center in October 2011 and intend to complete our transition into this facility prior to the March 31, 2012 expiration of the leases for our existing California distribution facilities. As part of this transition, we will implement a new warehouse management system that will supplement our current legacy system and further support our efforts to operate with increased efficiency and flexibility. There are risks inherent in transitioning our existing three distribution facilities into one new facility and in implementing a new warehouse management system, including the risk of late delivery of possession of the new facility, difficulty in negotiating acceptable terms to remain temporarily in the existing facilities in the event of any such late delivery and other operational difficulties that may arise in commencing operations in a new facility with a new management system. Any of the foregoing factors could have a material adverse effect on our business, financial condition and operating results.

We primarily use foreign manufacturing contractors and independent third-party agents to source our finished goods, which poses legal, regulatory, political and economic risks to our business operations.

Our products are primarily produced by, and purchased or procured from, independent manufacturing contractors located mainly in countries in Asia, Europe and Central and South America. A manufacturing contractor’s failure to ship products to us in a timely manner or to meet the required quality standards could cause us to miss the delivery date requirements of our customers for those items. The failure to make timely deliveries may cause customers to cancel orders, refuse to accept deliveries or demand reduced prices, any of which could have a material adverse effect on us. In addition, any of the following factors could negatively affect our ability to produce or deliver our products and, as a result, could have a material adverse effect on our business, financial condition and operating results:

 

   

political or labor instability, labor shortages or increases in costs of labor or production in countries where manufacturing contractors and suppliers are located;

 

   

political or military conflict involving the United States, which could cause a delay in the transportation of our products and raw materials and increase transportation costs;

 

   

heightened terrorism security concerns, which could subject imported or exported goods to additional, more frequent or more thorough inspections, leading to delays in deliveries or impoundment of goods for extended periods of time or could result in increased scrutiny by customs officials for counterfeit goods, leading to lost sales, increased costs for our anti-counterfeiting measures and damage to the reputation of our brands;

 

   

a significant decrease in availability or an increase in the cost of raw materials;

 

   

disease epidemics and health-related concerns, which could result in closed factories, reduced workforces, scarcity of raw materials and scrutiny or embargoing of goods produced in infected areas;

 

   

the migration and development of manufacturing contractors, which could affect where our products are or are planned to be produced;

 

   

imposition of regulations, quotas and safeguards relating to imports and our ability to adjust in a timely manner to changes in trade regulations, which, among other things, could limit our ability to produce products in cost-effective countries that have the labor and expertise needed;

 

   

increases in the costs of fuel, travel and transportation;

 

   

imposition of duties, taxes and other charges on imports;

 

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significant fluctuation of the value of the United States dollar against foreign currencies; and

 

   

restrictions on transfers of funds out of countries where our foreign licensees are located.

We do not have written agreements with any of our third-party manufacturing contractors. As a result, any single manufacturing contractor could unilaterally terminate its relationship with us at any time. In Fiscal 2011, our largest manufacturing contractor, who primarily produces its products in China and who we have worked with for the last seven years, accounted for the production of 30.5% of our finished products. Our inability to promptly replace manufacturing contractors that terminate their relationships with us or cease to provide high quality products in a timely and cost-efficient manner could have a material adverse effect on our business, financial condition and operating results.

In addition, we use third-party agents to source our finished goods with numerous manufacturing contractors on our behalf. We do not have written agreements with any of our agents. As a result, any single agent could unilaterally terminate its relationship with us at any time. In Fiscal 2011, our largest third-party agent, whose primary place of business is Hong Kong and who we have worked with for the last seven years, sourced approximately 19.5% of our purchases of finished goods. Our inability to promptly replace agents that terminate their relationships with us or cease to provide high quality service in a timely and cost-efficient manner could have a material adverse effect on our business, financial condition and operating results.

If our manufacturing contractors fail to use acceptable, ethical business practices, our business and reputation could suffer.

We require our manufacturing contractors to operate in compliance with applicable laws, rules and regulations regarding working conditions, employment practices and environmental compliance. Additionally, we impose upon our business partners operating guidelines that require additional obligations in those three areas in order to promote ethical business practices, and our staff and third parties we retain for such purposes periodically visit and monitor the operations of our manufacturing contractors to determine compliance. However, we do not control our manufacturing contractors or their labor and other business practices. If one of our manufacturing contractors violates applicable labor or other laws, rules or regulations or implements labor or other business practices that are generally regarded as unethical in the United States, the shipment of finished products to us could be interrupted, orders could be cancelled, relationships could be terminated and our reputation could be damaged. Any of these events could have a material adverse effect on our business, financial condition and operating results.

Restrictive covenants in our credit agreement may restrict our ability to pursue our business strategies.

We have a $100.0 million asset-based revolving credit facility (as amended from time to time, the “Credit Facility”) under which Michael Kors (USA), Inc. (“MKUSA”), Michael Kors (Europe) B.V., Michael Kors (Canada) Co. and Michael Kors Switzerland GmbH, our indirect wholly owned subsidiaries, are borrowers and we are a parent guarantor. The credit agreement governing the terms of the Credit Facility restricts, among other things, asset dispositions, mergers and acquisitions, dividends, stock repurchases and redemptions, other restricted payments, indebtedness, loans and investments, liens and affiliate transactions. Our credit agreement also contains customary events of default, including a change in control of the Company. These covenants, among other things, limit our ability to fund future working capital needs and capital expenditures, engage in future acquisitions or development activities, or otherwise realize the value of our assets and opportunities fully because of the need to dedicate a portion of cash flow from operations to payments on debt. In addition, our credit agreement, as amended and restated on September 15, 2011, contains financial covenants limiting our capital expenditures to $110.0 million for any one fiscal year, plus additional amounts as permitted, and a minimum 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). Such covenants could limit the flexibility of our subsidiaries in planning for, or reacting to, changes in the fashion industry. Our ability to comply with these covenants is subject to certain events outside of our control. If we are unable to comply with these covenants, the

 

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lenders under the Credit Facility could terminate their commitments and accelerate repayment of our outstanding borrowings. If such an acceleration were to occur, we may be unable to obtain adequate refinancing for our outstanding borrowings on favorable terms. Our Credit Facility also provides for the ability to issue stand-by and documentary letters of credit to secure certain properties, import merchandise and perform other business functions. If we were unable to secure letters of credit, certain landlords could require cash collateralization and our supply chain could be interrupted. If we are unable to repay our outstanding borrowings when due, the lenders under the Credit Facility will also have the right to proceed against the collateral granted to them to secure the indebtedness owed to them, which may have a material adverse effect on our business, financial condition and operating results.

We may be unable to protect our trademarks and other intellectual property rights, and others may allege that we infringe upon their intellectual property rights.

Our trademarks and other intellectual property rights are important to our success and our competitive position. We are susceptible to others imitating our products and infringing on our intellectual property rights. Our brand enjoys significant worldwide consumer recognition, and the generally higher pricing of our products creates additional incentive for counterfeiters and those seeking to infringe on our products. Such counterfeiting and other infringement could dilute our brand and harm our business.

The actions we take to establish and protect our trademarks and other intellectual property rights may not be adequate to prevent imitation of our products by others or other infringement of our intellectual property rights. Our trademark applications may fail to result in registered trademarks or provide the scope of coverage sought, and others may seek to invalidate our trademarks or block sales of our products as a violation of their trademarks and intellectual property rights. In addition, others may assert rights in, or ownership of, trademarks and other intellectual property rights of ours or in trademarks that are similar to ours or trademarks that we license and/or market, and we may not be able to successfully resolve these types of conflicts to our satisfaction. In some cases, trademark owners may have prior rights to our trademarks or similar trademarks. Furthermore, certain foreign countries may not protect trademarks and other intellectual property rights to the same extent as do the laws of the United States.

From time to time, in the ordinary course of our business, we become involved in opposition and cancellation proceedings with respect to trademarks similar to some of our brands. Any litigation or dispute involving the scope or enforceability of our intellectual property rights or any allegation that we infringe upon the intellectual property rights of others could be costly and time-consuming and could result, if determined adversely to us, in harm to our competitive position.

Our business is exposed to foreign currency exchange rate fluctuations.

We have established the Euro as the functional currency for our European subsidiaries and local currencies as the functional currencies for our other foreign subsidiaries. Certain adjustments resulting from translation have been recorded separately in shareholders’ equity as a component of accumulated other comprehensive income. Foreign currency transaction income and losses, primarily from translating U.S. dollar denominated assets on the books of European subsidiaries, are included in our consolidated statements of operations. As a result of using local currencies as the functional currencies for our foreign subsidiaries, results of these operations will be adversely affected during times of a weakening U.S. dollar.

Risks Related to this Offering and Ownership of our Ordinary Shares

No market currently exists for our ordinary shares, and there can be no assurance that a viable public market for our ordinary shares will develop.

Prior to this offering, there has been no public market for our ordinary shares. The initial public offering price for our ordinary shares will be determined through negotiations between us and the representatives of the

 

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underwriters and may not be indicative of the market price of our ordinary shares after this offering. If you purchase our ordinary shares, you may not be able to resell those ordinary shares at or above the initial public offering price. We cannot predict the extent to which investor interest in our ordinary shares will lead to the development of an active trading market on the NYSE or otherwise or how liquid that market might become. If an active public market for our ordinary shares does not develop, or is not sustained, it may be difficult for you to sell your ordinary shares at a price that is attractive to you or at all.

Our share price may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the initial public offering price.

After this offering, the market price for our ordinary shares is likely to be volatile, in part because our ordinary shares have not previously been traded publicly. In addition, the market price for our ordinary shares may fluctuate significantly in response to a number of factors, most of which we cannot control, including, among others:

 

   

fashion trends and changes in consumer preferences;

 

   

changes in general economic or market conditions or trends in our industry or the economy as a whole and, in particular, in the retail sales environment;

 

   

the timing and level of expenses for new store openings, relocations and remodels and the relative proportion of our new stores to existing stores;

 

   

the performance and successful integration of any new stores that we open;

 

   

changes in our merchandise mix and vendor base;

 

   

changes in key personnel;

 

   

entry into new markets;

 

   

our levels of comparable store sales;

 

   

announcements by us or our competitors of new product offerings or significant acquisitions, divestitures, strategic partnerships, joint ventures or capital commitments;

 

   

actions by competitors or other malls, lifestyle centers, street locations and strip center tenants;

 

   

weather conditions, particularly during the holiday shopping period;

 

   

the level of pre-opening expenses associated with new stores;

 

   

inventory shrinkage beyond our historical average rates;

 

   

changes in operating performance and stock market valuations of other retail companies;

 

   

investors’ perceptions of our prospects and the prospects of the retail industry;

 

   

fluctuations in quarterly operating results, as well as differences between our actual financial and operating results and those expected by investors;

 

   

the public’s response to press releases or other public announcements by us or third parties, including our filings with the SEC;

 

   

announcements relating to litigation;

 

   

guidance, if any, that we provide to the public, any changes in such guidance or our failure to meet such guidance;

 

   

changes in financial estimates or ratings by any securities analysts who follow our ordinary shares, our failure to meet such estimates or failure of those analysts to initiate or maintain coverage of our ordinary shares;

 

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the development and sustainability of an active trading market for our ordinary shares;

 

   

investor perceptions of the investment opportunity associated with our ordinary shares relative to other investment alternatives;

 

   

future sales of our ordinary shares by our officers, directors and significant shareholders;

 

   

other events or factors, including those resulting from system failures and disruptions, hurricanes, wars, acts of terrorism, other natural disasters or responses to such events; and

 

   

changes in accounting principles.

These and other factors may lower the market price of our ordinary shares, regardless of our actual operating performance. As a result, our ordinary shares may trade at prices significantly below the public offering price.

In addition, the stock markets, including the NYSE, have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many retail companies. In the past, shareholders have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, we could incur substantial costs and our resources and the attention of management could be diverted from our business.

Future sales of our ordinary shares, or the perception in the public markets that these sales may occur, may depress the price of our ordinary shares.

Additional sales of a substantial number of our ordinary shares in the public market after this offering, or the perception that such sales may occur, could have a material adverse effect on the price of our ordinary shares and could materially impair our ability to raise capital through the sale of additional shares. Upon completion of this offering, we will have 190,792,868 ordinary shares issued and outstanding. The ordinary shares offered in this offering will be freely tradable without restriction under the Securities Act of 1933, as amended (the “Securities Act”), except for any ordinary shares that may be held or acquired by our directors, executive officers and other affiliates (as that term is defined in the Securities Act), which will be restricted securities under the Securities Act. The ordinary shares not being offered in this offering will be restricted securities. Restricted securities may not be sold in the public market unless the sale is registered under the Securities Act or an exemption from registration is available.

Pursuant to the shareholders agreement described under the heading “Certain Relationships and Related Party Transactions—Shareholders Agreement,” our current shareholders, including Mr. Kors, Mr. Idol and Sportswear Holdings Limited (an affiliate of two of our directors, Messrs. Silas K. F. Chou and Lawrence S. Stroll) (Mr. Kors, Mr. Idol and Sportswear Holdings Limited are referred to collectively as our “Principal Shareholders”), have demand and piggyback rights that will require us to file registration statements registering their ordinary shares or to include sales of such ordinary shares in registration statements that we may file for ourselves or other shareholders. Any ordinary shares sold under these registration statements will be freely tradable in the public market. In the event such registration rights are exercised and a large number of ordinary shares are sold in the public market, such sales could reduce the trading price of our ordinary shares. These sales also could impede our ability to raise future capital. Additionally, we will bear all expenses in connection with any such registrations (except that the selling shareholders shall be responsible for their own fees and expenses of counsel and financial advisors, their internal administrative and similar costs and their pro rata shares of underwriters’ commissions and discounts). See “Certain Relationships and Related Party Transactions—Shareholders Agreement.”

We and each of our executive officers and directors, all of the selling shareholders and all of our other existing shareholders have agreed with the underwriters that for a period of 180 days after the date of this prospectus, subject to extension under certain circumstances, we and they will not offer, sell, assign, transfer, pledge, contract to sell or otherwise dispose of or hedge any of our ordinary shares, or any options or warrants to

 

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purchase any of our ordinary shares or any securities convertible into or exchangeable for our ordinary shares, subject to specified exceptions. The representatives of the underwriters may, in their discretion, at any time without prior notice, release all or any portion of the ordinary shares from the restrictions in any such agreement. See “Underwriting” for more information. All of our ordinary shares outstanding as of the date of this prospectus may be sold in the public market by existing shareholders 180 days after the date of this prospectus, subject to applicable volume and other limitations imposed under United States securities laws. See “Shares Eligible for Future Sale” for a more detailed description of the restrictions on selling our ordinary shares after this offering. Sales by our existing shareholders of a substantial number of shares in the public market, or the perception that these sales might occur, could cause the market price of our ordinary shares to decrease significantly.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about us or our business, our share price and trading volume could decline.

The trading market for our ordinary shares will depend in part on the research and reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our company, the trading price for our ordinary shares would be negatively impacted. If we obtain securities or industry analyst coverage and if one or more of the analysts who cover us downgrades our ordinary shares or publishes inaccurate or unfavorable research about us or our business, our share price would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, demand for our ordinary shares could decrease, which could cause our share price and trading volume to decline.

We do not expect to pay any cash dividends for the foreseeable future.

We currently expect to retain all our future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends for the foreseeable future following the completion of this offering. The declaration and payment of future dividends to holders of our ordinary shares will be at the discretion of our board of directors and will depend upon many factors, including our financial condition, earnings, legal requirements, restrictions in our debt agreements, including the Credit Facility, and other factors deemed relevant by our board of directors. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Revolving Credit Facility” for more information on the restrictions the Credit Facility imposes on our ability to declare and pay cash dividends. As a holding company, our ability to pay dividends depends on our receipt of cash dividends from our operating subsidiaries, which may further restrict our ability to pay dividends as a result of the laws of their respective jurisdictions of organization, agreements of our subsidiaries or covenants under future indebtedness that we or they may incur. In addition, under British Virgin Islands law, we may pay dividends to our shareholders only if, immediately after the dividend, the value of our assets would exceed our liabilities and we would be able to pay our debts as they fall due. Accordingly, if you purchase ordinary shares in this offering, realization of a gain on your investment will depend upon the appreciation of the price of our ordinary shares, which may never occur. Investors seeking cash dividends in the foreseeable future should not purchase our ordinary shares.

Transformation into a public company may increase our costs and disrupt the regular operations of our business.

We have historically operated as a privately owned company, and we expect to incur significant additional legal, accounting, reporting and other expenses as a result of having publicly traded ordinary shares, including, but not limited to, increased costs related to auditor fees, legal fees, directors’ fees, directors and officers insurance, investor relations and various other costs. We also anticipate that we will incur costs associated with corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), as well as rules implemented by the Securities and Exchange Commission (the “SEC”) and the NYSE. Moreover, the additional demands associated with being a public company may disrupt regular operations of our business by diverting the attention of some of our senior management team away from revenue producing activities.

 

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Failure to maintain adequate financial and management processes and controls could lead to errors in our financial reporting, which could harm our business and cause a decline in the price of our ordinary shares.

As a public company we will be required to document and test our internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act so that our management can certify the effectiveness of our internal controls and our independent registered public accounting firm can render an opinion on management’s assessment and on the effectiveness of our internal control over financial reporting by the time our annual report for Fiscal 2013 is due and thereafter. If our management is unable to certify the effectiveness of our internal controls or if our independent registered public accounting firm cannot render an opinion on management’s assessment and on the effectiveness of our internal control over financial reporting, or if material weaknesses in our internal controls are identified, we could be subject to regulatory scrutiny and a loss of public confidence, which could harm our business and cause a decline in the price of our ordinary shares.

As a “foreign private issuer” under the Securities Exchange Act of 1934, as amended, and a “controlled company” within the meaning of the NYSE’s corporate governance rules, we are permitted to, and we may, rely on exemptions from certain NYSE corporate governance standards, including, among others, the requirement that a majority of our board of directors consist of independent directors. Our reliance upon such exemptions may afford less protection to holders of our ordinary shares.

Section 303A of the NYSE Exchange Listing Rules (the “Listing Rules”) requires listed companies to have, among other things, a majority of their board members be independent and independent director oversight of executive compensation, nomination of directors and corporate governance matters. However, a “foreign private issuer” (as defined in Rule 3b-4 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) is permitted to follow its home country practice in lieu of the above requirements. Following this offering, we will be a foreign private issuer, and, as such, we may follow British Virgin Islands law, the law of our home country, with respect to the foregoing requirements, which does not require that a majority of our board consist of independent directors or that we implement a nominating or corporate governance committee. Our board therefore may include fewer independent directors than would be required if we were subject to the Listing Rules. Consequently, for so long as we remain a foreign private issuer, our board’s approach may be different from that of a board with a majority of independent directors, and as a result, our management oversight may be more limited than if we were subject to the Listing Rules. If in the future we lose our status as a foreign private issuer, and if we are unable to rely on the “controlled company” exemptions described below, we would be required to comply with the Listing Rules within six months.

Following this offering, we will also be a “controlled company” within the meaning of the NYSE’s corporate governance rules as a result of the ownership position and voting rights of certain of our existing shareholders. A controlled company is a company of which more than 50% of the voting power is held by an individual, a group or another company. As a controlled company, we may elect not to comply with certain NYSE corporate governance rules that would otherwise require our board of directors to have a majority of independent members and our compensation committee to be comprised entirely of independent directors. Accordingly, for so long as we remain a controlled company, our shareholders will not have the same protection afforded to shareholders of companies that are subject to all of the NYSE corporate governance requirements and the ability of our independent directors to influence our business policies and affairs may be reduced. If in the future we lose our status as a controlled company, and, if we are unable to rely on the “foreign private issuer” exemptions described above, we would be required to comply with the NYSE corporate governance rules in phases over the course of one year.

We may lose our foreign private issuer status in the future, which could result in significant additional costs and expenses.

As discussed above, following the completion of this offering we will be a “foreign private issuer,” and therefore, we will not be required to comply with all of the periodic disclosure and current reporting requirements of the Exchange Act. The determination of foreign private issuer status is made annually on the last business day

 

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of an issuer’s most recently completed second fiscal quarter, and accordingly the next determination will be made with respect to us on September 29, 2012. If more than 50% of our ordinary shares are directly or indirectly held by residents of the United States on the determination date, we will lose our foreign private issuer status. Depending on the size of this offering, the selling shareholders and purchasers in this offering and future public offerings, there may be a significant risk that we will lose our foreign private issuer status on September 29, 2012.

If we were to lose our foreign private issuer status, we would be required to file with the SEC periodic reports and registration statements on U.S. domestic issuer forms, which are more detailed and extensive than the forms available to a foreign private issuer. We would also have to mandatorily comply with U.S. federal proxy requirements, and our officers, directors and principal shareholders would become subject to the short-swing profit disclosure and recovery provisions of Section 16 of the Exchange Act. In addition, we would lose our ability to rely upon exemptions from certain corporate governance requirements on the New York Stock Exchange. As a result, the regulatory and compliance costs to us under U.S. securities laws as a U.S. domestic issuer could be significantly higher.

As a holding company, our only material assets will be our equity interests in our operating subsidiaries, and our principal source of revenue and cash flow will be distributions from such subsidiaries, which may be limited by law and/or contract in making such distributions.

As a holding company, our principal source of revenue and cash flow will be distributions from our subsidiaries. Therefore, our ability to carry out our business plan, to fund and conduct our business, service our debt (if any) and pay dividends (if any) in the future will depend on the ability of our subsidiaries to generate sufficient net income and cash flows to make upstream cash distributions to us. Our subsidiaries are separate legal entities, and although they may be wholly owned or controlled by us, they have no obligation to make any funds available to us, whether in the form of loans, dividends or otherwise. The ability of our subsidiaries to distribute cash to us will also be subject to, among other things, restrictions that are contained in our subsidiaries’ agreements (as entered into from time to time), availability of sufficient funds in such subsidiaries and applicable laws and regulatory restrictions. Such restrictions include, without limitation, the restrictions on the payment of dividends contained in the Credit Facility. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Revolving Credit Facility” for more information on the restrictions imposed by the Credit Facility. Claims of creditors of our subsidiaries generally will have priority as to the assets of such subsidiaries over our claims and claims of our creditors and shareholders. To the extent the ability of our subsidiaries to distribute dividends or other payments to us could be limited in any way, this could materially limit our ability to fund and conduct our business, service our debt (if any) and pay dividends (if any).

The interests of our Principal Shareholders may conflict with our interests and the interests of our other shareholders.

Upon completion of this offering, and assuming no exercise of the underwriters’ option to purchase additional ordinary shares, our Principal Shareholders and our other shareholders who held ordinary shares prior to the Preference Share Sale (as defined in “Certain Relationships and Related Party Transactions—Reorganization and Preference Share Sale”) will, on a fully diluted basis, collectively own approximately 103,401,576 of our ordinary shares and collectively will own a majority of our outstanding ordinary shares. Pursuant to the terms of the Voting and Lock-Up Agreement, dated as of July 11, 2011 (the “Voting Agreement”), our Principal Shareholders and such other shareholders have agreed to vote their shares as a block on all matters submitted to a vote of our shareholders. Upon completion of this offering, and assuming no exercise of the underwriters’ option to purchase additional ordinary shares, the parties to the Voting Agreement will collectively own, on a fully diluted basis, approximately 54.2% of our outstanding ordinary shares. As a result, our Principal Shareholders will have the ability to elect all of our directors and will be able to determine the outcome of most Company actions requiring shareholder approval, including a merger with or into another company or a sale of substantially all of our assets. The interests of our Principal Shareholders may conflict with our interests or those of other shareholders.

 

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Provisions in our organizational documents may delay or prevent our acquisition by a third party.

Our Memorandum of Association and Articles of Association (together, as amended from time to time, our “Memorandum and Articles of Association”) contains several provisions that may make it more difficult or expensive for a third party to acquire control of us without the approval of our board of directors. These provisions also may delay, prevent or deter a merger, acquisition, tender offer, proxy contest or other transaction that might otherwise result in our shareholders receiving a premium over the market price for their ordinary shares. These provisions include, among others:

 

   

our board of directors’ ability to issue, from time to time, one or more classes of preference shares and, with respect to each such class, to fix the terms thereof by resolution;

 

   

provisions relating to the multiple classes and three-year terms of directors, the manner of election of directors, removal of directors and the appointment of directors upon an increase in the number of directors or vacancy on our board of directors;

 

   

restrictions on the ability of shareholders to call meetings and bring proposals before meetings;

 

   

elimination of the ability of shareholders to act by written consent; and

 

   

the requirement of the affirmative vote of 75% of the shares entitled to vote to amend certain provisions of our Memorandum and Articles of Association.

These provisions of our Memorandum and Articles of Association could discourage potential takeover attempts and reduce the price that investors might be willing to pay for our ordinary shares in the future, which could reduce the market price of our ordinary shares. For more information, see “Description of Share Capital.”

As the rights of shareholders under British Virgin Islands law differ from those under United States law, you may have fewer protections as a shareholder.

Our corporate affairs will be governed by our Memorandum and Articles of Association, the BVI Business Companies Act, 2004 (as amended, the “BVI Act”) and the common law of the British Virgin Islands. The rights of shareholders to take legal action against our directors, actions by minority shareholders and the fiduciary responsibilities of our directors under British Virgin Islands law are to a large extent governed by the common law of the British Virgin Islands and by the BVI Act. The common law of the British Virgin Islands is derived in part from comparatively limited judicial precedent in the British Virgin Islands as well as from English common law, which has persuasive, but not binding, authority on a court in the British Virgin Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under British Virgin Islands law are not as clearly established as they would be under statutes or judicial precedents in some jurisdictions in the United States. In particular, the British Virgin Islands has a less developed body of securities laws as compared to the United States, and some states (such as Delaware) have more fully developed and judicially interpreted bodies of corporate law. As a result of the foregoing, holders of our ordinary shares may have more difficulty in protecting their interests through actions against our management, directors or major shareholders than they would as shareholders of a U.S. company.

The laws of the British Virgin Islands provide limited protection for minority shareholders, so minority shareholders will have limited or no recourse if they are dissatisfied with the conduct of our affairs.

Under the laws of the British Virgin Islands, there is limited statutory law for the protection of minority shareholders other than the provisions of the BVI Act dealing with shareholder remedies (as summarized under “Description of Share Capital—Shareholders’ Rights under British Virgin Islands Law Generally”). The principal protection under statutory law is that shareholders may bring an action to enforce the constituent documents of the company and are entitled to have the affairs of the company conducted in accordance with the BVI Act and the memorandum and articles of association of the company. As such, if those who control the company have persistently disregarded the requirements of the BVI Act or the provisions of the company’s

 

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memorandum and articles of association, then the courts will likely grant relief. Generally, the areas in which the courts will intervene are the following: (i) an act complained of which is outside the scope of the authorized business or is illegal or not capable of ratification by the majority; (ii) acts that constitute fraud on the minority where the wrongdoers control the company; (iii) acts that infringe on the personal rights of the shareholders, such as the right to vote; and (iv) acts where the company has not complied with provisions requiring approval of a special or extraordinary majority of shareholders, which are more limited than the rights afforded minority shareholders under the laws of many states in the United States.

It may be difficult for you to enforce judgments against us or our executive officers and directors in jurisdictions outside the United States.

Under our Memorandum and Articles of Association, we may indemnify and hold our directors harmless against all claims and suits brought against them, subject to limited exceptions. Furthermore, to the extent allowed by law, the rights and obligations among or between us, any of our current or former directors, officers and employees and any current or former shareholder will be governed exclusively by the laws of the British Virgin Islands and subject to the jurisdiction of the British Virgin Islands courts, unless those rights or obligations do not relate to or arise out of their capacities as such. Although there is doubt as to whether United States courts would enforce these provisions in an action brought in the United States under United States securities laws, these provisions could make judgments obtained outside of the British Virgin Islands more difficult to enforce against our assets in the British Virgin Islands or jurisdictions that would apply British Virgin Islands law.

British Virgin Islands companies may not be able to initiate shareholder derivative actions, thereby depriving shareholders of one avenue to protect their interests.

British Virgin Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States. The circumstances in which any such an action may be brought, and the procedures and defenses that may be available in respect of any such action, may result in the rights of shareholders of a British Virgin Islands company being more limited than those of shareholders of a company organized in the United States. Accordingly, shareholders may have fewer alternatives available to them if they believe that corporate wrongdoing has occurred. The British Virgin Islands courts are also unlikely to recognize or enforce judgments of courts in the United States based on certain liability provisions of United States securities law or to impose liabilities, in original actions brought in the British Virgin Islands, based on certain liability provisions of the United States securities laws that are penal in nature. There is no statutory recognition in the British Virgin Islands of judgments obtained in the United States, although the courts of the British Virgin Islands will generally recognize and enforce the non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits. This means that even if shareholders were to sue us successfully, they may not be able to recover anything to make up for the losses suffered.

We have a risk of being classified as a “controlled foreign corporation.”

As a company incorporated in the British Virgin Islands, we would be classified as a “controlled foreign corporation” for U.S. federal income tax purposes if any U.S. person held 10% or more of our ordinary shares (including ownership through the attribution rules of Section 958 of the Internal Revenue Code of 1986, as amended (the “Code”), each such person, a “U.S. 10% Shareholder”) and the sum of the percentage ownership by all U.S. 10% Shareholders exceeded 50% (by voting power or value) of our ordinary shares. We do not believe we are currently a controlled foreign corporation; however, we may be determined to be a controlled foreign corporation in the future. In the event that such a determination is made, all U.S. 10% Shareholders would be subject to taxation under Subpart F of the Code. The ultimate consequences of this determination are fact-specific to each U.S. 10% Shareholder but could include possible taxation of such U.S. 10% Shareholder on a pro rata portion of our income, even in the absence of any distribution of such income, and the taxation of all or a portion of the gain recognized by such U.S. 10% Shareholders on a sale of our ordinary shares at rates applicable to ordinary income.

 

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Legislation has been introduced that would, if enacted, treat us as a U.S. corporation for U.S. federal income tax purposes.

In March 2009, U.S. Senator Carl Levin and Representative Lloyd Doggett introduced legislation in the U.S. Senate and House, respectively, entitled the “Stop Tax Haven Abuse Act.” Rep. Doggett introduced similar legislation in 2010, and Sen. Levin and Rep. Doggett reintroduced similar legislation in 2011. If enacted, this legislation would, among other things, cause us to be treated as a U.S. corporation for U.S. tax purposes, generally, any entity whose shares are publicly traded on an established securities market, or whose gross assets are $50 million or more, if the “management and control” of such a corporation is, directly or indirectly, treated as occurring primarily within the United States. The proposed legislation provides that a corporation will be so treated if substantially all of the executive officers and senior management of the corporation who exercise day-to-day responsibility for making decisions involving strategic, financial and operational policies of the corporation are located primarily within the United States. To date, this legislation has not been approved by either the House of Representatives or the Senate. However, we can provide no assurance that this legislation or similar legislation will not ultimately be adopted. Any such modification to the U.S. federal income tax laws that affects the tax residency of a non-U.S. company managed and controlled in the United States could adversely affect the U.S. federal taxation of some or all of our income and the value of our ordinary shares.

 

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USE OF PROCEEDS

The selling shareholders, including certain members of our management, will receive all of the net proceeds from the sale of the 47,200,000 ordinary shares offered under this prospectus. We will not receive any proceeds from the sale of ordinary shares in this offering.

 

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DIVIDEND POLICY

We currently expect to retain all our future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends for the foreseeable future following the completion of this offering. The declaration and payment of future dividends to holders of our ordinary shares will be at the discretion of our board of directors and will depend upon many factors, including our financial condition, earnings, legal requirements, restrictions in our debt agreements, including the Credit Facility, and other factors deemed relevant by our board of directors. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Revolving Credit Facility” for more information on the restrictions the Credit Facility imposes on our ability to declare and pay cash dividends. As a holding company, our ability to pay dividends depends on our receipt of cash dividends from our operating subsidiaries, which may further restrict our ability to pay dividends as a result of the laws of their respective jurisdictions of organization, agreements of our subsidiaries or covenants under future indebtedness that we or they may incur. Furthermore, under British Virgin Islands law, we may pay dividends to our shareholders only if, immediately after the dividend, the value of our assets would exceed our liabilities and we would be able to pay our debts as they fall due. See “Risk Factors—Risks Related to this Offering and Ownership of our Ordinary Shares—We do not expect to pay any cash dividends for the foreseeable future,” and for a discussion of taxation of any dividends, see “Tax Considerations.”

 

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CAPITALIZATION

The following table sets forth our consolidated cash and cash equivalents and total capitalization as of October 1, 2011.

You should read the following table in conjunction with “Selected Historical Consolidated Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus.

 

     As of
October 1, 2011
 
     Actual
(unaudited)
 
     (dollars in
thousands)
 

Cash and cash equivalents

   $ 19,300   
  

 

 

 

Total debt(1)

   $ 16,218   
  

 

 

 

Shareholders’ equity:

  

Preference shares

     —     

Ordinary shares

     —     

Additional paid-in capital

     157,906   

Accumulated other comprehensive income

     (1,621

Retained earnings

     146,008   
  

 

 

 

Total shareholders’ equity

     302,293   
  

 

 

 

Total capitalization

   $ 318,511   
  

 

 

 

 

(1)

Represents borrowings under our Credit Facility. Under our Credit Facility, we are currently permitted to borrow up to $100.0 million from time to time based on the amount of our inventory and receivables. As of October 1, 2011, we had $16.2 million of borrowings outstanding and the ability to borrow an additional $56.4 million.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA

The following table sets forth selected historical consolidated financial and other data for Michael Kors Holdings Limited and its consolidated subsidiaries for the periods presented. The statements of operations data for Fiscal 2011, 2010 and 2009 and the balance sheet data as of the end of Fiscal 2011 and 2010 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The statements of operations data for the six months ended October 1, 2011 and the six months ended October 2, 2010 and the balance sheet data as of October 1, 2011 have been derived from our unaudited consolidated financial statements, which are included in this prospectus. Our results of operations for the six months ended October 1, 2011 are not necessarily indicative of the results that can be expected for the full year or any future period. The statements of operations data for Fiscal 2008 and 2007 and the balance sheet data as of the end of Fiscal 2009, 2008 and 2007 and as of October 2, 2010 have been derived from our unaudited consolidated financial statements, which are not included in this prospectus.

The selected historical consolidated financial data below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes included elsewhere in this prospectus.

 

    Six Months Ended     Fiscal Years Ended  
   

October 1,
2011

   

October 2,

2010

   

April 2,

2011

   

April 3,

2010

   

March 28,
2009

   

March 31,
2008

   

March 31,
2007

 
    (data presented in thousands, except for shares and per share data)  

Statements of Operations Data:

             

Net sales

  $ 520,207      $ 322,440      $ 757,800      $ 483,452      $ 377,058      $ 296,176      $ 197,442   

Royalty revenue

    28,451        18,444        45,539        24,647        20,016        16,479        13,310   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    548,658        340,884        803,339        508,099        397,074        312,655        210,752   

Cost of goods sold

    236,589        155,704        357,274        241,365        208,283        165,947        117,829   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    312,069        185,180        446,065        266,734        188,791        146,708        92,923   

Selling, general and administrative expenses

    190,799        121,361        279,822        191,717        147,490        108,407        75,369   

Depreciation and amortization

    17,016        11,680        25,543        18,843        14,020        10,289        9,063   

Impairment of long-lived assets

    —          2,838        3,834        —          3,043        1,844        7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    207,815        135,879        309,199        210,560        164,553        120,540        84,439   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    104,254        49,301        136,866        56,174        24,238        26,168        8,484   

Interest expense

    660        1,230        1,861        2,057        1,600        2,760        2,900   

Foreign currency loss (income)

    (1,729     (387     1,786        (830     391        (147     (21
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

    105,323        48,458        133,219        54,947        22,247        23,555        5,605   

Provision (benefit) for income taxes

    40,602        21,115        60,713        15,699        9,208        (36,562     2,075   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    64,721        27,343        72,506        39,248        13,039        60,117        3,530   

Net income applicable to preference shareholders

    14,173        5,894        15,629        8,460        2,811        12,959        761   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income available for ordinary
shareholders

  $ 50,548      $ 21,449      $ 56,877      $ 30,788      $ 10,228      $ 47,158      $ 2,769   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average ordinary shares outstanding(1):

             

Basic

    143,554,974        140,554,377        140,554,377        140,554,377        140,554,377        140,554,377        140,554,377   

Diluted

    183,378,696        179,177,268        179,177,268        179,177,268        179,177,268        179,177,268        179,177,268   

Net income per ordinary share(2):

             

Basic

  $ 0.35      $ 0.15      $ 0.40      $ 0.22      $ 0.07      $ 0.34      $ 0.02   

Diluted

  $ 0.35      $ 0.15      $ 0.40      $ 0.22      $ 0.07      $ 0.34      $ 0.02   

 

(1)

Gives effect to the Reorganization and the Share Split. See “Certain Relationships and Related Party Transactions—Reorganization Transactions and Preference Share Sale.”

(2)

Basic net income per ordinary share is computed by dividing net income available to ordinary shareholders by basic weighted average ordinary shares outstanding. Diluted net income per ordinary share assumes the conversion of preference shares to ordinary shares and is computed by dividing net income by diluted weighted average ordinary shares outstanding.

 

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    Six Months Ended     Fiscal Years Ended  
   

October 1,
2011

   

October 2,
2010

   

April 2,

2011

   

April 3,

2010

   

March 28,
2009

   

March 31,
2008

   

March 31,
2007

 
    (data presented in thousands, except for shares and store count data)  

Operating Data:

             

Comparable retail store sales growth

    42.3     39.5     48.2     19.2     6.3     17.5     16.0

Retail stores at end of period

    203        140        166        106        74        48        23   

Balance Sheet Data:

(as of the end of period dated above)

  

  

       

Working capital

  $ 181,800      $ 52,348      $ 117,673      $ 51,263      $ 13,739      $ 12,167      $ (1,878

Total assets

  $ 479,216      $ 324,418      $ 399,495      $ 281,852      $ 218,463      $ 191,416      $ 122,209   

Revolving line of credit

  $ 16,218      $ 25,955      $ 12,765      $ 43,980      $ 39,440      $ 29,921      $ 33,055   

Note payable to parent

  $ —        $ 103,500      $ 101,650      $ 103,500      $ 103,500      $ 103,500      $ 103,500   

Stockholders’ equity

  $ 302,293      $ 84,508      $ 125,320      $ 49,011      $ 11,475      $ (368   $ (60,691

Number of ordinary shares

    147,134,033        140,554,377        140,554,377        140,554,377        140,554,377        140,554,377        140,554,377   

Number of preference shares

    10,856,853        10,163,920        10,163,920        10,163,920        10,163,920        10,163,920        10,163,920   

 

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UNAUDITED PRO FORMA FINANCIAL DATA

Following the completion of this offering, we will recognize $18.2 million of compensation expense or $10.6 million, net of income tax benefit, as a result of stock options that become vested and exercisable through the date of this offering.

On a pro forma basis, if this offering had occurred on April 4, 2010, the first day of Fiscal 2011, the recurring compensation charge for the six months ended October 1, 2011 and for Fiscal 2011 would have been $5.3 million and $5.3 million, respectively, or $3.1 million and $3.1 million, respectively, net of income tax benefit calculated using our U.S. statutory income tax rate of 42.0% (our U.S. statutory income tax rate represents our U.S. federal statutory and blended state income tax rates). For the six months ended October 1, 2011, such a charge would have resulted in pro forma income before provision of income taxes of $100.0 million and pro forma net income of $61.6 million. For Fiscal 2011, such a charge would have resulted in pro forma income before provision of income taxes of $127.9 million and pro forma net income of $69.4 million. Our pro forma basic and diluted net income per ordinary share for the six months ended October 1, 2011 would have been $0.34 and $0.33, respectively, and our pro forma basic and diluted net income per ordinary share for Fiscal 2011 would have been $0.39 and $0.38, respectively.

The pro forma basic and diluted net income per ordinary share reflects (i) the Share Split and (ii) the conversion of all outstanding preference shares of the Company into ordinary shares immediately prior to the completion of this offering. In addition, the pro forma diluted net income per ordinary share reflects the dilution caused by the stock options for potential ordinary shares that would have become vested as a result of this offering if it had occurred on April 4, 2010.

 

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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 elsewhere in this prospectus. The discussion in this section contains forward-looking statements that are based upon current expectations. The forward-looking statements contained herein include, without limitation, statements concerning future revenue sources and concentration, gross profit margins, selling and marketing expenses, general and administrative expenses, capital resources, additional financings or borrowings and additional losses and are subject to risks and uncertainties including, but not limited to, those discussed below and elsewhere in this prospectus 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 information set forth in “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors.”

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 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 74 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 have a clear trajectory for significant future growth. Over the years, we have successfully expanded beyond apparel into accessories (including handbags, small leather goods, eyewear, jewelry and watches) and footwear, which together now account for the majority of our wholesale and retail sales. We have also expanded our distribution capabilities beyond wholesale into retail, which accounted for approximately 42.8%, 36.7% and 28.7% of our total revenue in Fiscal 2011, Fiscal 2010 and Fiscal 2009, respectively.

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 October 1, 2011, our retail segment included 169 North American retail stores, including concessions, and 34 international retail stores, including concessions, in Europe and Japan. As of October 1, 2011, our wholesale segment included wholesale sales through approximately 1,801 department store and specialty store doors in North America and wholesale sales through approximately 549 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 first six months of Fiscal 2012, our licensing segment accounted for approximately 5.2% of our total revenue and consisted primarily 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.

Our Objectives

Our core strengths include a rapidly growing luxury lifestyle brand, a design team led by a world-renowned, award-winning designer, a tested ability to take share in the growing global accessories product category, a

 

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proven multi-format retail segment with significant growth opportunity, strong relationships with premier wholesale customers, a growing licensing segment and a proven and experienced management team. Despite the various risks and uncertainties associated with the current global economic environment, we believe these core strengths will allow us to continue to execute our strategy for long-term sustainable growth in revenue and operating results.

We intend to continue to build on the above strengths by:

 

   

continuing to increase our brand awareness and customer loyalty in North America and internationally by:

 

   

continuing to open new retail stores in preeminent, high-visibility locations;

 

   

maintaining our strong advertising position in global fashion publications, growing our online advertising exposure and internet presence and continuing to distribute our store catalogue featuring our new collections;

 

   

holding our semi-annual runway shows that reinforce Mr. Kors’ designer status and high-fashion image, creating excitement around the Michael Kors and MICHAEL Michael Kors collections and generating global multimedia press coverage; and

 

   

leveraging Mr. Kors’ global prestige and popularity through a variety of press activities and personal appearances.

 

   

expanding our retail store base in North America by opening new stores in high traffic street and mall locations in markets with high-income demographics. By adhering to our already successful retail store formats throughout this anticipated expansion, we will continue to reinforce our brand image and achieve strong sales per square foot;

 

   

expanding our North American shop-in-shop footprint at select department stores by continuing to convert existing wholesale door space into shop-in-shops and expanding the size of existing shop-in-shops;

 

   

increasing our global comparable store growth with a number of initiatives already under way, such as increasing the size of existing stores and increasing our offerings in select product categories, including logo products, small leather goods, active footwear and fashion jewelry; and

 

   

growing our international retail and wholesale businesses by leveraging our existing operations in Europe and Japan to take advantage of the growing worldwide demand for accessible luxury goods.

Certain Factors Affecting Financial Condition and Results of Operations

Broaden Distribution Capabilities Beyond Wholesale into Retail. Over the years, we have successfully broadened our distribution capabilities beyond wholesale into retail, and we believe that this trend will continue as our retail store network grows at a faster rate than wholesale. We believe that retail allows greater control over the shopping environment, merchandise selection and many other aspects of the shopping experience that attracts and retains loyal customers and increases sales.

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 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.

 

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Demand for Our Accessories and Related Merchandise. According to the Altagamma Studies, the worldwide luxury goods industry is predicted to grow from approximately $230.1 billion in 2010 to between $299.3 billion and $305.9 billion in 2014. The accessories product category represented 25% of total sales for the worldwide luxury goods industry in 2010 and was the fastest growing product category between 2005 and 2010, growing at a CAGR of 9%. 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. Net sales of accessories and related merchandise (including handbags, small leather goods, footwear, watches, jewelry, eyewear and fragrances) in our retail and wholesale segments accounted for approximately 62.3% of our total revenue in Fiscal 2011. We anticipate that sales of our accessories and related merchandise will continue to grow and will become an increasingly important driver of global comparable store sales growth.

Public Company Costs. We anticipate becoming a publicly traded company in the near term. The activities associated with this process, as well as any future secondary public offerings, may have a significant impact on our results of operations and cash flows. While we expect to incur substantial costs in connection with becoming a publicly traded company, we do not anticipate receiving any cash proceeds or achieving any reduction to the costs of our operations from these activities. Our selling, general and administrative expenses may increase as a result of us becoming a publicly traded company.

Segment Information

We started our business as a wholesale vendor to department and specialty stores, but we now have significant retail and licensing businesses as well. 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 six months ended October 1, 2011 and October 2, 2010, and Fiscal 2011, Fiscal 2010 and Fiscal 2009 (in thousands):

 

     Six Months Ended      Fiscal Years Ended  
     October 1,
2011
     October 2,
2010
     April 2,
2011
     April 3,
2010
     March 28,
2009
 

Revenue:

              

Net sales: Retail

   $ 255,377       $ 139,639       $ 344,195       $ 186,538       $ 114,031   

Wholesale

     264,830         182,801         413,605         296,914         263,027   

Licensing

     28,451         18,444         45,539         24,647         20,016   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

   $ 548,658       $ 340,884       $ 803,339       $ 508,099       $ 397,074   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) from operations:

              

Retail

   $ 53,181       $ 19,339       $ 61,194       $ 15,514       $ (5,104

Wholesale

     32,745         21,214         48,241         31,258         20,933   

Licensing

     18,328         8,748         27,431         9,402         8,409   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income from operations

   $ 104,254       $ 49,301       $ 136,866       $ 56,174       $ 24,238   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Retail

From the beginning of Fiscal 2007, when we first undertook our major retail growth initiative, through Fiscal 2011, we have leveraged our successful retail store formats by opening a total of 156 new stores. During this time period, we have grown our North American retail presence significantly, increasing our North American store count by 134 stores, as well as increasing our international store count by 22 stores.

 

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The following table presents the growth in our network of retail stores during the six months ended October 1, 2011 and October 2, 2010, and Fiscal 2011, Fiscal 2010 and Fiscal 2009:

 

     Six Months Ended     Fiscal Years Ended  
     October 1,
2011
    October 2,
2010
    April 2,
2011
    April 3,
2010
    March 28,
2009
 

Full price retail stores including concessions:

          

Number of stores

     132        93        113        63        41   

Increase vs. prior period

     39        40        50        22        17   

Percentage increase vs. prior period

     41.9     75.5     79.4     53.7     70.8

Total gross square footage

     267,276        183,680        224,427        143,100        93,937   

Average square footage per store

     2,025        1,975        1,986        2,271        2,291   

Outlet stores:

          

Number of stores

     71        47        53        43        33   

Increase vs. prior period

     24        7        10        10        9   

Percentage increase vs. prior period

     51.1     17.5     23.3     30.3     37.5

Total gross square footage

     195,482        130,665        146,286        120,368        92,425   

Average square footage per store

     2,753        2,780        2,760        2,799        2,801   

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.

The following table presents the growth in our network of wholesale doors during the six months ended October 1, 2011 and October 2, 2010, and Fiscal 2011, Fiscal 2010 and Fiscal 2009:

 

     Six Months Ended     Fiscal Years Ended  
     October 1,
2011
    October 2,
2010
    April 2,
2011
    April 3,
2010
    March 28,
2009
 

Number of wholesale doors

     2,350        1,775        2,032        1,600        1,313   

Increase vs. prior period

     575        350        432        287        145   

Percentage increase vs. prior period

     32.4     24.6     27.0     21.9     12.4

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 and control the 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):

     Six Months Ended     Fiscal Years Ended  
     October 1,
2011
    October 2,
2010
    April 2,
2011
    April 3,
2010
    March 28,
2009
 

Total revenue

   $ 548,658      $ 340,884      $ 803,339      $ 508,099      $ 397,074   

Gross profit as a percent of total revenue

     56.9     54.3     55.5     52.5     47.5

Income from operations

   $ 104,254      $ 49,301      $ 136,866      $ 56,174      $ 24,238   

Retail net sales - North America

   $ 234,907      $ 135,632      $ 331,714      $ 183,452      $ 114,031   

Retail net sales - Europe

   $ 17,252      $ 3,873      $ 11,463      $ 3,086      $ —     

Retail net sales - Japan

   $ 3,218      $ 134      $ 1,018      $ —        $ —     

Increase in comparable store net sales - North America

     42.9     39.6     48.7     19.2     6.3

Increase in comparable store net sales - Europe*

     19.6     33.5     13.7     n/a        n/a   

Increase in comparable store net sales - Japan*

     21.8     n/a        n/a        n/a        n/a   

Wholesale net sales - North America

   $ 237,111      $ 173,021      $ 386,566      $ 289,179      $ 262,469   

Wholesale net sales - Europe

   $ 27,321      $ 9,780      $ 26,985      $ 7,735      $ 558   

Wholesale net sales - Other Regions

   $ 398      $ —        $ 54      $ —        $ —     

 

*

Where n/a is used, stores in that region were not open for the requisite comparable period.

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. All comparable store sales are presented on a 52-week basis.

Royalty revenue from licensing 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.

Gross profit is net sales minus cost of goods sold.

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, 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.

Impairment charges consist of charges to write-down both fixed and intangible assets to fair value.

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

 

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Interest expense represents interest and fees on our Credit Facility and amortization of deferred financing costs.

Foreign currency loss (income) 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 six months ended October 1, 2011 with the six months ended October 2, 2010

The following table details the results of our operations for the six months ended October 1, 2011 and for the six months ended October 2, 2010, and expresses the relationship of certain line items to total revenue as a percentage (dollars in thousands):

 

     Six Months Ended                 % of  Total
Revenue
2011 Period
    % of  Total
Revenue
2010 Period
 
     October 1,     October 2,                  
     2011     2010     $ Change     % Change      

Statements of Operations Data:

            

Net sales

   $ 520,207      $ 322,440      $ 197,767        61.3    

Royalty revenue

     28,451        18,444        10,007        54.3    
  

 

 

   

 

 

   

 

 

       

Total revenue

     548,658        340,884        207,774        61.0    

Cost of goods sold

     236,589        155,704        80,885        51.9     43.1     45.7
  

 

 

   

 

 

   

 

 

       

Gross profit

     312,069        185,180        126,889        68.5     56.9     54.3

Selling, general and administrative expenses

     190,799        121,361        69,438        57.2     34.8     35.6

Depreciation and amortization

     17,016        11,680        5,336        45.7     3.1     3.4

Impairment of long-lived assets

     —          2,838        (2,838       0.0     0.8
  

 

 

   

 

 

   

 

 

       

Total operating expenses

     207,815        135,879        71,936        52.9     37.9     39.9
  

 

 

   

 

 

   

 

 

       

Income from operations

     104,254        49,301        54,953        111.5     19.0     14.5

Interest expense, net

     660        1,230        (570     -46.3     0.1     0.4

Foreign currency income

     (1,729     (387     (1,342     346.8     -0.3     -0.1
  

 

 

   

 

 

   

 

 

       

Income before provision for income taxes

     105,323        48,458        56,865        117.3     19.2     14.2

Provision for income taxes

     40,602        21,115        19,487        92.3     7.4     6.2
  

 

 

   

 

 

   

 

 

       

Net income

   $ 64,721      $ 27,343      $ 37,378        136.7    
  

 

 

   

 

 

   

 

 

       

Total Revenue

Total revenue increased $207.8 million, or 61.0%, to $548.7 million for the six months ended October 1, 2011, compared to $340.9 million for the six months ended October 2, 2010. 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 royalty revenue.

 

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

 

     Six Months Ended                   % of total
Revenue
2011 period
    % of total
Revenue
2010 period
 
     October 1,
2011
     October 2,
2010
     $ Change      % Change      

Revenue:

               

Net sales:

               

Retail

   $ 255,377       $ 139,639       $ 115,738         82.9     46.5     41.0

Wholesale

     264,830         182,801         82,029         44.9     48.3     53.6

Licensing

     28,451         18,444         10,007         54.3     5.2     5.4
  

 

 

    

 

 

    

 

 

        

Total revenue

   $ 548,658       $ 340,884       $ 207,774         61.0    
  

 

 

    

 

 

    

 

 

        

Retail

Net sales from our retail stores increased $115.7 million, or 82.9%, to $255.4 million for the six months ended October 1, 2011, compared to $139.6 million for the six months ended October 2, 2010. We operated 203 retail stores, including concessions, as of October 1, 2011, compared to 140 retail stores, including concessions, as of October 2, 2010. During the six months ended October 1, 2011, our comparable store sales growth increased $57.8 million, or 42.3%, from the six months ended October 2, 2010. The growth in our comparable store sales was primarily due to an increase in sales of our accessories line and watches during the six months ended October 1, 2011. In addition, our non-comparable store sales were $57.9 million during the six months ended October 1, 2011, which was primarily the result of opening 63 new stores since October 2, 2010.

Wholesale

Net sales to our wholesale customers increased $82.0 million, or 44.9%, to $264.8 million for the six months ended October 1, 2011, compared to $182.8 million for the six months ended October 2, 2010. The increase in our wholesale net sales occurred primarily as a result of increased sales of our accessories line during the six months ended October 1, 2011, as we continue to enhance our presence in department and specialty stores by converting more doors to shop-in-shops, and working with existing retailers in optimizing our presence in their stores. In addition, our net sales from our European operations more than doubled during the six months ended October 1, 2011 as compared to the six months ended October 2, 2010, due largely to an increase in doors to 549 from 238 in the same period last year.

Licensing

Royalties earned on our licensing agreements increased $10.0 million, or 54.3%, to $28.5 million for the six months ended October 1, 2011, compared to $18.4 million for the six months ended October 2, 2010. The increase in royalties was primarily due to royalties earned on licensing agreements related to sales of watches.

Gross Profit

Gross profit increased $126.9 million, or 68.5%, to $312.1 million during the six months ended October 1, 2011, compared to $185.2 million for the six months ended October 2, 2010. Gross profit as a percentage of total revenue increased to 56.9% during the six months ended October 1, 2011, compared to 54.3% during the six months ended October 2, 2010. The increase in profit margin was primarily due to the growth in our retail net sales relative to our overall total revenue growth during the period, as our retail net sales generate higher profit margins relative to those of wholesale. In addition, we experienced increases of approximately 170 basis points and 70 basis points in gross profit margin from our wholesale and retail segments, respectively. The increase in profit margin on our wholesale segment largely resulted from lower allowances as a percentage of wholesale net sales and selling fewer overall off-price products during the six months ended October 1, 2011, as compared to the six months ended October 2, 2010. In addition, the increase in our wholesale European net sales, as a

 

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component of total wholesale net sales, had a favorable impact on profit margin and benefited from revaluation of foreign currency exchange contracts during the six months ended October 1, 2011. The increase in profit margin on our retail segment resulted primarily from fewer in-store markdowns during the six months ended October 1, 2011, as compared to the six months ended October 2, 2010.

Total Operating Expense

Total operating expenses increased $71.9 million, or 52.9%, to $207.8 million during the six months ended October 1, 2011, compared to $135.9 million for the six months ended October 2, 2010. Total operating expenses decreased to 37.9% as a percentage of total revenue for the six months ended October 1, 2011, compared to 39.9% for the six months ended October 2, 2010. The components that comprise total operating expenses are explained below.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $69.4 million, or 57.2%, to $190.8 million during the six months ended October 1, 2011, compared to $121.4 million for the six months ended October 2, 2010. The increase was primarily due to increases in our retail occupancy and salary costs of $37.5 million, and increases in corporate employee-related costs of $22.6 million. The increase in our retail occupancy and payroll costs was due to operating 203 retail stores versus 140 retail stores in the prior period. The increase in our corporate employee-related costs was due primarily to the redemption of employee stock options that were net settled in cash for approximately $10.7 million, as well as an increase in our corporate staff to accommodate our North American and international growth. Selling, general and administrative expenses as a percentage of total revenue decreased to 34.8% during the six months ended October 1, 2011, compared to 35.6% for the six months ended October 2, 2010. The decrease as a percentage of total revenue was primarily due to economies of scale achieved relative to our increase in total revenue.

We may not continue to experience a reduction in selling, general and administrative expenses as a percentage of revenue, as expenses may increase as a result of our becoming a publicly traded company. These expenses include, but are not limited to, professional fees, filing fees and increasing compensation costs related to employee equity-based awards.

Depreciation and Amortization

Depreciation and amortization increased $5.3 million, or 45.7%, to $17.0 million during the six months ended October 1, 2011, compared to $11.7 million for the six months ended October 2, 2010. 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 and investments made in our information systems infrastructure to accommodate our growth. Depreciation and amortization decreased to 3.1% as a percentage of total revenue during the six months ended October 1, 2011, compared to 3.4% for the six months ended October 2, 2010.

Impairment on Long-Lived Assets

Impairment on long-lived assets was $2.8 million for the six months ended October 2, 2010, which was comprised of an impairment charge on fixed assets of $0.9 million related to one of our retail locations, and an impairment charge on definite-lived intangible assets for lease rights of $1.9 million related to that location. There were no impairment charges on long-lived assets during the six months ended October 1, 2011.

Income from Operations

As a result of the foregoing, income from operations increased $55.0 million, or 111.5%, to $104.3 million during the six months ended October 1, 2011, compared to $49.3 million for the six months ended October 2, 2010. Income from operations as a percentage of total revenue increased to 19.0% during the six months ended October 1, 2011, compared to 14.5% for the six months ended October 2, 2010.

 

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

 

     Six Months Ended                   % of Net
Sales/
Revenue

2011 period
    % of Net
Sales/
Revenue

2010 period
 
     October 1,
2011
     October 2,
2010
     $ Change      % Change      

Income from Operations:

               

Retail

   $ 53,181       $ 19,339       $ 33,842         175.0     20.8     13.8

Wholesale

     32,745         21,214         11,531         54.4     12.4     11.6

Licensing

     18,328         8,748         9,580         109.5     64.4     47.4
  

 

 

    

 

 

    

 

 

        

Income from operations

   $ 104,254       $ 49,301       $ 54,953         111.5     19.0     14.5
  

 

 

    

 

 

    

 

 

        

Retail

Income from operations for our retail segment increased $33.8 million, or 175.0%, to $53.2 million during the six months ended October 1, 2011, compared to $19.3 million for the six months ended October 2, 2010. This increase was due to sales from the new stores opened, increases in comparable store sales and the increase in income from operations as a percentage of net retail sales of approximately 698 basis points to 20.8% during the six months ended October 1, 2011. The increase as a percentage of net sales was primarily due to decreases in selling, general and administrative expenses as a percentage of sales, the cost of which increased at a lesser rate than the rate of increase in net sales, as well as the aforementioned increase in gross profit margin of approximately 70 basis points during the six months ended October 1, 2011.

Wholesale

Income from operations for our wholesale segment increased $11.5 million, or 54.4%, to $32.7 million during the six months ended October 1, 2011, compared to $21.2 million for the six months ended October 2, 2010. This increase was primarily the result of the increase in gross profit margin, as described in the gross profit discussion above, and the decrease in operating expenses as a percentage of net sales, as a result of greater economies of scale experienced during the six months ended October 1, 2011 compared to the six months ended October 2, 2010.

Licensing

Income from operations for our licensing segment increased $9.6 million, or 109.5%, to $18.3 million during the six months ended October 1, 2011, compared to $8.7 million for the six months ended October 2, 2010. This increase is primarily the result of the aforementioned increase in sales of licensed products, while our operating expenses remained relatively fixed from the prior fiscal year.

Interest Expense

Interest expense decreased $0.6 million, or 46.3%, to $0.7 million during the six months ended October 1, 2011, compared to $1.2 million for the six months ended October 2, 2010. The decrease in interest expense was primarily due to the decrease in the average balance on our Credit Facility of approximately $4.1 million during the six months ended October 1, 2011, as well as experiencing a decrease in interest rates during the period.

Foreign Currency Income

Foreign currency income during the six months ended October 1, 2011 was $1.7 million as compared to foreign currency income of $0.4 million during the six months ended October 2, 2010. The increase in income during the six months ended October 1, 2011 was primarily due to the strengthening of the U.S. dollar relative to the Euro, which impacted the re-measurement of intercompany loans with certain of our European subsidiaries, which are denominated in U.S. dollars.

 

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Provision for Income Taxes

We recognized $40.6 million of income tax expense during the six months ended October 1, 2011, compared with $21.1 million for the six months ended October 2, 2010. Our effective tax rate for the six months ended October 1, 2011 was 38.5%, compared to 43.6% for the six months ended October 2, 2010. The decrease in our effective rate resulted primarily from the following: earnings related to certain of our non-U.S. subsidiaries, which are not expected to be profitable for Fiscal 2012; a decrease in statutory income tax rates applicable to certain of our non-U.S. subsidiaries; and a decrease in our U.S. blended state income tax rate.

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 (such as fees related to a public offering) 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 $37.4 million, or 136.7%, to $64.7 million during the six months ended October 1, 2011, compared to $27.3 million for the six months ended October 2, 2010.

Comparison of Fiscal 2011 with Fiscal 2010

The following table details the results of our operations for Fiscal 2011 and Fiscal 2010 and expresses the relationship of certain line items to total revenue as a percentage (dollars in thousands):

 

     Fiscal Years Ended     $ Change     % Change     % of Total
Revenue
Fiscal 2011
    % of  Total
Revenue
Fiscal 2010
 
     April 2,
2011
     April 3,
2010
         
               

Statements of Operations Data:

             

Net sales

   $ 757,800       $ 483,452      $ 274,348        56.7    

Royalty revenue

     45,539         24,647        20,892        84.8    
  

 

 

    

 

 

   

 

 

       

Total revenue

     803,339         508,099        295,240        58.1    

Cost of goods sold

     357,274         241,365        115,909        48.0     44.5     47.5
  

 

 

    

 

 

   

 

 

       

Gross profit

     446,065         266,734        179,331        67.2     55.5     52.5

Selling, general and administrative expenses

     279,822         191,717        88,105        46.0     34.8     37.7

Depreciation and amortization

     25,543         18,843        6,700        35.6     3.2     3.7

Impairment of long-lived assets

     3,834         —          3,834          0.5     0.0
  

 

 

    

 

 

   

 

 

       

Total operating expenses

     309,199         210,560        98,639        46.8     38.5     41.4
  

 

 

    

 

 

   

 

 

       

Income from operations

     136,866         56,174        80,692        143.6     17.0     11.1

Interest expense, net

     1,861         2,057        (196     -9.5     0.2     0.4

Foreign currency loss (income)

     1,786         (830     2,616        -315.2     0.2     -0.2
  

 

 

    

 

 

   

 

 

       

Income before provision for income taxes

     133,219         54,947        78,272        142.4     16.6     10.8

Provision for income taxes

     60,713         15,699        45,014        286.7     7.6     3.1
  

 

 

    

 

 

   

 

 

       

Net income

   $ 72,506       $ 39,248      $ 33,258        84.7    
  

 

 

    

 

 

   

 

 

       

 

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Total Revenue

Total revenue increased $295.2 million, or 58.1%, to $803.3 million for Fiscal 2011, compared to $508.1 million for Fiscal 2010. 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 royalty revenue.

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

 

     Fiscal Years Ended                
     April 2,
2011
     April 3,
2010
     $ Change      % Change  

Revenue:

           

Net sales:

           

Retail

   $ 344,195       $ 186,538       $ 157,657         84.5

Wholesale

     413,605         296,914         116,691         39.3

Licensing

     45,539         24,647         20,892         84.8
  

 

 

    

 

 

    

 

 

    

Total Revenue

   $ 803,339       $ 508,099       $ 295,240         58.1
  

 

 

    

 

 

    

 

 

    

Retail

Net sales from our retail stores increased $157.7 million, or 84.5%, to $344.2 million for Fiscal 2011, compared to $186.5 million for Fiscal 2010. We operated 166 retail stores, including concessions, as of April 2, 2011, compared to 106 retail stores, including concessions, as of April 3, 2010. During Fiscal 2011, our comparable store sales growth increased $84.5 million, or 48.2%, from Fiscal 2010. The growth in our comparable store sales was primarily due to an increase in sales of our accessories line and watches during Fiscal 2011. In addition, our non-comparable store sales were $73.2 million during Fiscal 2011, which was primarily the result of opening 60 new stores during Fiscal 2011.

Wholesale

Net sales to our wholesale customers increased $116.7 million, or 39.3%, to $413.6 million for Fiscal 2011, compared to $296.9 million for Fiscal 2010. The increase in our wholesale net sales occurred primarily as a result of increased sales of our accessories line during Fiscal 2011, as well as our continued efforts to work with our wholesale partners to enhance our presence in their department and specialty stores.

Licensing

Royalties earned on our licensing agreements increased $20.9 million, or 84.8%, to $45.5 million for Fiscal 2011, compared to $24.6 million for Fiscal 2010. The increase in royalties was primarily due to royalties earned on licensing agreements related to sales of watches.

Gross Profit

Gross profit increased $179.3 million, or 67.2%, to $446.1 million during Fiscal 2011, compared to $266.7 million for Fiscal 2010. Gross profit as a percentage of total revenue increased to 55.5% during Fiscal 2011, compared to 52.5% during Fiscal 2010. The increase in gross profit was due to an increase of approximately 300 basis points in gross profit margin generated from our retail segment, which largely resulted from fewer in-store markdowns during Fiscal 2011, as well as gross profit margin contributed from the increase in our royalty revenues. This increase was offset in part by a decrease in gross profit margin on our wholesale sales during Fiscal 2011, which was the result of an increase in costs of certain of our products. We did not offset these increases in product costs by increases in pricing, as we believed these increases in costs to be temporary fluctuations.

 

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Total Operating Expense

Total operating expenses increased $98.6 million, or 46.8%, to $309.2 million during Fiscal 2011, compared to $210.6 million for Fiscal 2010. Total operating expenses decreased to 38.5% as a percentage of total revenue for Fiscal 2011, compared to 41.4% for Fiscal 2010. The components that comprise total operating expenses are explained below.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $88.1 million, or 46.0%, to $279.8 million during Fiscal 2011, compared to $191.7 million for Fiscal 2010. The dollar increase was primarily due to increases in our retail occupancy and salary costs of $46.3 million, increases in advertising costs of $5.0 million and increases in corporate employee-related costs of $12.1 million. The increase in our retail occupancy and payroll costs was due to the opening of an additional 60 retail stores during Fiscal 2011. Advertising costs increased primarily due to our expansion into new markets during Fiscal 2011, including domestic and international. The increase in our corporate employee-related costs was due primarily to the increase in our corporate staff to accommodate our North American and international growth. Selling, general and administrative expenses as a percentage of total revenue decreased to 34.8% during Fiscal 2011, compared to 37.7% for Fiscal 2010. The decrease as a percentage of total revenue was primarily due to economies of scale achieved relative to our increase in total revenue.

We may not continue to experience a continued reduction in selling, general and administrative expenses as a percentage of revenue, as expenses may increase as a result of our becoming a publicly traded company. These expenses include, but are not limited to, professional fees and compensation costs related to employee equity-based awards.

Depreciation and Amortization

Depreciation and amortization increased $6.7 million, or 35.6%, to $25.5 million during Fiscal 2011, compared to $18.8 million for Fiscal 2010. Dollar 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 and investments made in our information systems infrastructure to accommodate our growth. Depreciation and amortization decreased to 3.2% as a percentage of total revenue during Fiscal 2011, compared to 3.7% for Fiscal 2010.

Impairment on Long-Lived Assets

Impairment on long-lived assets was $3.8 million for Fiscal 2011, which was comprised of an impairment charge on fixed assets of $2.1 million related to two of our retail locations, and an impairment charge on definite-lived intangible assets for lease rights of $1.8 million related to one of those locations. There were no impairment charges on long-lived assets during Fiscal 2010.

Income from Operations

As a result of the foregoing, income from operations increased $80.7 million, or 143.6%, to $136.9 million during Fiscal 2011, compared to $56.2 million for Fiscal 2010. Income from operations as a percentage of total revenue increased to 17.0% during Fiscal 2011, compared to 11.1% for Fiscal 2010.

 

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

 

     Fiscal Years Ended      $ Change      % Change     Fiscal 2011
% of Net
Sales/

Revenue
    Fiscal 2010
% of Net
Sales/

Revenue
 
     April 2,
2011
     April 3,
2010
           

Income from Operations:

               

Retail

   $ 61,194       $ 15,514       $ 45,680         294.4     17.8     8.3

Wholesale

     48,241         31,258         16,983         54.3     11.7     10.5

Licensing

     27,431         9,402         18,029         191.8     60.2     38.1
  

 

 

    

 

 

    

 

 

        

Income from Operations

   $ 136,866       $ 56,174       $ 80,692         143.6     17.0     11.1
  

 

 

    

 

 

    

 

 

        

Retail

Income from operations for our retail segment increased $45.7 million, or 294.4%, to $61.2 million during Fiscal 2011, compared to $15.5 million for Fiscal 2010. This increase was due to sales from the new stores opened, increases in comparable store sales and the increase in income from operations as a percentage of net retail sales of approximately 950 basis points to 17.8% during Fiscal 2011. The increase as a percentage of net sales was primarily due to decreases in selling, general and administrative expenses as a percentage of sales, the cost of which increased at a lesser rate than the rate of increase in net sales, as well as the aforementioned increase in gross profit margin of approximately 300 basis points during Fiscal 2011.

Wholesale

Income from operations for our wholesale segment increased $17.0 million, or 54.3%, to $48.2 million during Fiscal 2011, compared to $31.3 million for Fiscal 2010. This increase was primarily the result of the decrease in operating expenses as a percentage of net sales as a result of greater economies of scale experienced during Fiscal 2011 compared to Fiscal 2010.

Licensing

Income from operations for our licensing segment increased $18.0 million, or 191.8%, to $27.4 million during Fiscal 2011, compared to $9.4 million for Fiscal 2010. This increase is primarily the result of the aforementioned increase in sales of licensed products, while our operating expenses remained relatively fixed from the prior fiscal year.

Interest Expense

Interest expense decreased $0.2 million, or 9.5%, to $1.9 million during Fiscal 2011, compared to $2.1 million for Fiscal 2010. The decrease in interest expense was primarily due to the decrease in the average balance on our Credit Facility of approximately $14.2 million during Fiscal 2011, which was partially offset by an increase in interest rates during the period.

Foreign Currency Loss (Income)

Foreign currency loss during Fiscal 2011 was $1.8 million as compared to foreign currency income of $0.8 million during Fiscal 2010. The loss during Fiscal 2011 was primarily due to the strengthening of the Euro relative to the U.S. dollar, which impacted the re-measurement of intercompany loans with certain of our European subsidiaries, which are denominated in U.S. dollars.

 

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Provision for Income Taxes

We recognized $60.7 million of income tax expense during Fiscal 2011, compared with $15.7 million for Fiscal 2010. Our effective tax rate for Fiscal 2011 was 45.6%, compared to 43.8% for Fiscal 2010, before taking into effect a discrete item. Our discrete item related to a reversal of a tax liability during Fiscal 2010, which was negated as a result of the restructuring of certain of our foreign subsidiaries. Our effective tax rate after taking into effect the aforementioned discrete item was 28.6% for Fiscal 2010.

Net Income

As a result of the foregoing, our net income increased $33.3 million, or 84.7%, to $72.5 million during Fiscal 2011, compared to $39.2 million for Fiscal 2010.

Comparison of Fiscal 2010 with Fiscal 2009

The following table details the results of our operations for Fiscal 2010 and Fiscal 2009 and expresses the relationship of certain line items to total revenue as a percentage (dollars in thousands):

 

    Fiscal Years Ended     $ Change     % Change     % of Total
Revenue
Fiscal 2010
    % of  Total
Revenue
Fiscal 2009
 
    April 3,
2010
    March 28,
2009
         

Statements of Operations Data:

           

Net sales

  $ 483,452      $ 377,058        106,394        28.2    

Royalty revenue

    24,647        20,016        4,631        23.1    
 

 

 

   

 

 

   

 

 

       

Total revenue

    508,099        397,074        111,025        28.0    

Cost of goods sold

    241,365        208,283        33,082        15.9     47.5     52.5
 

 

 

   

 

 

   

 

 

       

Gross profit

    266,734        188,791        77,943        41.3     52.5     47.5

Selling, general and administrative expenses

    191,717        147,490        44,227        30.0     37.7     37.1

Depreciation and amortization

    18,843        14,020        4,823        34.4     3.7     3.5

Impairment of long-lived assets

    —          3,043        (3,043       0.0     0.8
 

 

 

   

 

 

   

 

 

       

Total operating expenses

    210,560        164,553        46,007        28.0     41.4     41.4
 

 

 

   

 

 

   

 

 

       

Income from operations

    56,174        24,238        31,936        131.8     11.1     6.1

Interest expense, net

    2,057        1,600        457        28.6     0.4     0.4

Foreign currency loss (income)

    (830     391        (1,221     -312.3     -0.2     0.1
 

 

 

   

 

 

   

 

 

       

Income before provision for income taxes

    54,947        22,247        32,700        147.0     10.8     5.6

Provision for income taxes

    15,699        9,208        6,491        70.5     3.1     2.3
 

 

 

   

 

 

   

 

 

       

Net income

  $ 39,248      $ 13,039      $ 26,209        201.0    
 

 

 

   

 

 

   

 

 

       

Total Revenue

Total revenue increased $111.0 million, or 28.0%, to $508.1 million during Fiscal 2010, compared to $397.1 million for Fiscal 2009. 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 royalty revenue.

 

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

 

     Fiscal Years Ended                
     April 3,
2010
     March 28,
2009
     $ Change      % Change  

Revenue:

           

Net sales:

           

Retail

   $ 186,538       $ 114,031       $ 72,507         63.6

Wholesale

     296,914         263,027         33,887         12.9

Licensing

     24,647         20,016         4,631         23.1
  

 

 

    

 

 

    

 

 

    

Total Revenue

   $ 508,099       $ 397,074       $ 111,025         28.0
  

 

 

    

 

 

    

 

 

    

Retail

Net sales from our retail stores increased $72.5 million, or 63.6%, to $186.5 million during Fiscal 2010, compared to $114.0 million for Fiscal 2009. We operated 106 stores as of April 3, 2010, compared to 74 stores as of March 28, 2009. During Fiscal 2010, our comparable store sales growth increased $21.1 million, or 19.2%, from Fiscal 2009. The growth in our comparable store sales was primarily due to an increase in sales of our accessories and footwear lines and watches during Fiscal 2010. In addition, our non-comparable store sales were $51.4 million during Fiscal 2010, which was primarily the result of opening 32 new stores during Fiscal 2010.

Wholesale

Net sales to our wholesale customers increased $33.9 million, or 12.9%, to $296.9 million during Fiscal 2010, compared to $263.0 million for Fiscal 2009. The increase in our wholesale net sales was primarily due to an increase in sales of our accessories line as well as an increase in sales of our footwear products during Fiscal 2010.

Licensing

Royalties earned on our licensing agreements increased $4.6 million, or 23.1%, to $24.6 million during Fiscal 2010, as compared to $20.0 million for Fiscal 2009. The increase during Fiscal 2010 was primarily due to increases in royalty revenue of $4.8 million earned on licensing agreements related to sales of watches, which were offset in part by decreases in royalty revenue earned on agreements related to women’s outerwear and footwear. During Fiscal 2010, a license agreement with respect to our bridge footwear line expired and those sales are now included in our wholesale segment.

Gross Profit

Gross profit increased $77.9 million, or 41.3%, to $266.7 million during Fiscal 2010, compared to $188.8 million for Fiscal 2009. Gross profit as a percentage of total revenue increased to 52.5% during Fiscal 2010, compared to 47.5% during Fiscal 2009. The increase in gross profit as a percentage of total revenue occurred primarily due to approximately 340 basis point increases in gross profit margin in each of our retail and wholesale segments. The increase in gross profit margin in our retail segment was due largely to fewer in-store markdowns during Fiscal 2010 as compared to Fiscal 2009. The increase in gross profit margin from our wholesale segment was due largely to a decrease in markdowns during Fiscal 2010 as compared to Fiscal 2009.

Total Operating Expenses

Total operating expenses increased $46.0 million, or 28.0%, to $210.6 million during Fiscal 2010, compared to $164.6 million for Fiscal 2009. Total operating expenses remained level at 41.4% as a percentage of total revenue for Fiscal 2010 and Fiscal 2009. 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 $44.2 million, or 30.0%, to $191.7 million during Fiscal 2010, as compared to $147.5 million for Fiscal 2009. The increases were primarily due to increases in the following: our retail occupancy and salary expenses of $22.5 million and advertising expenses of $6.3 million. The increases in our retail store occupancy and payroll costs were due to the opening of an additional 32 retail stores during Fiscal 2010 relative to the 26 retail stores that were opened during Fiscal 2009. The increase in our advertising expenses was primarily due to increases in our printed advertising expenses and advertising expenses to launch certain licensed products. Selling, general and administrative expenses as a percentage of total revenue increased to 37.7% during Fiscal 2010, as compared to 37.1% for Fiscal 2009, primarily due to the aforementioned advertising costs.

Depreciation and Amortization

Depreciation and amortization increased $4.8 million, or 34.4%, to $18.8 million during Fiscal 2010, as compared to $14.0 million for Fiscal 2009. Dollar increases in depreciation and amortization were primarily due to an increase in the build-out of our new retail locations as well as investments made in our information systems infrastructure. Depreciation and amortization increased to 3.7% as a percentage of total revenue during Fiscal 2010, as compared to 3.5% for Fiscal 2009.

Impairment on Long-Lived Assets

There were no impairment charges on long-lived assets during Fiscal 2010. Impairment on long-lived assets was $3.0 million for Fiscal 2009, which was related to the impairment of fixed assets for three of our retail stores.

Income from Operations

As a result of the foregoing, income from operations increased $31.9 million, or 131.8%, to $56.2 million during Fiscal 2010, compared to $24.2 million for Fiscal 2009. Income from operations as a percentage of total revenue increased to 11.1% during Fiscal 2010, compared to 6.1% for Fiscal 2009.

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

 

     Fiscal Years Ended     $ Change      % Change     Fiscal 2010
% of Net

Sales/
Revenue
    Fiscal 2009
% of Net

Sales/
Revenue
 
     April 3,
2010
     March 28,
2009
          

Income (loss) from Operations:

              

Retail

   $ 15,514       $ (5,104   $ 20,618         n/a        8.3     -4.5

Wholesale

     31,258         20,933        10,325         49.3     10.5     8.0

Licensing

     9,402         8,409        993         11.8     38.1     42.0
  

 

 

    

 

 

   

 

 

        

Income from Operations

   $ 56,174       $ 24,238      $ 31,936         131.8     11.1     6.1
  

 

 

    

 

 

   

 

 

        

Retail

Income from operations for the retail segment increased $20.6 million to $15.5 million during Fiscal 2010, compared to a loss from operations of $5.1 million during Fiscal 2009. Income from operations as a percentage of net sales for the retail segment increased to 8.3% during Fiscal 2010, primarily due to the growth in net retail sales, which more than offset the increase in operating costs. This increase occurred as we experienced contributions from our new stores as well as contributions from our increasing comparable store sales during Fiscal 2010.

 

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Wholesale

Income from operations for our wholesale segment increased $10.3 million, or 49.3%, to $31.3 million during Fiscal 2010, compared to $20.9 million during Fiscal 2009. Income from operations as a percentage of net sales for our wholesale segment increased to 10.5% during Fiscal 2010, primarily due to the aforementioned increase in gross profit margin of 340 basis points.

Licensing

Income from operations for our licensing segment increased $1.0 million, or 11.8%, to $9.4 million during Fiscal 2010, compared to $8.4 million for Fiscal 2009. Income from operations as a percentage of royalty revenue for our licensing segment decreased 3.9% to 38.1% during Fiscal 2010, primarily as a result of an increase in advertising expenses to launch certain licensed products during Fiscal 2010.

Interest Expense

Interest expense increased $0.5 million, or 28.6%, to $2.1 million during Fiscal 2010, compared to $1.6 million for Fiscal 2009. The increase in interest expense was primarily due to an increase in average borrowings on our Credit Facility of approximately $3.0 million during Fiscal 2010.

Foreign Currency Loss (Income)

Foreign currency income during Fiscal 2010 was $0.8 million as compared to a foreign currency loss of $0.4 million during Fiscal 2009. The foreign currency income during Fiscal 2010 was primarily due to the strengthening of the U.S. dollar relative to the Euro, which impacted the re-measurement of intercompany loans with certain of our European subsidiaries, which are denominated in U.S. dollars.

Provision for Income Taxes

We recognized $15.7 million of income tax expense during Fiscal 2010, compared with $9.2 million for Fiscal 2009. Our effective tax rate for Fiscal 2010, before taking into effect a discrete item, was 43.8%, compared to 41.4% for Fiscal 2009. Our effective rate, before taking into effect the discrete item, increased during Fiscal 2010 as a result of an increase in losses on certain of our foreign subsidiaries which do not yield any income tax benefits on a consolidated basis, as well as an increase in our blended state income tax rates during Fiscal 2010. The discrete item related to a reversal of an income tax liability during Fiscal 2010, which was negated as a result of the restructuring of certain of our foreign subsidiaries. Our effective tax rate after taking into effect the aforementioned discrete item was 28.6% for the Fiscal 2010.

Net Income

As a result of the foregoing, we generated net income of $39.2 million during Fiscal 2010, as compared to $13.0 million for Fiscal 2009.

Liquidity and Capital Resources

Liquidity

Our primary sources of liquidity are the cash flows generated from our operations, along with borrowings available under our 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 Credit Facility and available cash and cash equivalents, will be

 

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sufficient to meet our working capital needs for the next 12 months, including investments made and expenses incurred in connection with our store growth plans, systems development and store improvements. We expect to spend between approximately $100 million and $110 million on capital expenditures during Fiscal 2012, of which we have spent $32.0 million for the six months ending October 1, 2011. 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, build-out of our new warehouse, corporate offices and enhancing our information systems infrastructure.

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

 

 

     As of  
     October 1,
2011
     April 2,
2011
     April 3,
2010
 

Balance Sheet Data:

        

Cash and cash equivalents

   $ 19,300       $ 21,065       $ 5,664   

Working capital

   $ 181,800       $ 117,673       $ 51,263   

Total assets

   $ 479,216       $ 399,495       $ 281,852   

Revolving line of credit

   $ 16,218       $ 12,765       $ 43,980   

 

     Six Months Ended     Years Ended  
     October 1,
2011
    October 2,
2010
    April 2 ,
2011
    April 3 ,
2010
    March 28,
2009
 

Cash Flows Provided By (Used In):

          

Operating activities

   $ 19,864      $ 52,191      $ 110,308      $ 28,592      $ 29,450   

Investing activities

     (31,991     (24,130     (57,830     (32,175     (38,399

Financing activities

     11,020        (22,528     (37,726     5,581        8,605   

Effect of exchange rate

     (658     312        649        1,206        4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ (1,765   $ 5,845      $ 15,401      $ 3,204      $ (340
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash Provided by Operating Activities

Cash provided by operating activities decreased $32.3 million to $19.9 million during the six months ended October 1, 2011, as compared to $52.2 million for the six months ended October 2, 2010. The decrease in cash flows from operating activities is primarily due to increases in the change to our accounts receivables and accrued expenses, offset, in part, by an increase in our net income during the six months ended October 1, 2011 as compared to the six months ended October 2, 2010. The increase in the change to our accounts receivable was largely the result of cash received during the prior comparable period which was related to sales billed late in Fiscal 2010 (as described in the below paragraph), as well as the increase in our revenues during the current period. The increase in changes to our accrued expenses was largely due to income taxes paid during the six months ended October 1, 2011.

Cash provided by operating activities increased $81.7 million to $110.3 million during Fiscal 2011, as compared to $28.6 million for Fiscal 2010. The increase in cash flows from operating activities is primarily due to an increase in our net income, an increase in cash received on our accounts receivable and a decrease in expenditures in our accounts payable, offset in part by an increase in cash outflows related to our inventory during Fiscal 2011 as compared to Fiscal 2010. The increase in cash outflows on our inventory occurred primarily to accommodate the increase to our net sales, and was a function of volume. In addition, as we continue to open more retail stores we expect our expenditures on inventory to increase at a greater rate than the increase in our sales as inventory related to retail sales typically experiences slower inventory turnover than that of

 

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wholesale. The increase in the balance on our accounts payable was directly attributable to the increase in expenditures on our inventory described above. The increase in cash received on our accounts receivable is largely attributable to cash received from sales occurring from Fiscal 2010, which were billed late in that year as a result of the disruption in our primary distribution facility.

Cash provided by operating activities decreased $0.9 million to $28.6 million during Fiscal 2010, as compared to $29.5 million for Fiscal 2009. The decrease in cash flows from operating activities is primarily due to an increase in our accounts receivable, which was offset by an increase in our net income and a decrease in expenditures on inventory during Fiscal 2010 as compared to Fiscal 2009. The increase in accounts receivable was primarily due to delayed product shipments towards the end of Fiscal 2010. The delay in these shipments was due to a disruption to one of our distribution facilities, which resulted in a significant number of back-logged orders being shipped over a short period of time near the end of the fiscal year; consequently, billing occurred in a greater concentration late in Fiscal 2010.

Cash Used in Investing Activities

Net cash used in investing activities increased $7.9 million to $32.0 million during the six months ended October 1, 2011, as compared to $24.1 million during the six months ended October 2, 2010. 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 six months ended October 1, 2011, and shop-in-shops we installed during the six months ended October 1, 2011.

Net cash used in investing activities increased $25.7 million to $57.8 million during Fiscal 2011, as compared to $32.2 million during Fiscal 2010. The increase in cash used in investing activities is primarily the result of the build-out of our 60 new retail stores, which were constructed during Fiscal 2011, and shop-in-shops we installed during Fiscal 2011.

Net cash used in investing activities decreased $6.2 million to $32.2 million during Fiscal 2010, compared to $38.4 million for Fiscal 2009. The decrease in cash used in investing activities during Fiscal 2010 was primarily due to expenditures in Fiscal 2009 which related to the opening of two high-profile European locations.

Cash Provided by (Used in) Financing Activities

Net cash provided by financing activities was $11.0 million in the six months ended October 1, 2011, compared to net cash used in financing activities of $22.5 million during the six months ended October 2, 2010. The $33.5 million increase in cash flows from financing activities was primarily due to the net borrowings on our Credit Facility of $3.5 million during the six months ended October 1, 2011, as compared to net repayments of $18.0 million during the six months ended October 2, 2010. In addition, we received net proceeds from the private placement of our convertible preference shares, completed in July 2011, of $9.6 million.

Net cash used in financing activities was $37.7 million in Fiscal 2011, compared to net cash provided by financing activities of $5.6 million during Fiscal 2010. The $43.3 million increase in net cash used in financing activities was primarily due to the net repayments on our Credit Facility of $31.2 million during Fiscal 2011, as compared to net borrowings of $4.5 million during Fiscal 2010.

Net cash provided by financing activities decreased by $3.0 million during Fiscal 2010, to $5.6 million, compared to $8.6 million in Fiscal 2009. The decrease in net cash provided by financing activities was primarily due to net borrowings of $4.5 million on our Credit Facility during Fiscal 2010, compared to net borrowings of $9.5 million from our Credit Facility during Fiscal 2009.

 

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Revolving Credit Facility

On September 15, 2011, we completed an amendment to our Credit Facility, which was originally entered into during Fiscal 2007. Pursuant to such amendment, the Credit Facility provides for up to $100.0 million of borrowings, and expires on September 15, 2015. The agreement also provides for loans and letters of credit to our European subsidiaries of up to $35.0 million. All other terms and conditions under the Credit Facility remained consistent with the original agreement. The Credit Facility provides for aggregate credit available equal to the lesser of (i) $100.0 million, or (ii) the sum of specified percentages of eligible receivables and eligible inventory, as defined, plus $30.0 million. Amounts outstanding under the Credit Facility are collateralized by substantially all of our assets. The Credit Facility contains financial covenants limiting our capital expenditures to $110.0 million for any one fiscal year plus additional amounts as permitted, and a minimum 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), restrict and limit additional indebtedness, and restrict the incurrence of additional liens and cash dividends. As of October 1, 2011, we were in compliance with all of our covenants covered under the agreement.

Borrowings under the Credit Facility accrue interest at the rate per annum announced from time to time by the agent of 1.25% above the prevailing applicable prime rate, or at a per annum rate equal to 2.25% above the prevailing LIBOR rate. The weighted average interest rate for the revolving credit facility was 4.53% during Fiscal 2011. The Credit Facility requires an annual facility fee of $0.1 million, payable quarterly, and an annual commitment fee of 0.35% on the unused portion of the available credit under the Credit Facility, payable quarterly.

As of October 1, 2011, the amount outstanding under the Credit Facility was $16.2 million, and the amount available for future borrowings was $56.4 million. The largest amount borrowed during the six months ended October 1, 2011 was $34.1 million. At October 1, 2011, there were documentary letters of credit outstanding for approximately $16.6 million, and stand-by letters of credit of $10.8 million.

Contractual Obligations and Commercial Commitments

As of October 1, 2011, our lease commitments and contractual obligations were as follows (in thousands):

 

Fiscal year ending

   Remainder
of Fiscal
2012
     Fiscal
2013-2014
     Fiscal
2015-2016
     Fiscal
2017 and
Thereafter
     Total  

Operating leases

   $ 27,320       $ 110,697       $ 110,112       $ 234,048       $ 482,177   

Credit Facility

     —           —           16,218         —           16,218   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 27,320       $ 110,697       $ 126,330       $ 234,048       $ 498,395   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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.

Credit Facility represents the balance as of October 1, 2011, which although it has a maturity date of September 15, 2015, is classified as a current liability on our consolidated balance sheets due to its revolving nature. In addition, interest on the Credit Facility is excluded from the above table as the amount due in future periods is unknown based on its revolving nature.

Excluded from the above commitments is $1.9 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 April 2, 2011, 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 or capital expenditure commitments that represent firm commitments at April 2, 2011.

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 affiliated with, 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.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Critical accounting policies are those that are the most important portrayal of our financial condition and results of operations, and that require our most difficult, subjective and complex judgments as a result of the need to make estimates about the effect of matters that are inherently uncertain. While our significant accounting policies are described in more detail in the notes to our financial statements, our most critical accounting policies, discussed below, pertain to revenue recognition, impairment of long-lived assets, trademarks and goodwill, stock-based compensation and income taxes. In applying such policies, we must use some amounts that are based upon our informed judgments and best estimates. Estimates, by their nature, are based upon judgments and available information. The estimates that we make are based upon historical factors, current circumstances and the experience and judgment of management. We evaluate our assumptions and estimates on an ongoing basis.

Revenue Recognition

We recognize retail store revenue upon sale of our products to retail consumers, net of estimated returns. Wholesale revenue is recognized net of estimates for sales returns, discounts, markdowns and allowances, after merchandise is shipped and title and risk of loss are transferred to our wholesale customers. To arrive at net sales for retail, gross sales are reduced by actual returns and by a provision for estimated future customer returns, which is based on management’s review of historical and current customer returns. The amounts reserved for retail sales returns were $1.0 million, $2.3 million and $1.4 million at October 1, 2011, April 2, 2011 and April 3, 2010, respectively. To arrive at net sales for wholesale, gross sales are reduced by provisions for estimated future returns, based on current expectations, trade discounts, markdowns, allowances, operational chargebacks, as well as for certain cooperative selling expenses. Total sales reserves for wholesale were $32.9 million, $25.2 million and $20.2 million at October 1, 2011, April 2, 2011 and April 3, 2010, respectively.

Royalty revenue generated from product licenses, which includes contributions for advertising, is based on reported sales of licensed products bearing our trademarks, at rates specified in the license agreements. These agreements are also subject to contractual minimum levels. Royalty revenue generated by geography-specific licensing agreements is recognized as earned under the licensing agreements based on reported sales by licensees applicable to specified periods as outlined in the agreements. These agreements allow for the use of our trademarks to sell our branded products in certain geographic regions.

 

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Long-lived Assets

We evaluate long-lived assets, including fixed assets and intangible assets with finite useful lives, for impairment whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable. If the sum of our estimated undiscounted future cash flows is less than the carrying value, we recognize an impairment loss, measured as the amount by which the carrying value exceeds the fair value of the asset. These estimates of cash flow require significant management judgment and certain assumptions about future volume, sales and expense growth rates, devaluation and inflation. As such, these estimates may differ from actual cash flows. For Fiscal 2011 and Fiscal 2009, we recorded charges for impairments on fixed assets and intangible assets related to our retail segment of $3.8 million and $3.0 million, respectively.

Goodwill

On an annual basis, or whenever impairment indicators exist, we perform a valuation of goodwill. In the absence of any impairment indicators, goodwill is tested in the fourth quarter of each fiscal year. We apply our tests to reporting units within our wholesale and licensing segments, which are based on our current operating projections. Judgments regarding the existence of impairment indicators are based on market conditions and operational performance of the business. Future events could cause us to conclude that impairment indicators exist and therefore that goodwill is impaired.

We assess goodwill for impairment by calculating the fair value of our reporting units to which goodwill has been allocated using the discounted cash flow method along with the market multiples method. Both of these valuation methods require our management to make certain assumptions and estimates regarding certain industry trends and future profitability of our reporting units. If the carrying amount of a reporting unit exceeds its fair value, we would compare the implied fair value of the reporting unit goodwill with its carrying value. To compute the implied fair value, we would assign the fair value of the reporting unit to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination. The excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. If the carrying value of the reporting unit goodwill exceeded the implied fair value of the reporting unit goodwill, we would record an impairment loss to write down such goodwill to its implied fair value. The valuation of goodwill is affected by, among other things, our business plan for the future and estimated results of future operations.

We have tested our goodwill for impairment in our fourth quarter for the periods presented. There are no impairment charges related to goodwill for any of the fiscal periods presented.

Stock-based Compensation

We grant stock-based awards to certain of our employees and directors. These awards are measured at the grant date based on the fair value as calculated using the Black-Scholes option pricing model and are recognized as expense over the requisite service period, based on attainment of certain vesting requirements, as well as our completion of an initial public offering. Determining the fair value of stock-based awards at the grant date requires considerable judgment, including estimating expected volatility, expected term and risk-free rate.

Our expected volatility is based on the average volatility rates of similar actively traded companies over the past 9.5 years, which is our estimated expected average holding period. The expected holding period of the option is based on the period to expiration which is generally 9-10 years. This approach was chosen as it directly correlates to our service period. In addition, we have no historical option exercise experience. The risk-free rate is derived from the zero-coupon U.S. Treasury Strips yield curve, the period of which relates to the grant’s holding period. If factors change and we employ different assumptions, the fair value of future awards and resulting stock-based compensation expense may differ significantly from what we have estimated in the past.

Prior to the private placement of our convertible preference shares, which was completed during July 2011, we estimated the fair value of the shares underlying our stock option grants, which served as the grant price for

 

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the fair value calculation of our stock option grants. The estimates of our share value were based on contemporaneous valuations prepared with the assistance of a third party specialist. The October and December 2010 share values were derived from October 2010 valuations, while the March 2011 and August 2011 share values were derived from March and July 2011 valuations, respectively. These valuations were utilized for deriving our share value since the inception of our Stock Option Plan. In conjunction with the preparation of these valuations, we adhered to the guidance provided by the AICPA as prescribed in its Practice Aid entitled, “Valuation of Privately-Held-Company Equity Securities Issued as Compensation.” This Practice Aid specifically addresses valuation of common stock in private companies and outlines approaches that can be taken for that valuation, as well as providing guidelines for each approach. The approaches outlined in the Practice Aid are: (1) discounted cash flow, or income; (2) public company market approach (market multiples); and (3) the guideline transaction (M&A) market approach. Consistent with these guidelines, we employed the income (discounted cash flows) and public company market (market multiples) approaches when performing the valuations. We consistently employed these approaches when estimating the fair value of our shares prior to our private placement, which provided an arm’s length transaction that established an observable price for our shares in the absence of having a quoted market price on an active exchange. The option grants issued subsequent to the private placement were issued with a grant price which reflected the value of the private placement.

The inputs for the discounted cash flow model were comprised of our internal forecasts along with a weighted average cost of capital (discount rate), which was derived from averaging the rates calculated from several comparable companies. These comparable companies were chosen based on several criteria such as overall size, revenue and capitalization, as well as the industry, among others. The inputs used for deriving the multiples that were employed in the market approach analysis were obtained from published financial information from these comparable companies, as well as from our historical and forecasted financial results. The information used for the valuation of our shares was consistent with that used to value our reporting units for purposes of our goodwill impairment testing. The results from both of these two valuation approaches, income (DCF) and market multiples, were averaged in the determination of the fair value of our shares.

The information used in the above models was based on the most readily available and relevant information at the time each valuation was performed. The valuation models employed both observable and objective inputs, such as market data, as well as inputs which were more subjective, such as assumptions used in preparing our forecasts, which were based on our best estimates at each valuation date. The assumptions underlying our forecasts were derived from the information available at the time of the respective forecasts, and were revisited regularly when new information became available. In addition to results generated from the performance of these valuations, additional factors such as a marketability and liquidity discount, were factored into the final determination of the fair value of our shares. A marketability discount of 20% was used in the October 2010 valuation, and a marketability discount of 11% was used in the March 2011 valuation. The below table details the grant prices and grant totals for stock option grants issued since October 2010:

 

Grant Date

   Number
of options
granted
     Estimated
share value
used for fair
value calculation
     Fair value
of options
at grant date
     Option
exercise price
 

10/25/2010

     3,521,262       $ 2.19       $ 1.20       $ 2.63   

12/01/2010

     81,905       $ 2.19       $ 1.22       $ 2.63   

03/25/2011

     3,501,905       $ 6.05       $ 4.05       $ 5.00   

08/11/2011

     3,055,952       $ 12.12       $ 6.90       $ 12.12   

The fair value of the shares underlying the March 2011 grants used a multiple on earnings that was consistent with our peers at that time, as adjusted for the Company’s business plan. Inherent in the fair value calculation was the Company’s assessment of certain risks embedded in the business plan for Fiscal 2011 and thereafter, including: rapid revenue and earnings growth; roll out of our retail stores to lower productivity malls where our format had not been proven; our European expansion plans; and, our Japanese launch plans.

 

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Subsequent to March 2011, the Company successfully implemented many aspects of its business plan and launched an effort to sell a portion of the Company through a private placement. In July 2011, the Company completed the private placement. The fair value of the shares underlying the August 2011 grants used the private placement valuation, which was based on a multiple applied to the forecasted Fiscal 2012 earnings. An increase in the multiple on earnings, as well as an increase in forecasted earnings from the March 2011 valuation to the July 2011 valuation resulted in the increase in the fair value of the shares from $6.05 to $12.12.

Based upon an offering price of $20.00 per share, the outstanding vested and unvested options have an intrinsic value of $328.7 million.

Income Taxes

Deferred income tax assets and liabilities reflect temporary differences between the tax basis and financial reporting basis of our assets and liabilities and are determined using the tax rates and laws in effect for the periods in which the differences are expected to reverse. We periodically assess the realizability of deferred tax assets and the adequacy of deferred tax liabilities, based on the results of local, state, federal or foreign statutory tax audits or our own estimates and judgments.

Realization of deferred tax assets associated with net operating loss and tax credit carryforwards is dependent upon generating sufficient taxable income prior to their expiration in the applicable tax jurisdiction. We periodically review the recoverability of our deferred tax assets and provide valuation allowances as deemed necessary to reduce deferred tax assets to amounts that more-likely-than-not will be realized. This determination involves considerable judgment and our management considers many factors when assessing the likelihood of future realization of deferred tax assets, including recent earnings results within various taxing jurisdictions, expectations of future taxable income, the carryforward periods remaining and other factors. Changes in the required valuation allowance are recorded in income in the period such determination is made. Deferred tax assets could be reduced in the future if our estimates of taxable income during the carryforward period are significantly reduced or alternative tax strategies are no longer viable.

We recognize the impact of an uncertain income tax position taken on our income tax returns at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. The effect of an uncertain income tax position will not be taken into account if the position has less than a 50% likelihood of being sustained. Our tax positions are analyzed periodically (at least quarterly) and adjustments are made as events occur that warrant adjustments for those positions. We record interest expense and penalties payable to relevant tax authorities as income tax expense.

Recent Accounting Pronouncements

We have considered all new accounting pronouncements and 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.

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.

 

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Foreign Currency Exchange Risk

We are exposed to risks on certain purchase commitments to foreign suppliers based on the value of the functional currency relative to the local currency of the supplier on the date of the commitment. As such, we enter into forward currency contracts that generally mature in 18 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. Although these are derivative contracts to hedge cash flow risks, we do not designate these contracts as hedges for accounting purposes. Accordingly, the changes in the fair value of these contracts at the balance sheet date and upon maturity (settlement) are recorded in 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.

We perform a sensitivity analysis to determine the effects of fluctuations in foreign currency exchange rates. For this sensitivity analysis, we assume a hypothetical change in foreign exchange rates against the U.S. dollar. Based on all foreign currency exchange contracts outstanding as of October 1, 2011, a 10% devaluation of the U.S. dollar compared to the level of foreign currency exchange rates for currencies under contract as of October 1, 2011 would result in approximately $3.3 million of net unrealized foreign currency loss. Conversely, a 10% appreciation of the U.S. dollar would result in approximately $5.6 million of net unrealized gains.

Interest Rate Risk

We are exposed to interest rate risk in relation to our Credit Facility, the balance of which was $16.2 million at October 1, 2011. Our Credit Facility carries interest rates that are tied to LIBOR and the prime rate, and therefore our statements of operations and cash flows are exposed to changes in interest rates. A one percentage point increase in either the prime rate or LIBOR would cause an increase to the interest expense on our Credit Facility of approximately $0.2 million. The balance of our Credit Facility at October 1, 2011 is not indicative of future balances that may be subject to fluctuations in interest rates.

 

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BUSINESS

Our Company

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 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 74 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 have a clear trajectory for significant future growth. Over the years, we have successfully expanded beyond apparel into accessories (including handbags, small leather goods, eyewear, jewelry and watches) and footwear, which together now account for the majority of our wholesale and retail sales. We have also expanded our distribution capabilities beyond wholesale into retail, which accounted for approximately 42.8%, 36.7% and 28.7% of our total revenue in Fiscal 2011, Fiscal 2010 and Fiscal 2009, respectively. Our total revenue was $803.3 million in Fiscal 2011 as compared to $508.1 million in Fiscal 2010, representing a 58.1% year-over-year increase. Our net income was $72.5 million in Fiscal 2011 as compared to $39.2 million in Fiscal 2010, representing a 84.7% year-over-year increase.

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. In Fiscal 2011, our retail segment accounted for approximately 42.8% of our total revenue. As of October 1, 2011, our retail segment included:

 

   

169 North American retail stores, including concessions; and

 

   

34 international retail stores, including concessions, in Europe and Japan.

In Fiscal 2011, our wholesale segment accounted for approximately 51.5% of our total revenue. As of October 1, 2011, our wholesale segment included:

 

   

wholesale sales through approximately 1,801 department store and specialty store doors in North America; and

 

   

wholesale sales through approximately 549 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. In Fiscal 2011, our licensing segment accounted for approximately 5.7% of our total revenue and consisted primarily 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, including, among others, Bergdorf Goodman, Saks Fifth Avenue, Neiman Marcus, Holt Renfrew, Harrods, Harvey Nichols, Selfridges, Le Bon Marché and Printemps. In 2004, we saw an opportunity to capitalize on the brand strength of the Michael Kors collection and address the significant demand opportunity in accessible luxury goods, and we introduced the MICHAEL Michael Kors collection, which has a strong focus on accessories, in addition to offering footwear and apparel. The MICHAEL Michael Kors collection is carried in all of our lifestyle stores as well as leading department stores throughout the world, including, among others, Bloomingdale’s, Nordstrom, Macy’s, Harrod’s, Harvey Nichols, Selfridges, Printemps, Lotte, Hyundai, Isetan and Lane Crawford. Taken together, our two primary collections target a broad customer base while retaining a premium luxury image. In addition to these two primary collections, we also offer select footwear and outerwear through our KORS Michael Kors accessible luxury collection, which is not material to our net sales.

 

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Our Market Opportunity

We operate in the global luxury goods industry. According to the Altagamma Studies, total global sales of luxury goods were approximately $230.1 billion in 2010. Over the past ten years, the industry has grown and has remained resilient during economic downturns. In 2010, the industry showed a significant recovery with 13% growth and surpassed the pre-financial crisis peak of $226.1 billion set in 2007. The industry is expected to grow at a 7% CAGR from 2010 to 2014 to reach sales of between $299.3 and $305.9 billion. We believe that this growth will be driven by an improving global economy, favorable demographics and increased demand for luxury goods in emerging markets due to higher per capita income levels.

 

2010 Worldwide Luxury Goods Categories %

   2010 Worldwide Luxury Goods Geographies %
LOGO    LOGO

Source:    Altagamma Studies

According to the Altagamma Studies, in 2010, the two largest product categories in the global luxury goods industry were accessories (defined in the Altagamma Studies as handbags, wallets, other leather products, shoes and other non-leather accessories, such as jewelry and eyewear) and apparel. The accessories product category represented 25% of total luxury goods sales in 2010 and generated sales of approximately $57.5 billion. From 2005 to 2010, the accessories product category experienced higher growth than any other category in the industry, registering a 9% CAGR. Accessories were also the only product category to post positive growth during the 2007-2009 economic downturn, followed by a strong sales increase of 17% in 2010. The 2010 growth in accessories was driven by a 22% increase in leather goods sales, with sales of handbags leading the way. The apparel product category, which represented 27% of total luxury goods sales in 2010 and was estimated at approximately $62.1 billion, experienced a significant recovery as well with 12% growth in 2010.

According to the Altagamma Studies, the global luxury goods industry is concentrated on our core geographic areas of operation, the Americas and Europe, which in 2010 represented 30% and 37% of the industry’s sales, respectively. In 2010, the Americas saw strong growth of 16% in luxury goods sales, reaching a total size of approximately $69.0 billion. Europe also experienced solid 2010 growth of 10%, reaching estimated sales of approximately $85.1 billion. The United States market largely drove the 2010 recovery in luxury good sales, posting 15% growth to reach estimated sales of approximately $64.0 billion. Today, the United States remains the country with the highest luxury goods consumption and in 2010 had approximately 28% of global luxury goods sales. The Asia Pacific region (excluding Japan) represented 17% of global luxury goods sales in 2010. Between 2005 and 2010, this region captured an additional 7% share of global luxury goods sales and experienced the fastest growth with a 15% CAGR.

Our Competitive Strengths

We believe that the following strengths differentiate us from our competitors:

Rapidly Growing Luxury Lifestyle Brand with Best-in-Class Growth Metrics. We believe that the Michael Kors name has become synonymous with luxurious fashion that is timeless and elegant, expressed through sophisticated accessory and ready-to-wear collections. Each of our collections exemplifies the jet-set

 

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lifestyle and features high quality designs, materials and craftsmanship. Some of the most widely recognized global trendsetters—including celebrities such as Angelina Jolie, Heidi Klum, Blake Lively, Penelope Cruz, Gwyneth Paltrow and Catherine Zeta-Jones—walk the red carpet in our collections. We have built a solid foundation for continued long-term global growth and currently enjoy best-in-class growth metrics. For instance:

 

   

we experienced year-over-year total revenue growth of 58.1% and 28.0% in Fiscal 2011 and Fiscal 2010, respectively;

 

   

our global comparable store sales increased 48.2%, 19.2% and 6.3% in Fiscal 2011, Fiscal 2010 and Fiscal 2009, respectively, and we have had positive comparable store sales growth in every quarter in the last five fiscal years; and

 

   

our global retail store count grew from 48 at the beginning of Fiscal 2009 to 166 through the end of Fiscal 2011, representing a 51.2% CAGR.

Design Vision Led by World-Renowned, Award-Winning Designer. Michael Kors, a world-renowned designer, personally leads our experienced design team. Mr. Kors and his team are responsible for conceptualizing and directing the design of all of our products, and their design leadership is a unique advantage that we possess. Mr. Kors has received a number of awards, including the CFDA Women’s Fashion Designer of the Year (1999), the CFDA Men’s Fashion Designer of the Year (2003), the ACE Accessory Designer of the Year (2006) and the CFDA Lifetime Achievement Award (2010). These and other awards recognize the contribution Mr. Kors and his team have made to the fashion industry and our Company. Our brand image has been further enhanced since 2004 by Mr. Kors’ position as a judge on the six-time Emmy-nominated reality show Project Runway.

Poised to Take Share in the Growing Global Accessories Product Category. According to the Altagamma Studies, from 2005 to 2010, the accessories product category was the fastest growing product category in the global luxury goods industry, increasing at a 9% CAGR, and in 2010 the accessories product category generated sales of approximately $57.5 billion, representing 25% of total luxury goods sales. In 2004, we saw the opportunity to capitalize on growing accessories demand by leveraging the strength of the Michael Kors luxury collection, and we introduced the accessible luxury MICHAEL Michael Kors collection. Since launching the MICHAEL Michael Kors collection, awareness of our brand within the United States has grown exponentially, increasing from 11% in 2004 to 71% in 2011, according to a study we commissioned. In turn, our sales of accessories have grown at an approximately 57.6% CAGR over the last three years, outperforming industry growth. Net sales of accessories and related merchandise (including handbags, small leather goods, footwear, watches, jewelry, eyewear and fragrance) in our retail and wholesale segments accounted for approximately 62.3% of our total revenue in Fiscal 2011. We anticipate that sales of our accessories and related merchandise will continue to grow and will become an increasingly important driver of global comparable store sales growth.

Proven Multi-Format Retail Segment with Significant Growth Opportunity. In Fiscal 2011, our retail segment reported total revenue of $344.2 million and an industry-best 48.2% increase in year-over-year comparable store sales from Fiscal 2010. Within our retail segment we have three primary retail store formats: collection stores, lifestyle stores and outlet stores. Our collection stores are located in some of the world’s most prestigious shopping areas, such as Madison Avenue in New York and Bond Street in London, and are generally 3,100 square feet in size. Our lifestyle stores are located in some of the world’s most frequented metropolitan shopping locations and leading regional shopping centers, and are generally 2,100 square feet in size. We also extend our reach to additional consumer groups through our outlet stores, which are generally 2,700 square feet in size. In addition to these three retail store formats, we operate concessions in a select number of department stores in North America and internationally.

Strong Relationships with Premier Wholesale Customers. We partner with leading wholesale customers, such as Bergdorf Goodman, Saks Fifth Avenue, Neiman Marcus, Holt Renfrew, Bloomingdale’s, Nordstrom and Macy’s in North America; and Harrods, Harvey Nichols, Selfridges and Galeries Lafayette in Europe. These relationships enable us to access large numbers of our key consumers in a targeted manner. In addition, we are

 

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engaged in wholesale growth initiatives that are designed to transform the Michael Kors displays at select department stores into branded shop-in-shops. By installing customized freestanding fixtures, wall casings and components, decorative items and flooring, as well as deploying specially trained staff, we believe that our shop-in-shops provide department store consumers with a more personalized shopping experience than traditional retail department store configurations. These initiatives, among others, have helped increase total revenue for our wholesale segment from $296.9 million in Fiscal 2010 to $413.6 million in Fiscal 2011, representing a 39.3% year-over-year increase.

Growing Licensing Segment. The strength of our global brand has been instrumental in helping us build our licensing business. We collaborate with a select number of product licensees who produce and sell what we believe are products requiring specialized expertise that are enhanced by our brand strength. Our relationship with Fossil, for instance, has helped us create a line of watches that we believe have become, and will continue to be, status items for young fashion-conscious consumers. Other product licensees include, among others, Estée Lauder for fragrances and Marchon for eyewear. Our relationships with our product licensees have helped us leverage our success across demographics and categories by taking advantage of their unique expertise, resulting in total revenue for licensed products increasing from $24.6 million in Fiscal 2010 to $45.5 million in Fiscal 2011, representing a 84.8% year-over-year increase. In addition, we have entered into agreements with non-manufacturing licensees who we believe have particular expertise in the distribution of fashion accessories, footwear and apparel in specific geographic territories, such as Korea, the Philippines, Singapore, Malaysia, greater China, the Middle East and Turkey.

Proven and Experienced Management Team. Our senior management team has extensive experience across a broad range of disciplines in the retail industry, including design, sales, marketing, public relations, merchandising, real estate, supply chain and finance. With an average of 25 years of experience in the retail industry, including at a number of public companies, and an average of eight years with Michael Kors, our senior management team has strong creative and operational experience and a successful track record. This extensive experience extends beyond our senior management team and deep into our organization. For example, we have a 50-person design team, the senior staff of which has an average of 19 years of experience in the industry.

Our Growth Strategy

Our goal is to increase our revenue and profits and strengthen our global brand. Our growth strategy includes the following:

Increase Our Brand Awareness. We intend to continue increasing brand awareness and customer loyalty in North America and internationally in a number of ways, including by:

 

   

continuing to open new retail stores in preeminent, high-visibility locations;

 

   

maintaining our strong advertising position in global fashion publications, growing our online advertising exposure and internet presence and continuing to distribute our store catalog featuring our new collections;

 

   

holding our semi-annual runway shows that reinforce Mr. Kors’ designer status and high-fashion image, creating excitement around the Michael Kors and MICHAEL Michael Kors collections and generating global multimedia press coverage; and

 

   

leveraging Mr. Kors’ global prestige and popularity through a variety of press activities and personal appearances.

Expand Our Retail Store Base in North America. We expanded our retail store base in North America by 30 stores in Fiscal 2010 and by 40 stores in Fiscal 2011. We believe that there is significant opportunity to continue expanding our retail store base in North America and to increase our North American retail store base to approximately 400 locations in the long term. We will look to open new stores predominately in high traffic areas of street and mall locations in high-income demographic areas and will adhere to our already successful retail store formats, which we believe reinforce our brand image and generate strong sales per square foot.

 

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Expand North American Shop-in-Shop Footprint at Select Department Stores. In Fiscal 2011, we achieved a 33.7% year-over-year increase in our North American wholesale sales through substantially the same number of department store wholesale doors, primarily due to an increase in shop-in-shops. We believe that our proprietary shop-in-shop fixtures effectively communicate our brand image within the department store, enhance the presentation of our merchandise and create a more personalized shopping experience for department store customers. We plan to grow our North American shop-in-shop footprint at select department stores by continuing to convert existing wholesale door space into shop-in-shops and expanding the size of existing shop-in-shops.

Increase Global Comparable Store Sales. In Fiscal 2011, we reported a 48.2% year-over-year increase in global comparable store sales. We expect to continue to increase global comparable store sales with a number of initiatives already under way to increase the size and frequency of purchases by our existing customers and to attract new customers. Such initiatives include, among others, increasing the size of existing stores, creating compelling store environments and offering new products, including logo products, small leather goods, active footwear and fashion jewelry.

Grow International Retail and Wholesale Businesses. Given the growing worldwide demand for accessible luxury goods, continued international expansion in select regions represents a compelling opportunity for additional growth. As of October 1, 2011, we operated 34 retail stores, including concessions, internationally, and our products are sold through approximately 549 department store and specialty store wholesale doors internationally. We plan to leverage our existing operations in London, Lugano, Madrid, Milan, Munich, Paris and Tokyo to drive continued retail and wholesale expansion in Europe and Japan. In the long term, we believe that we can increase our international retail store base, including concessions, to approximately 100 locations in Europe and approximately 100 locations in Japan. In addition, we plan to expand our shop-in-shop footprint at select department stores throughout Europe and our concession footprint at select department stores in Japan.

Our Collections and Products

We offer two primary collections: the Michael Kors luxury collection and the MICHAEL Michael Kors accessible luxury collection. In addition to these two primary collections, we also offer select footwear and outerwear through our KORS Michael Kors accessible luxury collection, which is not material to our net sales. We believe consumers associate our collections with a jet-set aesthetic that infuses stylish elegance and a sporty attitude into any lifestyle. Taken together, our collections target a broad customer base while retaining a premium luxury image.

Since 1981, we have consistently developed our distinctive brand image across an expanding number of products, price tiers and geographic markets. Our products are widely recognized and feature high quality designs, materials and craftsmanship. Our superior quality and design across our product lines allow us to maintain premium price points that encourage repeat purchases among our growing customer base.

The Michael Kors Collection

The Michael Kors collection was first introduced in 1981 and reflects the pinnacle of luxury. This collection establishes the aesthetic authority of our entire brand and serves as the cornerstone of Michael Kors’ semi-annual runway shows. The Michael Kors collection is carried in many of our retail stores as well as the finest luxury department stores in the world, including, among others, Bergdorf Goodman, Saks Fifth Avenue, Neiman Marcus, Holt Renfrew, Harrods, Harvey Nichols, Selfridges, Le Bon Marché and Printemps.

In the Michael Kors collection we offer accessories, including handbags and small leather goods, many of which are made from high quality leathers and other exotic skins, footwear and apparel, including ready-to-wear womenswear and menswear. Generally, our handbags and small leather goods retail from $500 to $6,000, our footwear retails from $500 to $1,300 and our women’s apparel retails from $400 to $4,000.

 

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The MICHAEL Michael Kors Collection

The MICHAEL Michael Kors collection was first introduced in 2004 when we identified the opportunity to capitalize on the brand strength of the Michael Kors collection to meet the significant demand for accessible luxury goods. The MICHAEL Michael Kors collection has a strong focus on accessories, in addition to offering footwear and apparel, and is positioned to appeal to a younger demographic. Since the introduction of this collection, awareness of our brand within the United States has increased exponentially, increasing from 11% in 2004 to 71% in 2011, according to a study we commissioned. Our MICHAEL Michael Kors collection is carried in all of our lifestyle stores as well as leading department stores throughout the world, including, among others, Bloomingdale’s, Nordstrom, Macy’s, Harrod’s, Harvey Nichols, Selfridges, Printemps, Lotte, Hyundai, Isetan and Lane Crawford.

In the MICHAEL Michael Kors collection, we offer: accessories, primarily handbags, which are created to meet the fashion and functional requirements of our broad and diverse consumer base, and small leather goods, such as clutches, wallets, wristlets and cosmetic cases; footwear, exclusively in women’s styles; and womenswear, including dresses, tops, jeans, pants, skirts, shorts and outerwear. Generally, our handbags retail from $200 to $800, our small leather goods retail from $45 to $200, our footwear retails from $70 to $500 and our women’s apparel retails from $50 to $500.

Our Licensed Products

Watches. Fossil has been our exclusive watch licensee since April 2004. We believe our watches are a “must-have” item among young fashion consumers and present an opportunity to build brand loyalty globally with younger consumers. Watches are sold in our retail stores and by our licensing partner to wholesale customers in addition to select watch retailers. Generally, our watches retail for between $150 and $500.

Eyewear. Marchon has been our exclusive eyewear licensee since January 2004. Marchon has developed what we believe is a distinctive product assortment of eyewear inspired by our collections. Our eyewear products are focused on status eyewear with sunglasses serving as a key category. Eyewear is sold in our retail stores and by our licensing partner to wholesale customers in addition to select sunglass retailers and prescription eyewear providers. Generally, our eyewear retails for between $85 and $285.

Jewelry. Fossil has been our exclusive fashion jewelry licensee since December 2010. Our jewelry product line is complementary to our watches and accessories lines and is comprised of bracelets, necklaces, rings and earrings. Our jewelry is sold in our retail stores and by our licensing partner to wholesale customers in addition to other specialty stores. Generally, our jewelry retails for between $45 and $400.

Fragrances. Estée Lauder has been our exclusive women’s and men’s fragrance licensee since May 2003. Fragrances are sold in our retail stores and by our licensing partner to wholesale customers in addition to select fragrance retailers. Generally, our fragrances retail for between $20 and $115.

Design and Merchandising

Michael Kors personally leads an experienced, New York-based design team, which is responsible for conceptualizing and directing the design of all of our products. Mr. Kors and his design team have access to our extensive archives of product designs created over the past 30 years, which are a valuable resource for new product concepts. Our designers are also supported by a strong merchandising team that analyzes sales, market trends and consumer preferences to identify business opportunities that help guide each season’s design process. In addition, merchandisers streamline our entire product line by editing, adding and deleting styles with the objective of maximizing profitable sales across our segments. Having one centralized, internal design and merchandising group helps us execute well-defined design concepts that are consistent with the strategic direction of our brand.

 

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Our store design and point-of-sale merchandising group creates and oversees implementation of our store environments. From our retail stores to our shop-in-shop locations in major department stores, we work to ensure the consistent communication of the Michael Kors jet-set lifestyle image. Our retail stores and department store locations feature upscale and sleek décor with iconic references to the Michael Kors brand that provide a modern backdrop to our contemporary merchandise and establish the sporty, luxurious ambience that embodies the message of the Michael Kors label worldwide.

Our merchandising team works in close collaboration with our licensing partners to ensure that our licensed products, such as watches, jewelry, eyewear and fragrances, are conceptualized and designed to address the intended market opportunity and convey the distinctive perspective and lifestyle associated with our brand. While our licensing partners employ their own designers, we collaborate throughout the design process and approve the design of all licensed products. Licensed products are also subject to our quality control standards and we exercise final approval for all new licensed products prior to their sale.

Marketing, Advertising and Public Relations

Our marketing strategy is to deliver a consistent message every time the consumer comes in contact with our brand through all of our communications and visual merchandising. Our image is created and executed internally by our creative marketing, visual merchandising and public relations teams, which helps ensure the consistency of our message.

In Fiscal 2011, we recognized approximately $27.4 million in advertising expense in North America and internationally. In conjunction with promoting a consistent global image, we use our extensive customer database and consumer knowledge to target particular products and communications to certain consumers directly in an effort to foster sales efficiency. We engage in a wide range of direct marketing programs, including, among others, emails, print advertising, catalogs and brochures, in order to stimulate sales in a consumer-preferred shopping venue. As part of our direct marketing strategy, our catalogs are sent to selected households to encourage consumer purchases and to build brand awareness. In addition, the growing number of visitors to our michaelkors.com online store provides an opportunity to increase the size of our database and to communicate with consumers to increase online and physical store sales and build brand awareness. We launched michaelkors.com in 2007 in partnership with Neiman Marcus. We sell merchandise to Neiman Marcus at wholesale, which is subsequently resold by Neiman Marcus through michaelkors.com. Neiman Marcus receives all of the proceeds from these online sales.

Our experienced public relations team engages in a wide variety of press activities internationally. Our semi-annual fashion shows serve to reinforce Mr. Kors’ designer status and high fashion image, creating excitement around the Michael Kors and MICHAEL Michael Kors collections, while Mr. Kors’ many other personal appearances and press activities capitalize on his popularity to attract global multimedia coverage for our brands and businesses. In addition, some of the most widely recognized global trendsetters—including celebrities such as Angelina Jolie, Heidi Klum, Blake Lively, Penelope Cruz, Gwyneth Paltrow and Catherine Zeta-Jones—walk the red carpet in our collections. We also have a unique marketing asset in Mr. Kors himself. Mr. Kors’ involvement in the highly successful Project Runway has helped build awareness of our Honorary Chairman and Chief Creative Officer and our brand in general.

Business Segments

Retail Segment

We started in business as a wholesale vendor to department and specialty stores, but over the last five years we have developed a significant retail business. Our retail segment represented approximately 42.8% of our total revenue in Fiscal 2011. In the long term, we believe that we can increase our global retail store base to approximately 400 locations in North America, 100 locations in Europe and 100 locations in Japan.

 

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The following table presents the number of retail stores we operated by geographic location as of October 1, 2011:

 

Location

   Number of
Full-Price Retail
Stores, Including
Concessions
     Number of
Outlet Stores
 

North America

     108         61   

Europe

     18         8   

Japan

     6         2   
  

 

 

    

 

 

 

Total

     132         71   
  

 

 

    

 

 

 

Full-Price Retail Stores, Including Concessions. Our full-price retail stores, including concessions, establish, reinforce and capitalize on the image of the Michael Kors brand. Our full-price retail stores are located on prestigious streets in metropolitan areas and in upscale regional shopping centers. We operate two full-price retail store formats: collection stores and lifestyle stores. Our collection stores offer the broadest assortment of our collection apparel and accessories and are located in some of the world’s most prestigious shopping areas, such as Madison Avenue in New York and Bond Street in London. Our collection stores are generally 3,100 square feet in size. Our lifestyle stores are also located in some of the world’s most frequented metropolitan shopping locations and leading regional shopping centers, and are generally 2,100 square feet in size. Our lifestyle stores emphasize our accessories lines and items from our MICHAEL Michael Kors accessible luxury collection. We employ a proven retail concept across both formats, in addition to our outlet stores, that over the past three fiscal years has seen consistent increases in average sales per square foot and average four-wall operating income in the United States, as well as an industry-best Fiscal 2011 increase in comparable store sales of 48.2%. In addition to these two full-price retail store formats, we operate concessions in a select number of department stores in North America and internationally. We use a rigorous store selection strategy for new stores and concessions that focuses on key street and mall locations in high traffic, affluent areas. Depending on their size and location, our full-price retail stores, including concessions, present certain product lines that include accessories, footwear and apparel from both the Michael Kors collection and the MICHAEL Michael Kors collection. Our store associates are trained to maintain a high standard of visual presentation, merchandising and customer service. The result is a highly personalized sales team that represents our jet-set brand image.

Outlet Stores. We extend our reach to additional consumer groups through our outlet stores. Our outlet stores serve as an efficient means to sell products manufactured for them, as well as excess inventory, outside of our full-price retail format. Our outlet stores are located in select top outlet centers in North America, Europe and Japan.

Wholesale Segment

We began as a wholesale business, and today we sell our products through our wholesale segment to leading department stores, as well as specialty retail stores and travel shopping locations, throughout the world. This segment remains very important to our overall consumer reach, and we custom tailor our assortment through wholesale product planning and allocation processes to match the needs of our customers in different localities. We have grown our wholesale business by working closely with our wholesale customers, both domestic and international, to ensure a clear and consistent product presentation. As part of our business strategy, we continue to transform select department store locations into branded shop-in-shops, expand the size of our existing department store shop-in-shops and differentiate our in-store sales organization through proprietary jet-set intensive training.

 

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The following table presents the number of department store and specialty store wholesale doors by geographic location in which our products were sold as of October 1, 2011:

 

Location

   Number of Wholesale
Doors
 

North America

     1,801   

International

     549   
  

 

 

 

Total

     2,350   
  

 

 

 

North American Wholesale. Recognizing the continued importance of North American department and specialty stores as a distribution channel for premier accessories, footwear and apparel, we are strengthening our longstanding relationships with our key North American wholesale customers, including, among others, Bergdorf Goodman, Saks Fifth Avenue, Neiman Marcus, Holt Renfrew, Bloomingdales, Nordstrom and Macy’s. We are accomplishing this through new products and styles and our shop-in-shops renovation program. This segment offers access to Michael Kors customers who prefer shopping at department and specialty stores or who live in geographic areas that are not large enough to support one of our retail stores. Depending on the size and location of the wholesale door, we offer various products from both our Michael Kors collection and our MICHAEL Michael Kors collection.

International Wholesale. Our international business is generated substantially through our wholesale segment. We have developed relationships with select department stores, specialty retailers and travel shopping locations in Europe. We have created image enhancing environments in these locations through our shop-in-shops to increase brand appeal and stimulate growth. Some of our more significant international wholesale customers include Harrods, Harvey Nichols, Selfridges, Galeries Lafayette, Brown Thomas, Beymen, Lane Crawford and Isetan. Depending on the size and location of the wholesale door, we offer various products from both our Michael Kors collection and our MICHAEL Michael Kors collection.

Licensing Segment

We have both product and geographic licensing relationships.

Product Licensing. In our product licensing relationships we take an active role in the design process and seek to control the marketing and distribution of products under the Michael Kors brand. Our key current product licensing relationships are as follows:

 

Category

  

Licensing Partner

  

Introduction Date

  

Territory

Watches and Jewelry    Fossil   

Watches as of April 2004;

Jewelry as of December 2010

   Worldwide

Eyewear

   Marchon    January 2004    Worldwide

Fragrances

   Estée Lauder    May 2003    Worldwide

While our products made under license are sold through our retail and wholesale businesses, with our approval, our licensees have the right to distribute Michael Kors branded products selectively through several other distribution channels, such as watches in jewelry stores and eyewear through selected prescription eyewear providers. Our licensing partners pay us royalties on their sales of Michael Kors branded products and provide additional exposure of our brand while allowing us to impose restrictions aimed at controlling that exposure.

Geographic Licensing. We have entered into licensing agreements pursuant to which we have granted third parties the right to distribute and sell our products in certain geographical areas, including, among others, Korea, the Philippines, Singapore, Malaysia, the Middle East and Turkey. In addition, our operations in China, Hong Kong, Macau and Taiwan are conducted pursuant to similar licensing agreements that we have entered into with entities that are indirectly owned by certain of our current shareholders, including Mr. Kors, Mr. Idol and

 

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Sportswear Holdings Limited. See “Certain Relationships and Related Party Transactions—Michael Kors Far East Holdings Limited.” Through these license agreements, we seek to increase sales of our products to the licensees who buy their inventory from us and/or our authorized vendors, increase royalty income from our product licensees who also sell to our geographic licensees and, in some cases, generate direct royalties from geographic licensees, depending upon the nature of the business in the particular territory.

The following table details our net sales and revenue by segment and geographic location for the six months ended October 1, 2011 and October 2, 2010 and for Fiscal 2011, Fiscal 2010 and Fiscal 2009 (dollars in thousands).

 

     Six Months Ended      Fiscal Years Ended  
     October 1,
2011
     October 2,
2010
     April 2,
2011
     April 3,
2010
     March 28,
2009
 

Retail net sales - North America

   $ 234,907       $ 135,632       $ 331,714       $ 183,452       $ 114,031   

Retail net sales - Europe

     17,252         3,873         11,463         3,086         —     

Retail net sales - Japan

     3,218         134         1,018         —           —     

Wholesale net sales - North America

     237,111         173,021         386,566         289,179         262,469   

Wholesale net sales - Europe

     27,321         9,780         26,985         7,735         558   

Wholesale net sales - Other Regions

     398         —           54         —           —     

Licensing revenue - North America

     28,451         18,444         45,539         24,647         20,016   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 548,658       $ 340,884       $ 803,339       $ 508,099       $ 397,074   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Manufacturing and Sourcing

We contract for the purchase of finished goods with independent third-party manufacturing contractors, whereby the manufacturing contractor is generally responsible for the entire manufacturing process, including the purchase of piece goods and trim. Although we do not have written agreements with any of our manufacturing contractors, we believe we have mutually satisfactory relationships with them. We allocate product manufacturing among third-party agents based on their capabilities, the availability of production capacity, pricing and delivery. We have relationships with various agents who source our finished goods with numerous manufacturing contactors on our behalf. Although we do not have written agreements with any of our agents, we believe we have mutually satisfactory relationships with them. In Fiscal 2011 and 2010, one third-party agent sourced approximately 19.5% and 23.1% of our finished goods purchases, respectively. In Fiscal 2011, by dollar volume, approximately 97.0% of our products were produced in Asia and Europe. See “—Import Restrictions and Other Government Regulations” and “Risk Factors—Risks Related to Our Business—We primarily use foreign manufacturing contractors and independent third-party agents to source our finished goods, which poses legal, regulatory, political and economic risks to our business operations.”

Manufacturing contractors and agents operate under the close supervision of our global manufacturing divisions and buying agents headquartered in North America, Europe and Asia. All garments are produced according to our specifications. Production staff in the United States monitor manufacturing at supplier facilities in order to correct problems prior to shipment of the final product. Procedures have been implemented under our vendor certification and compliance programs, so that quality assurance is focused upon as early as possible in the production process, allowing merchandise to be received at the distribution facilities and shipped to customers with minimal interruption.

Distribution

We have distribution centers in the United States, Canada, Europe and Japan. In the United States, distribution currently occurs at Company-leased warehouses in California and New Jersey. We also process distribution through a Company-leased warehouse in Canada. Two of our warehouses, one in Japan and the other in Holland, are operated through a third-party logistics provider. For further information on our Company-leased warehouses, see “—Properties.”

 

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We currently operate our California distribution from three separate warehouses totaling approximately 350,000 square feet. The leases for these three facilities expire on March 31, 2012. We have executed a lease for an approximately 500,000 square foot distribution center in Whittier, California, which we believe will allow us to significantly increase our distribution capabilities and efficiency. We took possession of the new distribution center in October 2011 and intend to complete our transition into this facility prior to the March 31, 2012 expiration of the leases for our existing California distribution facilities. As part of this transition, we will implement a new warehouse management system that will supplement our current legacy system and further support our efforts to operate with increased efficiency and flexibility. See “Risk Factors—Risks Related to Our Business—We are dependent on a limited number of distribution facilities. If one or more of our distribution facilities becomes inoperable, our business, financial condition and operating results could be negatively affected.”

Information Technology

We believe that the use of sophisticated technology is a key aspect of our strength as a business. We utilize a state-of-the-art retail platform that integrates retail inventory management, point of sale systems, customer relationship management and loss prevention. All of our information technology systems are integrated across our global network using the latest technology. Our legacy system for production, logistics, inventory, shipping, billing and collection is a system that is widely used in the apparel and fashion industry. See “Risk Factors—Risks Related to Our Business—A material disruption in our information technology systems could have a material adverse effect on our business, financial condition and results of operations.”

Competition

We face intense competition in the product lines and markets in which we compete. Our products compete with other branded products within their product category. In our wholesale business, we compete with numerous manufacturers, importers and distributors of accessories, footwear and apparel for the limited space available for product display. Moreover, the general availability of manufacturing contractors allows new entrants easy access to the markets in which we compete, which may increase the number of our competitors and adversely affect our competitive position and our business.

In varying degrees, depending on the product category involved, we compete on the basis of style, price, customer service, quality, brand prestige and recognition, among other bases. Some of our competitors have achieved significant recognition for their brand names or have substantially greater financial, distribution, marketing and other resources than us. We believe, however, that we have significant competitive advantages because of our brand recognition and the acceptance of our brand name by consumers. See “Risk Factors—Risks Related to Our Business—The markets in which we operate are highly competitive, both within North America and internationally, and increased competition based on a number of factors could cause our profitability to decline.”

Seasonality

We experience certain effects of seasonality with respect to our wholesale and retail segments. Our wholesale segment experiences greater sales in our second and fourth fiscal quarters relative to our fiscal year as a result of the Fall and Spring seasons. Our retail segment experiences greater sales during our third and fourth fiscal quarters as a result of Holiday season sales. In the aggregate, however, we do not experience significant quarter-to-quarter fluctuations in our sales. Moreover, given our recent growth, the effects of any seasonality are further muted by incremental sales related to our new stores and shop-in-shops.

Intellectual Property

We own the Michael Kors and MICHAEL Michael Kors trademarks, as well as other material trademark rights related to the production, marketing and distribution of our products, both in the United States and in other

 

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countries in which our products are principally sold. We also have trademark applications pending for a variety of related logos. We aggressively police our trademarks and pursue infringers both domestically and internationally. We also pursue counterfeiters domestically and internationally through leads generated internally, as well as through our network of investigators and business partners around the world.

Pursuant to an agreement entered into by Mr. Kors in connection with the acquisition by Sportswear Holdings Limited of a majority interest in the Company in 2003, Mr. Kors (i) represented that all intellectual property rights used in connection with the Company’s business at such time were owned exclusively by the Company, (ii) assigned to the Company (to the extent not already assigned to and owned by the Company) exclusive worldwide rights in perpetuity to the “Michael Kors” name and trademark and all derivations thereof, as well as to Mr. Kors’ signature and likeness, and all goodwill associated therewith, (iii) agreed not to take any action against the Company inconsistent with such ownership by the Company (including, without limitation, by asserting any privacy, publicity or moral rights) and (iv) agreed not to use, whether or not he is employed by the Company, any of such intellectual property in connection with any commercial enterprise (provided that he may use the name Michael Kors as his legal name only, and not as service mark or trade name, to identify himself personally and to engage in charitable activities and other activities that do not compete with any businesses of the Company).

Employees

At the end of Fiscal 2011, 2010 and 2009, we had approximately 2,945, 1,645 and 1,197 total employees, respectively. As of April 2, 2011, approximately 2,321 of our employees were engaged in retail selling and administrative positions, and our remaining employees were engaged in other aspects of our business. None of our employees are currently covered by collective bargaining agreements and we believe that our relations with our employees are good.

Import Restrictions and Other Government Regulations

Virtually all of our merchandise imported into the United States, Canada, Europe and Asia is subject to duties. In addition, most of the countries to which we ship could impose safeguard quotas to protect their local industries from import surges that threaten to create market disruption. The United States and other countries may also unilaterally impose additional duties in response to a particular product being imported at unfairly traded prices that, in such increased quantities, cause or threaten injury to the relevant domestic industry (generally known as “anti-dumping” actions). If dumping is suspected in the United States, the United States government may self-initiate a dumping case on behalf of a particular industry. Furthermore, additional duties, generally known as countervailing duties, can also be imposed by the United States government to offset subsidies provided by a foreign government to foreign manufacturers if the importation of such subsidized merchandise injures or threatens to injure a United States industry. We are also subject to other international trade agreements and regulations, such as the North American Free Trade Agreement. See “Risk Factors—Risks Related to Our Business—We primarily use foreign manufacturing contractors and independent third-party agents to source our finished goods, which poses legal, regulatory, political and economic risks to our business operations.”

Accessories, footwear and apparel sold by us are also subject to regulation in the United States and other countries by governmental agencies, including, in the United States, the Federal Trade Commission and the Consumer Products Safety Commission. These regulations relate principally to product labeling, licensing requirements, flammability testing and product safety. We are also subject to environmental laws, rules and regulations. We do not estimate any significant capital expenditures for environmental control matters either in the current fiscal year or in the near future. Our licensed products and licensing partners are also subject to regulation. Our agreements require our licensing partners to operate in compliance with all laws and regulations, and we are not aware of any violations that could reasonably be expected to have a material adverse effect on our business or operating results.

 

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Although we have not suffered any material restriction from doing business in desirable markets in the past, we cannot assure that significant impediments will not arise in the future as we expand product offerings and introduce additional trademarks to new markets.

Legal Proceedings

We are involved in various routine legal proceedings incident to the ordinary course of our business. We believe that the outcome of all pending legal proceedings in the aggregate will not have a material adverse effect on our business, financial condition or operating results.

Properties

The following table sets forth the location, use and size of our significant distribution and corporate facilities as of October 1, 2011, all of which are leased. The leases expire at various times through Fiscal 2028, subject to renewal options.

 

Location

  

Use

   Approximate Square
Footage
 

Whittier, CA(1)

   Distribution      513,375   

Compton, CA(1)

   Distribution      346,642   

New York, NY

   Corporate Offices      100,484   

Montreal, Quebec

   Canadian Corporate Office and Distribution      67,238   

East Rutherford, NJ

   Corporate Offices      31,000   

Secaucus, NJ

   Corporate Offices and Distribution      22,760   

Secaucus, NJ

   Corporate Offices      15,329   

 

(1)

We currently operate our California distribution from facilities in Compton, CA. The leases for these facilities expire on March 31, 2012. We have executed a lease for a distribution center in Whittier, CA, which we believe will allow us to significantly increase our distribution capabilities and efficiency. We took possession and began transitioning to the new distribution center in October 2011 and intend to complete the transition prior to the March 31, 2012 expiration of the leases for our facilities in Compton, CA.

As of October 1, 2011, we also occupied 184 leased retail stores worldwide (excluding concessions). We consider our properties to be in good condition generally and believe that our facilities are adequate for our operations and provide sufficient capacity to meet our anticipated requirements.

 

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MANAGEMENT

Executive Officers and Directors

The following table lists each of our executive officers and directors and their respective ages and positions as of the date of this prospectus.

 

Name

   Age   

Position

Michael Kors

   52    Honorary Chairman, Chief Creative Officer and Director

John D. Idol

   53    Chairman, Chief Executive Officer and Director

Joseph B. Parsons

   58    Executive Vice President, Chief Financial Officer and Chief Operating Officer

Lee S. Sporn

   52    Senior Vice President of Business Affairs and General Counsel

Silas K. F. Chou

   65    Director

Lawrence S. Stroll

   52    Director

M. William Benedetto

   70    Director

Stephen F. Reitman

   64    Director

Set forth below is a brief biography of each of our executive officers and directors.

Michael Kors is Chief Creative Officer, Honorary Chairman and a director of the Company. Mr. Kors studied fashion design at the Fashion Institute of Technology in Manhattan and in 1981 created what has become an enduring and iconic luxury lifestyle empire with a distinctive point of view and global reach. He held his first runway show in 1984 for the Michael Kors fall collection and he has successfully built our Company into a global luxury lifestyle brand. Mr. Kors has been the recipient of numerous industry awards including the CFDA Womenswear Designer of the Year in 1999 and Menswear Designer of the Year in 2003. Amongst his other accolades, Mr. Kors has also been awarded The Accessories Council ACE Award for Designer of the Year in 2006 and Fashion Group International’s Star Honoree at its annual Night of Stars Awards in 2009. In 2010, the CFDA acknowledged Mr. Kors with their most prestigious honor, the Lifetime Achievement Award. He also received the Award of Courage from the American Foundation for AIDS Research (amfAR) in 2011. In addition to all of these accomplishments, from 1998 to 2004 Mr. Kors also served as creative director of Celine, the renowned French luxury brand. Mr. Kors has also been a judge on the Emmy-nominated reality show Project Runway since 2004.

John D. Idol has been the Chairman of Michael Kors since September 2011 and the Chief Executive Officer and a director since December 2003. Previously, from July 2001 until July 2003, Mr. Idol served as Chairman and Chief Executive Officer and a director of Kasper ASL, Ltd., whose lines included the Anne Klein brand. Prior to that, from July 1997 until July 2001, Mr. Idol served as Chief Executive Officer and a director of Donna Karan International Inc. Prior thereto, from 1994 until 1997, Mr. Idol served as Ralph Lauren’s Group President and Chief Operating Officer of Product Licensing, Home Collection and Men’s Collection.

Joseph B. Parsons is the Executive Vice President, Chief Financial Officer and Chief Operating Officer of Michael Kors and has been with the Company since January 2004. Previously, from March 2002 until December 2003, Mr. Parsons served as Executive Vice President and Chief Financial Officer of Kasper ASL, Ltd. Prior to that, until October 2001, Mr. Parsons served as Executive Vice President and Chief Financial Officer of Donna Karan International Inc., where he had been employed in various roles since 1993. Prior thereto, Mr. Parsons served as Assistant Controller for Crystal Brands, Inc. from 1989 to 1993. Previously, from 1979 to 1989, Mr. Parsons worked at KPMG, where he began his career.

 

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Lee S. Sporn has been the Senior Vice President of Business Affairs and General Counsel of Michael Kors since December 2003. Previously, from September 2001 until December 2003, Mr. Sporn served as Senior Vice President, General Counsel and Secretary of Kasper ASL, Ltd. Prior to that, until September 2001, Mr. Sporn served as Vice President of Intellectual Property and Associate General Counsel of Polo Ralph Lauren Corp., where he had been employed in various roles since 1990.

Silas K. F. Chou is Co-Chairman of Sportswear Holdings Limited, a global private equity company established in 1989 by Mr. Chou and Mr. Lawrence Stroll. Since its founding, Sportswear Holdings has acquired and successfully developed several global lifestyle brands, including Tommy Hilfiger, Pepe Jeans and Michael Kors. Sportswear Holdings’ current holdings include interests in Michael Kors, Michael Kors Far East, Tommy Hilfiger Asia, Karl Lagerfeld, Pepe Jeans and Hackett. Prior to forming Sportswear Holdings, Mr. Chou and Mr. Stroll owned and operated Poloco S.A., the European licensee for Polo Ralph Lauren apparel. Mr. Chou is also Chief Executive Officer of Novel Holdings, a Hong Kong based group that includes South Ocean Knitters, one of the world’s leading textile and apparel manufacturers, as well as a diversified investment business with dedicated investment teams focused on Asian real estate and global private equity, technology and life sciences. Mr. Chou is also Executive Chairman of Iconix China, a joint venture between Iconix Brand Group, Inc. (NYSE: ICON) and Novel Fashion, an affiliate of Mr. Chou, focused on developing Iconix’s portfolio of leading apparel and home goods brands in greater China. Mr. Chou has served as a director of Michael Kors since January 2003 and was its Co-Chairman from January 2003 to September 2011. Prior thereto, Mr. Chou was a director of Tommy Hilfiger Corporation, and he served as its Chairman and then Co-Chairman, from 1989 to 2002.

Lawrence S. Stroll is Co-Chairman of Sportswear Holdings Limited, a global private equity company established in 1989 by Mr. Stroll and Mr. Silas Chou. Since its founding, Sportswear Holdings has acquired and successfully developed several global lifestyle brands, including Tommy Hilfiger, Pepe Jeans and Michael Kors. Sportswear Holdings’ current holdings include interests in Michael Kors, Michael Kors Far East, Tommy Hilfiger Asia, Karl Lagerfeld, Pepe Jeans and Hackett. Prior to forming Sportswear Holdings, Mr. Stroll and Mr. Chou owned and operated Poloco S.A., the European licensee for Polo Ralph Lauren apparel, for which Mr. Stroll served as Chief Executive Officer. From April 2007 until September 2011, Mr. Stroll served as the Co-Chairman of Hackett Ltd. Mr. Stroll has also served as a director of Michael Kors since January 2003 and was its Co-Chairman from January 2003 to September 2011. Prior thereto, Mr. Stroll served as Co-Chairman of Tommy Hilfiger Corporation from 1998 to 2002 and as a director from 1992 to 2002, as well as Chief Executive Officer of Pepe Jeans London Corporation from 1993 to 1998. Mr. Stroll’s legal name is Lawrence S. Strulovitch.

M. William Benedetto has been a director of the Company since December 2011. Mr. Benedetto is a co-founder and chairman emeritus of The Benedetto Gartland Group, a boutique investment bank founded in 1988 that specializes in raising equity capital for private equity firms and providing other investment banking services. From 1983 to 1988, Mr. Benedetto served as executive vice president, director and manager of Dean Witter Reynolds, Inc.’s Investment Banking Division, and previously Mr. Benedetto served as an executive in the financial services industry since 1978. From 1980 to 1983, Mr. Benedetto served as head of corporate finance for Warburg, Paribas Becker. Mr. Benedetto was lead director of Donna Karan International from 1996 to 2001 and chaired its audit and compensation committees. Mr. Benedetto was a member of the board of directors of Georgetown University, and was chairman of its board of regents until June 30, 2010, is a director of FidelisCare, a healthcare insurance company.

Stephen F. Reitman has been a director of the Company since December 2011. Mr. Reitman has served on the board of directors of Reitmans (Canada) Limited, a specialty ladies’ wear retailer based in Canada, since 1984. From 1984 until June 2010, Mr. Reitman served as Executive Vice President and Chief Operating Officer of Reitmans (Canada) Limited, and in June 2010 he was appointed President and Chief Operating Officer. Mr. Reitman also currently serves on the board of directors of Celio International S.A., a privately-held European apparel retailer, and Simone Perele Canada Ltd., a wholly owned subsidiary of Simone Perele S.A. Mr. Reitman received his MBA from the Wharton School of the University of Pennsylvania in 1971.

 

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Controlled Company and Foreign Private Issuer Exemption

We have been approved to list our ordinary shares on the NYSE. For purposes of the NYSE rules, we expect to be a “controlled company.” “Controlled companies” under those rules are companies of which more than 50% of the voting power is held by an individual, a group or another company. Our Principal Shareholders will continue to control more than 50% of the voting power of our ordinary shares upon completion of this offering and will be able to nominate a majority of directors for election to our board of directors. Accordingly, we are eligible to, and we intend to, take advantage of certain exemptions from NYSE governance requirements provided in the NYSE rules. Specifically, as a controlled company under NYSE rules, we are not required to have a majority of independent directors or a compensation committee composed entirely of independent directors. We are also not required to have a nominating and corporate governance committee. The controlled company exemptio