10-K 1 kors0401201710-k.htm 10-K Document

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-K
 
 
 
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 1, 2017
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 001-35368
 
 
Michael Kors Holdings Limited
(Exact Name of Registrant as Specified in Its Charter)
 
 
British Virgin Islands
N/A
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
33 Kingsway
London, United Kingdom
WC2B 6UF
(Address of Principal Executive Offices)
Registrant’s telephone number, including area code: 44 207 632 8600
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on which Registered
Ordinary Shares, no par value
New York Stock Exchange
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
 
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
ý  Yes    ¨  No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
¨  Yes    ý  No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 
ý  Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    
ý  Yes    ¨  No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    
¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
ý
Accelerated filer
¨
Non-accelerated filer
¨  (Do not check if smaller reporting company)
Smaller reporting company
¨
Emerging growth company
¨  
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
¨  Yes    ý  No
The aggregate market value of the registrant’s voting and non-voting ordinary shares held by non-affiliates of the registrant was $7,374,518,747 as of October 1, 2016, the last business day of the registrant’s most recently completed second fiscal quarter based on the closing price of the common stock on the New York Stock Exchange.
As of May 25, 2017, Michael Kors Holdings Limited had 155,839,126 ordinary shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this report, to the extent not set forth herein, is incorporated by reference from the Registrant’s definitive Proxy Statement, which will be filed in June 2017, for the 2017 Annual Meeting of the Shareholders.
 
 
 
 
 



TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
 
 
 
 
 
 
 
 
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
 
 
 
 
 
 
 
 
Item 10
Item 11
Item 12
Item 13
Item 14
 
 
 
 
 
 
 
 
Item 15

2


NOTE REGARDING FORWARD-LOOKING STATEMENTS
The statements in this Annual Report on Form 10-K, including documents incorporated herein by reference, that refer to plans and expectations for future periods are forward-looking statements. These forward-looking statements are based on management’s current expectations. Words such as “expects,” “anticipates,” “plans,” “believes,” “estimates,” “may,” “will,”, “should” and variations of such words and similar expressions are intended to identify such forward-looking statements. You should not place undue reliance on such statements. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond the Company’s control, which could cause the Company’s actual results to differ materially from those indicated in these forward-looking statements. These factors are more fully discussed in the Company’s risk factors, as they may be amended from time to time, which are set forth in the Company’s filings with the Securities and Exchange Commission, including in this Annual Report, particularly under “Item 1A. Risk Factors” and in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The Company undertakes no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances, except as required by applicable laws or regulations.
Electronic Access to Company Reports
Our investor website can be accessed at www.michaelkors.com under “Investor Relations.” Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports filed with or furnished to the Securities and Exchange Commission (the “SEC”) pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our investor website under the caption “SEC Filings” promptly after we electronically file such materials with, or furnish such materials to, the SEC. No information contained on our website is intended to be included as part of, or incorporated by reference into, this Annual Report on Form 10-K. Information relating to corporate governance at our Company, including our Corporate Governance Guidelines, our Code of Business Conduct and Ethics for all directors, officers, and employees, and information concerning our directors, Committees of the Board, including Committee charters, and transactions in Company securities by directors and executive officers, is available at our investor website under the captions “Corporate Governance” and “SEC Filings.” Paper copies of these filings and corporate governance documents are available to shareholders free of charge by written request to Investor Relations, Michael Kors Holdings Limited, 33 Kingsway, London, United Kingdom, WC2B 6UF. Documents filed with the SEC are also available on the SEC’s website at www.sec.gov.


3


PART I
Unless the context requires otherwise, references in this Annual Report on Form 10-K to “Michael Kors”, “we”, “us”, “our”, “the Company”, “our Company” and “our business” refer to Michael Kors Holdings Limited and its consolidated subsidiaries, unless the context requires otherwise. References to our stores, retail stores and retail segment include all of our full-price retail stores (including concessions), our e-commerce websites and outlet stores and 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 2016,” which refers to the 53-week period ending April 2, 2016. Some differences in the numbers in the tables and text throughout this annual report may exist due to rounding. All comparable store sales are presented on a 52-week basis.
Item 1. Business
Our Company
We are a global luxury fashion brand led by a world-class management team and a renowned, award-winning designer. Since launching his namesake brand over 35 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 over 100 countries.
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 2017, our retail segment accounted for approximately 57.2% of our total revenue. As of April 1, 2017, our retail segment included:
 
398 retail stores in the Americas, including concessions;
429 international retail stores, including concessions, in Europe and Asia; and
our e-commerce sites in the United States ("U.S.") and Canada, as well as our newly launched e-commerce sites in France, Germany, Italy, Spain, Switzerland, the United Kingdom, China and Japan.
In Fiscal 2017, our wholesale segment accounted for approximately 39.5% of our total revenue. As of April 1, 2017, our wholesale segment included:
 
wholesale sales through approximately 1,405 department stores and 904 specialty store doors in the Americas; and
wholesale sales through approximately 1,099 specialty stores and 199 department store doors internationally.
A small number of our wholesale customers account for a significant portion of our net sales. Net sales to our five largest wholesale customers represented 21.0% of our total revenue for Fiscal 2017 and 25.8% of our total revenue for Fiscal 2016. Our largest wholesale customer, Macy's, accounted for 8.9% of our total revenue for Fiscal 2017 and 12.7% of our total revenue for Fiscal 2016.
Our remaining revenue is generated through our licensing segment, through which we license to third parties certain production, sales and/or distribution rights through product and geographic licensing arrangements. In Fiscal 2017, our licensing segment accounted for approximately 3.3% of our total revenue and consisted primarily of royalties earned on licensed products and our geographic licenses.
For additional financial information regarding our segments, see Segment Information note in the accompanying consolidated financial statements.
We offer three primary collections: the Michael Kors Collection luxury line, the MICHAEL Michael Kors accessible luxury line and the Michael Kors Mens line. 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 Bergdorf Goodman, Saks Fifth Avenue, Neiman Marcus and Holt Renfrew, among others. 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 MICHAEL Michael Kors, which has a strong focus on accessories, in addition to offering footwear and apparel. MICHAEL Michael Kors is carried in all of our lifestyle stores, as well as leading department stores throughout the world, including Bloomingdale’s, Nordstrom, Macy’s, Harvey Nichols, Galeries Lafayette, Printemps, Lotte, Hyundai, Isetan and Lane Crawford, among others. More recently, we have begun to grow our men's business in recognition of the significant opportunity afforded by our brand's established fashion authority and the expanding men's market. Taken together, our primary collections target a broad customer base while retaining our premium luxury image.

4


Industry
We operate in the global luxury goods industry. Over the past ten years, the luxury goods industry has grown and has remained resilient during economic downturns. However, the accessible luxury retail and wholesale industry has recently been challenged by a number of factors, including lower consumer traffic trends, a promotional selling environment, lower tourist travel, currency effects, restrained consumer spending and a shift in spending from personal luxury goods to luxury experiences. As a result, while accessories have remained the biggest personal luxury goods category, the level of growth within this category, while still positive, has decelerated from prior years. In addition, the consumer demand within the luxury watch and luxury apparel categories has experienced a decline. While the wholesale channel has been challenged, the retail channel has continued to grow, largely driven by the rapid growth of the e-commerce channel and increased off-price sales, which has continued to cannibalize brick and mortar retail store sales. As the overall environment has become increasingly omni-channel, increased customer engagement and tailoring merchandise to customer shopping and communication preferences have become the key ingredients to winning market share. We believe that our innovative product offerings and customer engagement initiatives make us well positioned to capitalize on the continued growth of the luxury accessories product category, as it is one of our primary product categories of focus, as well as to grow our sales in other product categories.
Geographic Information
We generate revenue globally through our three segments. Through our retail and wholesale segments we sell our products in three principal geographic markets: the Americas, including North America, Latin America (excluding Brazil) and the Caribbean, Europe and Asia. Through our licensing segment, we enter into agreements that license to third parties the use of our brand name and trademarks, certain production rights, and sales and/or distribution rights. We have wholesale arrangements pursuant to which we sell products to our geographic licensees, including our licensees in certain parts of Asia (which were reported within our Americas wholesale operations prior to Fiscal 2016).
The following table details our net sales and revenue by segment and geographic location (in millions):
 
 
Fiscal Years Ended
 
 
April 1,
2017
 
April 2,
2016
 
March 28,
2015
 
 
Retail net sales - The Americas
$
1,713.7

 
$
1,779.0

 
$
1,656.1

 
Retail net sales - Europe
507.7

 
509.6

 
412.1

 
Retail net sales - Asia
350.7

 
106.3

 
66.4

 
Wholesale net sales - The Americas
1,340.9

 
1,628.6

 
1,662.5

 
Wholesale net sales - Europe
376.5

 
406.4

 
401.1

 
Wholesale net sales - Asia
58.4

 
108.9

 
1.5

 
Licensing Revenue- The Americas
86.1

 
99.0

 
100.3

 
Licensing Revenue- Europe
59.7

 
74.3

 
71.5

 
Total revenue
$
4,493.7

 
$
4,712.1

 
$
4,371.5

Competitive Strengths
We believe that the following strengths differentiate us from our competitors:
Global Luxury Fashion Brand Led by a World-Renowned, Award-Winning Designer. Over the years, we have transformed from an American luxury sportswear house to a global accessories, footwear and apparel company with presence in over 100 countries. 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, which recognize the contribution Mr. Kors and his team have made to the fashion industry and our Company. 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 Cate Blanchett, Viola Davis, Ashley Graham, Kate Hudson, Angelina Jolie, Blake Lively, Jennifer Lopez, Nicole Kidman, Taylor Swift, Gwyneth Paltrow, and the Duchess of Cambridge wear our collections. We have built a solid foundation for long-term growth through our innovative product offerings, strategically controlled retail and wholesale distribution networks, expanded digital presence and other initiatives.

5


Leveraging our Success in the Accessories Product Category to Grow our Brand Position in Other Product Categories. The strength of our Michael Kors luxury collection and our accessible luxury MICHAEL Michael Kors lines have allowed us to expand our brand awareness and position ourselves as one of the leading global luxury brands in the accessories product category. Capitalizing on the success of our accessories product category, we are continuing to grow and diversify our brand through other product categories, such as mens apparel and accessories, dresses, footwear and wearable technology.
Proven Multi-Format Retail Segment with Future Growth Opportunity. In Fiscal 2017, our retail segment reported net sales of $2.572 billion, which represented a 7.4% increase from net sales of $2.395 billion in Fiscal 2016. Within our retail segment we have four primary retail store formats: collection stores, lifestyle stores, outlet stores and e-commerce sites. Our collection stores are located in some of the world’s most prestigious shopping areas, such as Madison Avenue in New York and Rodeo Drive in California, and are generally 2,800 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 2,800 square feet in size. We also extend our reach to additional consumer groups through our outlet stores, which are generally 4,000 square feet in size. We also have e-commerce sites in the United States and Canada and have recently launched new e-commerce sites in China, France, Germany, Italy, Japan, Spain, Switzerland, and the United Kingdom. During Fiscal 2018, we plan to launch e-commerce sites in South Korea, as well as in additional countries in Europe. In addition to these four 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 and Macy’s in North America, as well as Harvey Nichols, Printemps, Selfridges and Galeries Lafayette in Europe. These relationships enable us to access large numbers of our key consumers in a targeted manner. Our "shop-in-shops" have specially trained staff, as well as customized fixtures, wall casings, decorative items, and flooring, and provide department store consumers with a more personalized shopping experience than traditional retail department store configurations. We are also engaged with our wholesale customers on various initiatives and have entered into new innovative supply chain partnerships with our wholesale customers designed to increase the speed at which our products reach the ultimate consumer. During Fiscal 2017, we began to strategically reduce shipments to decrease promotional activity within our wholesale channel. While we believe that this is necessary to appropriately position our brand long-term, net sales for our wholesale segment decreased by 17.2% from $2.144 billion in Fiscal 2016 to $1.776 billion in Fiscal 2017.
Innovative Product Offerings from our 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, including Fossil Partners, LP. (“Fossil”) for watches and jewelry, Aramis and Designer Fragrances division of The Estée Lauder Companies Inc. (“Estée Lauder”) for fragrances and beauty and Luxottica Group ("Luxottica") for eyewear, among others. While total revenue for licensed products declined from $173.3 million in Fiscal 2016 to $145.8 million in Fiscal 2017, primarily due to declines related to watch and jewelry product categories and lower geographic licensing revenues due to our acquisitions of the previously licensed operations in Greater China and South Korea, we have continued to introduce new and innovative product offerings in collaboration with our licensees, including the new line of Access smartwatches and other connected accessories launched in Fiscal 2017, as well as new fragrance offerings, including Wonderlust, Sexy Blossom and Turquoise. During Fiscal 2018, we plan to introduce additional fragrance and smartwatch offerings in collaboration with our licensees.
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 27 years of experience in the retail industry, including at a number of public companies, and an average of ten 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.
Business Strategy
Our goal is to continue to create shareholder value by increasing our revenue and profits and strengthening our global brand. We plan to achieve our business strategy by focusing on the following six strategic initiatives:
Trendsetting and Innovative Product Offerings. We will continue to introduce trendsetting and innovative products, as well as expanding our offerings across product categories to strengthen our position as a fashion leader and generate business growth through:
layered strategically-priced product offerings within our iconic accessory product lines, with unique craftsmanship and design features including personalization, logos, mixed-media leathers, and other detailed elements;
expanded licensed product offerings, including new fragrances and smartwatches;

6


continued women's apparel growth through increased dress assortment;
increased product offerings within our menswear and footwear businesses.
Enhanced Brand Communication. We intend to continue increasing brand awareness and customer loyalty in a number of ways, including by:
leveraging Mr. Kors' global prestige and popularity through a variety of press activities and personal appearances;
holding our semi-annual runway shows that reinforce Mr. Kors' designer status and high-fashion image, hosting events in key markets around the world and creating excitement around Michael Kors Collection, MICHAEL Michael Kors, Michael Kors Mens and Michael Kors Access, and generating global multimedia press coverage;
continuing to evolve our premier retail stores in preeminent, high-visibility locations around the world;
delivering a focused message and a clear brand point of view across all marketing channels and ensuring consistency of our product messaging through global marketing campaigns;
maintaining and refining our strong advertising position and editorial coverage in global fashion publications;
evolving our digital strategy to align with the media consumption habits of our target markets to ensure that we are promoting the right message to the right person at the right time and leveraging our social media presence to drive targeted, personalized reach; and
providing broad brand awareness in key global markets through increased outdoor advertising placements.
Leading Luxury Digital Presence. We intend to continue making investments in technology focused on optimizing our digital presence, including:
expanding our international e-commerce presence by launching an additional e-commerce site in Europe, which will support eight countries, as well as an e-commerce site in South Korea in Fiscal 2018; and
continuing to evolve our digital experience in response to the shift in consumer preferences toward mobile devices with a focus on addressing new levels of customer service expectations.
Expanding Our Global Presence. We will continue to increase our global penetration in Asia and Europe and leverage our existing operations in international locations to increase global brand awareness and market share by:
growing our recently acquired businesses in Asia through new store openings and increased investments in marketing to grow brand awareness;
providing a consistent, sophisticated jet-set lifestyle experience to our customers around the world; and
growing our existing global operations by further expanding our international e-commerce presence, elevating our store experience and optimizing our store fleet, as well as continuing to grow our mens' business and our apparel and footwear product categories around the world.
Continue to Grow our Men's Business. We will continue to grow our men's apparel and accessories business and focus on increasing our brand presence and awareness through:
focused marketing and inclusion of our men’s lines within our global advertising campaigns;
increasing men's store presence and product assortment, including apparel and accessories, across all channels;
developing multi-tier men's product offerings designed to fill our multiple distribution needs; and
increased focus on design elements that emphasize logo and other iconic items associated with our brand.
Optimizing Customer Engagement. We plan to continue to invest in technology and focus on customer relationship initiatives as part of our omni-channel strategy to provide a seamless customer experience across the different channels by:
creating a more personalized shopping experience catered to our customers' shopping preferences;
continuing to enhance customer experience through omni-channel order fulfillment, including by filling online orders through our retail stores and through our click-and-collect service offerings;
introducing new mobile technologies across our retail store and e-commerce network with enhanced styling and wardrobe-building tools and customer-preferred communication capabilities; and
introducing a new customer loyalty program, which we are planning to pilot during Fiscal 2018.

7


Collections and Products
We have three primary collections that offer accessories, footwear and apparel: the Michael Kors Collection, MICHAEL Michael Kors and Michael Kors Mens, all of which are offered through our retail and wholesale segments. We also offer licensed products primarily through our retail segment. Our net sales by major product category were as follows (in millions):
 
Fiscal Years Ended
 
April 1,
2017
 
% of
Total
 
April 2,
2016
 
% of
Total
 
March 28,
2015
 
% of
Total
Accessories
$
3,061.4

 
70.4%
 
$
3,179.7

 
70.1%
 
$
2,872.2

 
68.4%
Apparel
543.2

 
12.5%
 
543.7

 
12.0%
 
549.4

 
13.1%
Footwear
462.0

 
10.6%
 
491.0

 
10.8%
 
444.1

 
10.5%
Licensed product
281.3

 
6.5%
 
324.4

 
7.1%
 
334.0

 
8.0%
Net sales
$
4,347.9

 
 
 
$
4,538.8

 
 
 
$
4,199.7

 
 
Michael Kors Collection
The Michael Kors Collection is a sophisticated designer collection for women based on a philosophy of essential luxury and pragmatic glamour. The collection includes ready-to-wear and accessories, including handbags and small leather goods, and footwear, many of which are made from fine quality leathers and other exotic skins. Generally, our women's handbags and small leather goods retail from $300 to $6,000, our footwear retails from $300 to $1,500 and our ready-to-wear retails from $300 to $6,000.
MICHAEL Michael Kors
MICHAEL Michael Kors has a strong focus on women's accessories, primarily handbags, as well as footwear and apparel for women, and is carried in all of our lifestyle stores as well as leading department stores throughout the world. MICHAEL Michael Kors offers: handbags designed to meet the fashion and functional requirements of our broad and diverse consumer base; small leather goods such as clutches, wallets, wristlets and cosmetic cases; footwear; and apparel, including dresses, tops, jeans, pants, skirts, shorts and outerwear. Generally, our handbags retail from $200 to $600, our small leather goods retail from $45 to $250, our footwear retails from $40 to $350 and our apparel retails from $50 to $500.
Michael Kors Mens
Michael Kors Mens is an innovative collection of men's ready-to-wear, accessories, and footwear with a modern American style. Our menswear apparel retails from $50 to $1,300 and our menswear accessories generally retail from $40 to $800.
Our Licensed Products
Watches. Fossil has been our exclusive watch licensee since April 2004. Watches are sold in our retail stores, our e-commerce sites and by Fossil to wholesale customers in addition to select watch retailers. Generally, our fashion watches retail from $195 to $595.
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, our e-commerce sites and by Fossil to wholesale customers in addition to other specialty stores. Generally, our jewelry retails from $55 to $300.
Wearable Technology. In addition to the fashion watch and jewelry product categories discussed above, Fossil is our exclusive licensee for wearable technology and connected accessories. During Fiscal 2017, we introduced our first line of Michael Kors Access smart watches and other connected accessories, which retail from $95 to $500.
Eyewear. Since January 2015, Luxottica has been our exclusive eyewear licensee for developing distinctive 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, on our e-commerce sites and by Luxottica to wholesale customers in addition to select sunglass retailers and prescription eyewear providers. Generally, our eyewear retails from $100 to $210.

8


Fragrances and Beauty. Estée Lauder has been our exclusive women’s and men’s fragrance licensee since May 2003. Fragrances are sold in our retail stores, on our e-commerce sites and by Estée Lauder to wholesale customers in addition to select fragrance retailers. Our fragrance and related products generally retail from $18 to $125.
Advertising and Marketing
Our marketing strategy is to deliver a brand and product message that is consistent with the Michael Kors brand image across all customer touch points on their path from brand consideration through purchase. Our global 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 2017, we recognized approximately $118.7 million in advertising and marketing expenses globally. We engage in a wide range of integrated marketing programs, across various marketing channels including but not limited to email marketing, print advertising, outdoor advertising, online marketing, social media, direct print mailings, public relations outreach, visual merchandising and partnership marketing, in an effort to engage our existing and potential customer base and ultimately stimulate sales in a consumer-preferred shopping venue. In addition, our spring and fall ready-to-wear collections, along with our latest accessories, are showcased at New York Fashion Week. The semi-annual runway shows also generate extensive media coverage.
The growing number of visitors to our e-commerce websites provides an opportunity to increase the size of our customer database and to communicate with our consumers to increase online and physical store sales, as well as build brand awareness. Our mobile optimized e-commerce sites feature the Michael Kors lifestyle images, which allows us to better engage new and existing customers and create innovative ways to keep the brand at the forefront of consumers’ minds by offering a broad selection of products, including accessories, apparel, and footwear. Since e-commerce growth is critical to our overall growth strategy, we continued to expand our global e-commerce presence by launching new e-commerce sites in six European countries, China and Japan during Fiscal 2017, and plan to launch e-commerce sites in additional countries in Europe and South Korea during Fiscal 2018.
Manufacturing and Sourcing
We contract for the purchase of finished goods principally 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. 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 contractors on our behalf. Although our relationships with our manufacturing contractors or agents are generally terminable at any time, we believe we have mutually satisfactory relationships with these third parties. In Fiscal 2017 and Fiscal 2016, one third-party agent sourced approximately 13.9% and 14.9% of our finished goods purchases, respectively. In Fiscal 2017, by dollar volume, approximately 96.3% of our products were produced in Asia and Europe. See “Import Restrictions and Other Government Regulations” and Item 1A. —“Risk Factors” — “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 products are produced according to our specifications. Production staff monitors manufacturing at supplier facilities in order to correct problems prior to shipment of the final product. Quality assurance is focused on 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
Our primary distribution facility in the U.S. is the 1,284,420 square foot leased facility in Whittier, California, which we operate directly and services our retail stores, e-commerce site, and our wholesale operations in the U.S. We also engage in omni-channel order fulfillment by filling online orders through our retail stores and through our click-and-collect service offerings. Our primary distribution facility in Europe is our new Company-owned and operated 1,108,680 square foot distribution facility in Holland, which began during Fiscal 2017 to support our European operations, including the newly launched e-commerce sites. We are also in the process of transitioning out of our previous third-party operated distribution facility in Holland and anticipate to be fully transitioned to our Company-owned facility by the middle of Fiscal 2018.We also have a regional distribution center in Canada, which is leased, as well as regional distribution centers in China, Hong Kong, Japan, South Korea and Taiwan, which are operated by third-parties.

9


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 countries in which our products are principally sold. We also have trademark applications pending for a variety of related marks and logos. We aggressively police our trademarks and pursue infringers both domestically and internationally. We also pursue counterfeiters in the United States, Europe, the Middle East, the Far East and elsewhere in the world in both online and offline channels through leads generated internally, as well as through our network of customs authorities, law enforcement, legal representatives and brand specialists around the world.
Pursuant to an agreement entered into by Mr. Kors in connection with the acquisition by our former principal shareholder 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 2017, 2016 and 2015, we had approximately 13,702, 12,689 and 11,094 total employees, respectively. As of April 1, 2017, we had approximately 7,048 full-time employees and approximately 6,654 part-time employees. Approximately 11,467 of our employees were engaged in retail selling and administrative positions, and our remaining employees were engaged in other aspects of our business as of April 1, 2017. None of our employees are currently covered by collective bargaining agreements and we believe that our relations with our employees are good.
Competition
We face intense competition in the product lines and markets in which we operate from both, existing and new competitors. Our products compete with other branded products within their product category. 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. 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. We believe, however, that we have significant competitive advantages because of our brand recognition and the acceptance of our brand name by consumers. See Item 1A. “Risk Factors" — "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 generally experiences its greatest sales in our third and fourth fiscal quarters while our first fiscal quarter experiences the lowest sales. Our retail segment generally experiences greater sales during our third fiscal quarter as a result of Holiday season sales. In the aggregate, our first fiscal quarter typically experiences significantly less sales volume relative to the other three quarters and our third fiscal quarter generally has higher sales volume relative to the other three quarters.





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Import Restrictions and Other Governmental Regulations
Virtually all of our merchandise imported into the U.S., 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 U.S. government is also considering the imposition of a border adjustment tax. The U.S. 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 U.S., the U.S. 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 ("NAFTA"). See Item 1A. “Risk Factors" — "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 U.S. and other countries by governmental agencies, including, in the U.S., 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. Similarly, accessories, footwear and apparel sold by us are also subject to import regulations in the U.S. and other countries concerning the use of wildlife products for commercial and non-commercial trade, including the U.S. Fish and Wildlife Service. We do not estimate any significant capital expenditures for environmental control matters 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 applicable 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.
We are also required to comply with the disclosure requirements under the U.S. Securities Exchange Act of 1934, as amended, relating to the use of conflict minerals in our products. As a result, we have incurred, and expect to continue to incur, additional costs to comply with this rule.
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.
Item 1A.     Risk Factors
You should carefully read this entire report, including, without limitation, the following risk factors and the section of this annual report entitled “Note 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.
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 the following brands, among others, Coach, Burberry, Guess, Ralph Lauren, Hermès, Louis Vuitton, Gucci, Marc Jacobs, Chloé, Tory Burch, Prada, Kate Spade, Tommy Hilfiger and Calvin Klein, as well as through third party distribution channels, such as e-commerce, department stores and specialty stores. 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;
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;

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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 revenues, which could adversely affect our business, financial condition and operating results.
Competition, along with other factors such as consolidation, changes in consumer spending patterns and a highly promotional environment, 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.
Our retail stores are heavily dependent on the ability and desire of consumers to travel and shop and a decline in consumer traffic could have a negative effect on our comparable store sales and/or average sales per square foot, which could cause our share price to decline.
Reduced travel resulting from economic conditions, fuel shortages, increased fuel prices, travel restrictions, travel concerns and other circumstances, including adverse weather conditions, disease epidemics and other health-related concerns, war, terrorist attacks or the perceived threat of war or terrorist attacks could have a material adverse effect on us, particularly if such events impact our customers desire to travel to our retail stores. In addition, other factors that could impact the success of our retail stores include: (i) the location of the mall or the location of a particular store within the mall; (ii) the other tenants occupying space at the mall; (iii) vacancies within the mall; (iv) increased competition in areas where the malls are located; (v) the amount of advertising and promotional dollars spent on attracting consumers to the malls; and (vi) a shift toward online shopping. A decline in consumer traffic could have a negative effect on our comparable store sales and/or average sales per square foot. 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 have a material adverse effect on our results of operations and result in a decline in the price of our ordinary shares.
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.

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The success of our business also depends on our ability to continue to develop and maintain a reliable digital experience for our customers. We strive to give our customers a jet-set shopping experience both in stores and through digital technologies, such as computers, mobile phones, tablets, and other devices. We also use social media to interact with our customers and enhance their shopping experience. Our inability to develop and continuously improve our digital footprint could negatively affect our ability to compete with other brands, which could adversely impact our business, results of operations and financial condition.
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 can 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, results of operations and financial condition.
The long-term growth of our business depends on the successful execution of our strategic initiatives.
As part of our long-term strategy, we intend to grow our market share and revenue through the following initiatives:
trendsetting and innovative product offerings;
enhanced brand communication;
leading luxury digital presence;
expanding our global presence;
growing our men's business; and
optimizing customer engagement.
As announced on May 31, 2017, we also intend to optimize our retail store fleet, including, through the closure of between 100 and 125 of our underperforming full-price retail stores over the next two years, in order to generate cost savings and focus on our most highly productive locations. We cannot guarantee that we will be able to successfully execute on this initiative or achieve the anticipated cost savings, efficiencies, or other benefits related to the retail fleet optimization.
If we are unable to execute on our strategic initiatives, our business, results of operations and financial condition could be materially adversely affected.
Our business is subject to risks associated with importing products, and the imposition of additional duties and any changes to international trade agreements could have a material adverse effect on our business, financial condition and results of operations.
There are risks inherent to importing our products. Virtually all of our merchandise is manufactured in Asia or Europe, and is subject to duties when imported into the United States, Canada, Europe and Asia, as applicable. The United States government could impose a border adjustment tax, which could have a material adverse effect on our business, results of operations and financial condition. 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 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 or the governments of other countries 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 or the industry of such other country, as applicable. If the United States imposes import duties or other protective import measures, other countries could retaliate in ways that could harm the international distribution of our products. 
We are also dependent on international trade agreements and regulations, such as NAFTA.  If the United States were to withdraw from or materially modify NAFTA or certain other international trade agreements, our business could be adversely affected.

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The accessories, footwear and apparel sold by us are also subject to import regulations in the United States and other countries concerning the use of wildlife products for commercial and non-commercial trade, including the U.S. Fish and Wildlife Service (“F&W”). F&W requires that we obtain a license to import animal and fauna that are subject to regulation by F&W and can revoke (or refuse to renew) this license, seize and possibly destroy our shipments and/or fine the Company for F&W violations.

The imposition of taxes, duties and quotas, the initiation of an anti-dumping action or a countervailing duty action, the withdrawal from or material modification to trade agreements and/or the repercussions of F&W violations could have a material adverse effect on our business, results of operations and financial condition.
We are dependent on a limited number of distribution facilities. If one or more of our distribution facilities experiences operational difficulties or becomes inoperable, it could have a material adverse effect on our business, results of operation and financial condition.
We operate a limited number of distribution facilities. Our ability to meet the needs of our wholesale customers and our own retail stores and e-commerce sites depends on the proper operation of these distribution facilities. If any of these distribution 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 retail and wholesale customers. 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. Any of the foregoing factors could result in decreased sales and have a material adverse effect on our business, results of operations and financial condition.
In addition, we have been moving into new and larger facilities as needed and have been concurrently implementing new warehouse management systems to further support our efforts to operate with increased efficiency and flexibility. There are risks inherent in operating in new distribution environments and implementing new warehouse management systems, including operational difficulties that may arise with such transitions. We may experience shipping delays should there be any disruptions in our new warehouse management systems or warehouses themselves.
Privacy breaches and other cyber security risks related to our business could negatively affect our reputation, credibility and business.
We are dependent on information technology systems and networks for a significant portion of our direct-to-consumer sales, including our e-commerce sites and retail business credit card transaction authorization and processing. We are responsible for storing data relating to our customers and employees and also rely on third party vendors for the storage, processing and transmission of personal and Company information. Consumers, lawmakers and consumer advocates alike are increasingly concerned over the security of personal information transmitted over the internet, consumer identity theft and privacy. In addition to taking the necessary precautions ourselves, we require that third-party service providers implement reasonable security measures to protect our employees’ and 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 or security breaches will occur in the future. Likewise, our systems and technology are subject to the risk of system failures, viruses, “hackers” and other causes that are out of our control. A significant breach of customer, employee or Company data could damage the Company’s reputation, its relationship with customers and the Michael Kors brand, and could result in lost sales, sizable fines, significant breach-notification costs and lawsuits, as well as adversely affect results of operations. The Company may also incur additional costs in the future related to the implementation of additional security measures to protect against new or enhanced data security and privacy threats, or to comply with state, federal and international laws that may be enacted to address those threats.
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, manage customer communications, summarize results and manage our business. The failure of our IT systems to operate properly or effectively, problems with transitioning to upgraded or replacement systems, or difficulty in/failure to implement new systems, could adversely affect our business. In addition, we have e-commerce websites in the United States, Canada, select European countries, China and Japan, and plans for additional e-commerce sites in South Korea and additional countries in Europe. Our IT systems and websites may be subject to damage and/or interruption from power outages, computer, network and telecommunications failures, computer viruses, “hackers”, security breaches, usage errors by our employees and bad acts by our customers and website visitors. If our IT systems or websites 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 (including our customer data) and interruptions or delays in our operations in the interim. Any significant disruption in our IT systems or websites could harm our reputation and credibility, and could have a material adverse effect on our business, results of operations and financial condition.

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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, 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, 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, results of operations and financial condition.
Fluctuations in our tax obligations and changes in tax laws and regulations may have a material adverse impact on our future effective tax rates and results of operations.
Our subsidiaries are subject to taxation in the United States and various foreign jurisdictions, with the applicable tax rates varying by jurisdiction. As a result, our overall effective tax rate is affected by the proportion of earnings from the various tax jurisdictions. We record tax expense based on our estimates of taxable income and required reserves for uncertain tax positions in multiple tax jurisdictions. At any time, there are multiple tax years that are subject to examinations by various taxing authorities. The ultimate resolution of these audits and negotiations with taxing authorities may result in a settlement amount that differs from our original estimate. The United States government has called for comprehensive tax reform which, among other things, might change certain U.S. tax rules impacting the way U.S. based multinationals are taxed on U.S. and foreign income. Any proposed or future changes in tax laws and regulations or interpretations could have a material adverse effect on our effective tax rates, results of operations and financial condition.
On March 26, 2015, the United Kingdom ("U.K.") enacted new Diverted Profits Tax legislation (the “DPT”), which is effective on April 1, 2015. Under the DPT, profits of certain multinational enterprises (such as the Company) deemed to have been artificially diverted from the U.K. will be taxed at a rate of 25%. While the Company believes that all of its affiliated entities and the transactions among them have the required economic substance, there is no assurance that this legislation will not have a material effect on its results of operations and financial condition.
We and our subsidiaries are also engaged in a number of intercompany transactions. Although we believe that these transactions reflect arm’s length terms and that proper transfer pricing documentation is in place, which should be respected for tax purposes, the transfer prices and conditions may be scrutinized by local tax authorities, which could result in additional tax liabilities. On October 5, 2015, the Organization for Economic Co-operation and Development (OECD), an international association of thirty four countries, including the U.S. and U.K., released the final reports from its Base Erosion and Profit Shifting (BEPS) Action Plans. The BEPS recommendations covered a number of issues, including country-by-country reporting, permanent establishment rules, transfer pricing rules and tax treaties. Future tax reform resulting from this development may result in changes to long-standing tax principles, which could adversely affect our effective tax rate or result in higher cash tax liabilities.
We face risks associated with operating in international markets and our strategy to continue to expand internationally.
We operate on a global basis, with approximately 34.3% of our total revenue from operations outside of the U.S. during Fiscal 2017. As a result, we are subject to the risks of doing business internationally, including political and economic instability in foreign countries, laws, regulations and policies of foreign governments, potential negative consequences from changes in taxation policies, political or civil unrest, acts of terrorism, military actions or other conditions. Economic instability and unsettled regional and global conflicts may negatively affect consumer spending by foreign tourists and local consumers in the various regions where we operate, which could adversely affect our revenues and results of operations. We also sell our products at varying retail price points based on geographic location that yield different gross profit margins, and we achieve different operating profit margins, depending on geographic region, due to a variety of factors including product mix, store size, occupancy costs, labor costs and retail pricing. Changes in any one or more of these factors could result in lower revenues, increased costs, and negatively impact our business, results of operations and financial condition.

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There are some countries where 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 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, results of operations and financial condition.
In addition, on June 23, 2016, voters in the United Kingdom ("U.K."). approved an advisory referendum to withdraw from the European Union (“Brexit”).  The Brexit vote and the perceptions as to the impact of the withdrawal of the U.K. from the European Union ("E.U.") may adversely affect business activity, political stability and economic conditions in the U.K., the E.U. and elsewhere. Negotiations on withdrawal and post-exit arrangements likely will be complex and protracted, and there can be no assurance regarding the terms, timing or consummation of any such arrangements.  The proposed withdrawal could adversely affect the tax, currency, operational, legal and regulatory regimes to which our businesses in the region are subject. The withdrawal could also disrupt the free movement of goods, services and people between the U.K. and the E.U. and significantly disrupt trade between the U.K. and the E.U. and other parties. There can be no assurance that any or all of these events will not have a material adverse effect on our business, results of operations and financial condition.
Acquisitions may not be successfully integrated and may not achieve intended benefits.
We face additional risks associated with our strategy to expand internationally through the acquisition of our geographic licensees. On January 1, 2016, we transitioned the previously licensed business in South Korea to a wholly owned operation and on May 31, 2016, we acquired our previously licensed business in the Greater China region, which includes China, Hong Kong, Macau and Taiwan.
We may not be able to successfully integrate the business of any licensee or another entity that we acquire into our own business or achieve any expected cost savings or synergies from such integration. The potential difficulties that we may face that could cause the results of the acquisition to not be in line with our expectations, include, among others:
failure to implement our business plan for the combined business;
delays or difficulties in completing the integration of acquired companies or assets;
higher than expected costs, lower than expected cost savings and/or a need to allocate resources to manage unexpected operating difficulties;
unanticipated issues in integrating logistics, information and other systems;
unanticipated changes in applicable laws and regulations;
retaining key employees;
operating risks inherent in the acquired business and our business;
diversion of the attention and resources of management;
assumption of liabilities not identified in due diligence or other unanticipated issues, expenses and liabilities; and
the impact on our internal controls and compliance with the requirements under the Sarbanes-Oxley Act of 2002.
Our acquisitions may not perform as well as initially expected which could have a material adverse effect on our financial condition and results of operations.
We also have a controlling interest in our joint venture in Latin America ("MK Panama") and consolidate this joint venture into our operations. We may not realize a satisfactory return on our investment and our joint venture also exposes us to risks to the extent that our joint venture partner may have economic or business interests or goals that are inconsistent with ours; take actions contrary to our policies or objectives; experience financial or other difficulties; or be unable or unwilling to fulfill their obligations under the joint venture agreement, any of which could negatively impact our business, results of operations and financial condition.

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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 represented 21.0% of our total revenue for Fiscal 2017 and 25.8% of our total revenue for Fiscal 2016. Our largest wholesale customer, Macy's, accounted for 8.9% of our total revenue for Fiscal 2017 and 12.7% of our total revenue for Fiscal 2016. 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 smaller amount of our products and/or 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, results of operations and financial condition.
Our business is exposed to foreign currency exchange rate fluctuations.
Our results of operations for our international subsidiaries are exposed to foreign exchange rate fluctuations as the financial results of the applicable subsidiaries are translated from the local currency into U.S. dollars during financial statement consolidation. If the U.S. dollar strengthens against foreign currencies, the translation of these foreign currency denominated transactions could impact our consolidated results of operations. In addition, we have intercompany notes amongst certain of our non-U.S. subsidiaries, which may be denominated in a currency other than the local currency of a particular reporting entity. As a result of using a currency other than the functional currency of the related subsidiary, results of these operations may be adversely affected during times of significant fluctuation between the functional currency of that subsidiary and the denomination currency of the note. We continuously monitor our foreign currency exposure and hedge a portion of our foreign subsidiaries’ foreign currency-denominated inventory purchases to minimize the impact of changes in foreign currency exchange rates. However, we cannot fully anticipate all of our foreign currency exposures and cannot ensure that these hedges will fully offset the impact of foreign currency exchange rate fluctuations.
As a result of operating retail stores and concessions in various countries outside of the U.S., we are also exposed to market risk from fluctuations in foreign currency exchange rates, particularly the Euro, the British Pound, the Chinese Yuan Renminbi, the Japanese Yen, the Korean Won and the Canadian Dollar, among others. A substantial weakening of foreign currencies against the U.S. Dollar could require us to raise our retail prices or reduce our profit margins in various locations outside of the U.S. In addition, our sales and profitability could be negatively impacted if consumers in those markets were unwilling to purchase our products at increased prices.
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. If we close a leased retail space, we remain obligated under the applicable lease. We also may be unable to renew leases at the end of their terms.
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 up to 10 years, generally require a fixed annual rent and most require the payment of additional rent if store sales exceed a negotiated amount. Certain of our European stores also require initial investments in the form of key money to secure prime locations, which may be paid to landlords or existing lessees. 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 April 1, 2017, we were party to operating leases associated with our stores as well as other corporate facilities requiring future minimum lease payments aggregating to $1.093 billion through Fiscal 2022 and approximately $549.3 million thereafter through Fiscal 2035. We recently announced that we intend to optimize our retail store fleet, including, through the closure of between 100 and 125 of full-price underperforming retail stores. In connection with this retail fleet optimization, we may remain obligated under the applicable lease for, among other things, payment of the base rent for the balance of the lease term. In some instances, we may be unable to close an underperforming retail store due to continuous operation provisions in our leases. In addition, as each of our leases expire, we may be unable to negotiate renewals, either on commercially acceptable terms or at all, which could cause us to close retail stores in desirable locations. Our substantial operating lease obligations, including with respect to closed retail spaces, could have a material adverse effect on our business, results of operations and financial condition.

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Our business may be negatively impacted due to excess inventories if we misjudge the demand for our products.

We are subject to significant pricing pressure caused by many factors, including competition, a highly promotional selling environment, and changes in consumer spending patterns. If we fail to anticipate, identify and respond effectively to changing consumer demands and fashion trends, we may be faced with significant excess inventories for some products and missed opportunities for other products. If that occurs, we may be forced to rely on markdowns or promotional sales to dispose of excess and slow-moving inventory, which may negatively impact our gross margin and profitability.
Our share price may periodically fluctuate based on the accuracy of our earnings guidance or other forward-looking statements regarding our financial performance.
Our business and long-range planning process is designed to maximize our long-term growth and profitability, and not to achieve an earnings target in any particular fiscal quarter. We believe that this longer-term focus is in the best interests of the Company and our shareholders. At the same time, however, we recognize that it is helpful to provide investors with guidance as to our forecast of total revenue, earnings per share, comparable store sales and other financial metrics or projections. While we generally expect to provide updates to our financial guidance when we report our results each fiscal quarter, we do not have any responsibility to update any of our forward-looking statements at such times or otherwise. In addition, any longer-term guidance that we provide is based on goals that we believe, at the time guidance is given, are reasonably attainable for growth and performance over a number of years. However, such long-range targets are more difficult to predict than our current quarter and fiscal year expectations. If, or when, we announce actual results that differ from those that have been predicted by us, outside investment analysts, or others, our share price could be adversely affected. Investors who rely on these predictions when making investment decisions with respect to our securities do so at their own risk. We take no responsibility for any losses suffered as a result of such changes in our share price.
We periodically return value to shareholders through our share repurchase program. Investors may have an expectation that we will repurchase all shares available under our share repurchase program. The market price of our securities could be adversely affected if our share repurchase activity differs from investors’ expectations or if our share repurchase program were to terminate.
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 certain rights to distribute and sell our products in certain geographical areas, such as the Middle East, Eastern Europe, Brazil, certain parts of Asia and Australia. In addition, we have a joint venture that covers the distribution and sale of products and the operation of retail stores in Latin America (excluding Brazil) and the Caribbean. 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 our brand. The misuse of our brand by a licensing partner could have a material adverse effect on our business, results of operations and financial condition.

18


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, results of operations and financial condition.
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 Asia and Europe. 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, results of operations and financial condition:
political or labor instability, labor shortages (stemming from labor disputes or otherwise), or increases in costs of labor or production in countries where manufacturing contractors and suppliers are located;
significant delays or disruptions in delivery of our products due to labor disputes or strikes at the location of the source of our goods and/or at ports of entry;
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;
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 2017, our largest manufacturing contractor, who primarily produces its products in China and who we have worked with for over ten years, accounted for the production of 29.6% 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, results of operations and financial condition, and impact the cost and availability of our goods.

19


In addition, we use third-party agents to source our finished goods with numerous manufacturing contractors on our behalf. Any single agent could unilaterally terminate its relationship with us at any time. In Fiscal 2017, our largest third-party agent, whose primary place of business is Hong Kong and who we have worked with for over 10 years, sourced approximately 13.9% 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, results of operations and financial condition.
If we fail to comply with labor laws, or if our manufacturing contractors fail to use acceptable, ethical business practices, our business and reputation could suffer.
We are subject to labor laws governing relationships with employees, including minimum wage requirements, overtime, working conditions and citizenship requirements. Compliance with these laws and regulations may lead to increased costs and operational complexity and may increase our exposure to governmental investigations or litigation.
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, results of operations and financial condition.
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, including MICHAEL KORS and MICHAEL MICHAEL KORS, logos 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 in the Americas, Europe, the Middle East, the Far East and elsewhere in the world in both online and offline channels. Our brand enjoys significant worldwide consumer recognition, and the generally higher pricing of our products creates additional incentive for counterfeiters to infringe on our brand. We work with customs authorities, law enforcement, legal representatives and brand specialists globally in an effort to prevent the sale of counterfeit Michael Kors products, but we cannot guarantee the extent to which our efforts to prevent counterfeiting of our brand and other intellectual property infringement will be successful. Such counterfeiting and other infringement could dilute our brand and harm our reputation and business.
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.
Restrictive covenants in our credit agreement may restrict our ability to pursue our business strategies.
We have a $1.0 billion senior unsecured revolving credit facility (the “2015 Credit Facility”) under which Michael Kors Holdings Limited and its indirect wholly owned subsidiaries Michael Kors (USA), Inc. (“MKUSA”), Michael Kors (Europe) B.V., Michael Kors (Canada) Holdings Ltd. and Michael Kors (Switzerland) GmbH, are borrowers, and the borrowers and certain material subsidiaries provide unsecured guarantees. The credit agreement governing the terms of the 2015 Credit Facility restricts, among other things, asset dispositions, mergers and acquisitions, dividends, share repurchases and redemptions, other restricted payments, indebtedness, loans and investments, liens and affiliate transactions. The 2015 Credit Facility also contains customary events of default, including, but not limited to, payment defaults, material inaccuracy of representations and warranties, covenant defaults, cross-defaults to certain indebtedness, certain events of bankruptcy or insolvency, certain events under ERISA, material judgments, actual or asserted failure of any guaranty supporting the 2015 Credit Facility to be in full force and effect, and changes

20


of control. If such an event of default occurs, the lenders under the 2015 Credit Facility would be entitled to take various actions, including, but not limited to, terminating the commitments and accelerating amounts outstanding under the 2015 Credit Facility. In addition, our credit agreement contains a financial covenant requiring us to maintain a leverage ratio of no greater than 3.5 to 1.0 (with the ratio being total consolidated indebtedness plus 6.0 times the consolidated rent expense for the last four consecutive fiscal quarters, to Consolidated EBITDAR for the last four consecutive fiscal quarters, as defined in Note 9 to the accompanying consolidated financial statements). See credit discussion in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity”. The covenants in the 2015 Credit Facility, among other things, may limit our ability to fund our 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 our cash flow from operations to payments on debt.
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 are required to document and test our internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. 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 have an adverse effect on our business and cause a decline in the price of our ordinary shares.
Provisions in our organizational documents may delay or prevent our acquisition by a third party.
Our Memorandum and Articles of Association (together, as amended from time to time, our “Memorandum and Articles”) 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 amend the Memorandum and Articles to create and 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.
These provisions of our Memorandum and Articles 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.

21


Rights of shareholders under British Virgin Islands law differ from those under United States law, and, accordingly, our shareholders may have fewer protections.
Our corporate affairs are governed by our Memorandum and Articles, 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. The principal protection under statutory law is that shareholders may bring an action to enforce the constituent documents of a British Virgin Islands 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 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 to minority shareholders under the laws of many states in the United States.
It may be difficult to enforce judgments against us or our executive officers and directors in jurisdictions outside the United States.
Under our Memorandum and Articles, 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 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.

22


Item 1B.     Unresolved Staff Comments
None.
Item 2.    Properties
The following table sets forth the location, use and size of our significant distribution and corporate facilities as of April 1, 2017, all of which are leased with the exception of our distribution center in Holland, which is owned. The leases expire at various times through Fiscal 2035, subject to renewal options.
Location
 
Use
 
Approximate Square
Footage
Whittier, CA
 
U.S. Distribution Center
 
1,284,420
Venlo, Holland
 
European Distribution Center
 
1,108,680
New York, NY
 
U.S. Corporate Offices
 
262,450
Montreal, Quebec
 
Canadian Corporate Office and Distribution
 
248,070
East Rutherford, NJ
 
U.S. Corporate Offices
 
53,480
Manno, Switzerland
 
European Corporate Offices
 
25,400
Secaucus, NJ
 
U.S. Distribution Center
 
22,760
London, England
 
Regional Corporate Offices
 
21,650
Paris, France
 
Regional Corporate Offices
 
16,030
As of April 1, 2017, we also occupied 827 leased retail stores worldwide (including concessions). We consider our properties to be in good condition and believe that our facilities are adequate for our operations and provide sufficient capacity to meet our anticipated requirements.
Other than the land and building for our European distribution center in Venlo, Holland, fixed assets related to our stores (e.g. leasehold improvements, fixtures, etc.) and computer equipment, we do not own any material property as of April 1, 2017.
Item 3.    Legal Proceedings
We are involved in various routine legal proceedings incident to the ordinary course of our business. We believe that the outcome of all pending legal proceedings in the aggregate will not have a material adverse effect on our business, results of operations and financial condition.
Item 4.    Mine Safety Disclosures
None.

23


PART II
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Since our initial public offering ("IPO") on December 15, 2011, our ordinary shares have traded on the NYSE under the symbol “KORS”. At April 1, 2017, there were 155,833,304 ordinary shares outstanding, and the closing sale price of our ordinary shares was $38.11. Also as of that date, we had approximately 240 ordinary shareholders of record. The table below sets forth the high and low closing sale prices of our ordinary shares for the periods indicated:
 
High
 
Low
Fiscal 2016 Quarter Ended:
 
 
 
June 27, 2015
$
66.26

 
$
44.91

September 26, 2015
$
45.37

 
$
38.06

December 26, 2015
$
43.89

 
$
38.53

April 2, 2016
$
58.54

 
$
35.57

 
 
 
 
Fiscal 2017 Quarter Ended:
 
 
 
July 2, 2016
$
56.35

 
$
40.70

October 1, 2016
$
52.90

 
$
46.79

December 31, 2016
$
51.76

 
$
42.75

April 1, 2017
$
43.56

 
$
36.02

Share Performance Graph
The line graph below compares the cumulative total shareholder return on our ordinary shares with the Russell 1000 Index (RUI), Standard & Poor’s 500 Index (GSPC), S&P Retail Index (RLX) and the NYSE Composite Index (NYA), and a peer group index of companies that we believe are closest to ours for the period covering our initial public offering on December 15, 2011 through March 31, 2017, the last business day of the our fiscal year. The graph assumes an investment of $100 made at the closing of trading on December 15, 2011, in (i) our ordinary shares, (ii) the shares comprising the RUI, (iii) the shares comprising the GSPC, (iv) the shares comprising the RLX and (v) the shares comprising the NYA. The peer group consists of the following: Coach, Inc., Guess, Inc., PVH Corp., Limited Brands, Inc., and Ralph Lauren Corporation. All values assume reinvestment of the full amount of all dividends, if any, into additional shares of the same class of equity securities at the frequency with which dividends are paid on such securities during the applicable time period.
kors040120_chart-07263.jpg


24


Issuer Purchases of Equity Securities
On May 25, 2016, the Company's Board of Directors authorized a new $1.0 billion share repurchase program, which replaced the remaining balance of the previous share repurchase program authorized on October 30, 2014. The Company also has in place a “withhold to cover” repurchase program, which allows the Company to withhold ordinary shares from certain executive officers to satisfy minimum tax withholding obligations relating to the vesting of their restricted share awards.
The following table provides information regarding the Company’s ordinary share repurchases during the three months ended April 1, 2017:
 
Total Number  of Shares  Purchased
 
Average
Price Paid
per Share
 
Total Number of  Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Dollar Value of
Shares (or Units) That May
Yet be Purchased Under the
Plans or Programs (in millions)
January 1 – January 28

 
$

 
 
$250.0
January 29 – February 25
2,720,100

 
38.25

 
2,720,100
 
146.0
February 26 – April 1
3,921,715

 
37.22

 
3,921,715
 
On May 25, 2017, the Company's Board of Directors authorized a new $1.000 billion share repurchase program.
Item 6.    Selected Financial 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 2017, Fiscal 2016 and Fiscal 2015 and the balance sheet data as of the end of Fiscal 2017 and Fiscal 2016 have been derived from our audited consolidated financial statements included elsewhere in this report. The statements of operations data for Fiscal 2013 and Fiscal 2012 and the balance sheet data as of the end of Fiscal 2014, Fiscal 2013 and Fiscal 2012 have been derived from our prior audited consolidated financial statements, which are not included in this report.
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 annual report.

25


 
Fiscal Years Ended
 
April 1,
2017
 
April 2, 2016 (1)
 
March 28,
2015
 
March 30,
2014
 
March 31,
2013
 
(data presented in millions, except for shares and per share data)
Statement of Operations Data:
 
 
 
 
 
 
 
 
 
Net sales
$
4,347.9

 
$
4,538.8

 
$
4,199.7

 
$
3,170.5

 
$
2,094.7

Licensing revenue
145.8

 
173.3

 
171.8

 
140.3

 
87.0

Total revenue
4,493.7

 
4,712.1

 
4,371.5

 
3,310.8

 
2,181.7

Cost of goods sold
1,832.3

 
1,914.9

 
1,723.8

 
1,294.7

 
875.1

Gross profit
2,661.4

 
2,797.2

 
2,647.7

 
2,016.1

 
1,306.6

Selling, general and administrative expenses
1,552.5

 
1,428.0

 
1,251.5

 
926.9

 
621.6

Depreciation and amortization
219.8

 
183.2

 
138.4

 
79.7

 
54.3

Impairment of long-lived assets
199.2

 
10.9

 
0.8

 
1.3

 
0.7

Total operating expenses
1,971.5

 
1,622.1

 
1,390.7

 
1,007.9

 
676.6

Income from operations
689.9

 
1,175.1

 
1,257.0

 
1,008.2

 
630.0

Other income
(5.4
)
 
(3.7
)
 
(1.6
)
 

 

Interest expense, net
4.1

 
1.7

 
0.2

 
0.4

 
1.5

Foreign currency loss
2.6

 
4.8

 
2.6

 
0.1

 
1.4

Income before provision for income taxes
688.6

 
1,172.3

 
1,255.8

 
1,007.7

 
627.1

Provision for income taxes
137.1

 
334.6

 
374.8

 
346.2

 
229.5

Net income
551.5

 
837.7

 
881.0

 
661.5

 
397.6

Less: Net loss attributable to noncontrolling interest
(1.0
)
 
(1.4
)
 

 

 

Net income attributable to MKHL
$
552.5

 
$
839.1

 
$
881.0

 
$
661.5

 
$
397.6

 
 
 
 
 
 
 
 
 
 
Weighted average ordinary shares outstanding:
 
 
 
 
 
 
 
 
 
Basic
165,986,733

 
186,293,295

 
202,680,572

 
202,582,945

 
196,615,054

Diluted
168,123,813

 
189,054,289

 
205,865,769

 
205,638,107

 
201,540,144

Net income per ordinary share(2):
 
 
 
 
 
 
 
 
 
Basic
$
3.33

 
$
4.50

 
$
4.35

 
$
3.27

 
$
2.02

Diluted
$
3.29

 
$
4.44

 
$
4.28

 
$
3.22

 
$
1.97

 
 
 
(1) 
Fiscal year ended April 2, 2016 contained 53 weeks, whereas all other fiscal years presented are based on 52-week periods.
(2) 
Basic net income per ordinary share is computed by dividing net income available to ordinary shareholders of MKHL by basic weighted average ordinary shares outstanding. Diluted net income per ordinary share is computed by dividing net income attributable to ordinary shareholders of MKHL by diluted weighted average ordinary shares outstanding.
 
Fiscal Years Ended
 
April 1,
2017
 
April 2,
2016
 
March 28,
2015
 
March 30,
2014
 
March 31,
2013
 
(data presented in millions, except for share and store data)
Operating Data:
 
 
 
 
 
 
 
 
 
Comparable retail store sales (decline) growth (1)
(8.3
)%
 
(4.2
)%
 
10.3
%
 
26.2
%
 
40.1
%
Retail stores, including concessions, end of period
827

 
668

 
526

 
405

 
304

 
 
 
 
 
 
 
 
 
 
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Working capital
$
598.9

 
$
1,234.3

 
$
1,663.4

 
$
1,438.3

 
$
816.5

Total assets
$
2,409.6

 
$
2,566.8

 
$
2,684.6

 
$
2,211.2

 
$
1,280.1

Short-term debt
$
133.1

 
$

 
$

 
$

 
$

Long-term debt
$

 
$
2.3

 
$

 
$

 
$

Shareholders' equity of MKHL
$
1,592.6

 
$
1,995.7

 
$
2,241.0

 
$
1,806.1

 
$
1,047.2

Number of ordinary shares issued
209,332,493

 
208,084,175

 
206,486,699

 
204,291,345

 
201,454,408

 
 
 
(1) 
Fiscal year ended April 2, 2016 contained 53 weeks, whereas all other fiscal years presented are based on 52-week periods. All comparable store sales are presented on a 52-week basis.


26



ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis of our Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and notes thereto included as part of this Annual Report on Form 10-K. This discussion contains forward-looking statements that are based upon current expectations. We sometimes identify forward-looking statements with such words as “may,” “expect,” “anticipate,” “estimate,” “seek,” “intend,” “believe” or similar words concerning future events. The forward-looking statements contained herein, include, without limitation, statements concerning future revenue sources and concentration, gross profit margins, selling and marketing expenses, capital expenditures, general and administrative expenses, capital resources, new stores, retail fleet optimization and anticipated cost savings, additional financings or borrowings and additional losses and are subject to risks and uncertainties including, but not limited to, those discussed in this report that could cause actual results to differ materially from the results contemplated by these forward-looking statements. We also urge you to carefully review the risk factors set forth in “Item 1A. – Risk Factors.”
Overview
Our Business
We are a global luxury fashion brand led by a world-class management team and a renowned, award-winning designer. Since launching his namesake brand over 35 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 over 100 countries. We are a highly recognized luxury fashion brand in the Americas and Europe with accelerating brand awareness in other international markets.
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 April 1, 2017, our retail segment included 398 retail stores in the Americas (including concessions), 429 international retail stores (including concessions) throughout Europe and Asia, our e-commerce sites in the United States ("U.S.") and Canada, as well as our recently launched e-commerce sites in Europe, China and Japan. As of April 1, 2017, our wholesale segment included wholesale sales through approximately 1,405 department store doors and 904 specialty store doors in the Americas and wholesale sales through approximately 1,099 specialty store doors and 199 department 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.
We offer three primary collections: the Michael Kors Collection luxury line, the MICHAEL Michael Kors accessible luxury line and the Michael Kors Mens line. The Michael Kors Collection establishes the aesthetic authority of our entire brand and is carried by many of our retail stores, our e-commerce sites, as well as in the finest luxury department stores in the world. In 2004, we introduced MICHAEL Michael Kors, which has a strong focus on accessories, in addition to offering footwear and apparel, and addresses the significant demand opportunity in accessible luxury goods. More recently, we have begun to grow our men's business in recognition of the significant opportunity afforded by our brand's established fashion authority and the expanding men's market. Taken together, our primary collections target a broad customer base while retaining our premium luxury image.
Certain Factors Affecting Financial Condition and Results of Operations
Establishing brand identity and enhancing global presence. We intend to continue to increase our international presence and global brand recognition through the formation of various joint ventures with international partners, and continuing with our international licensing arrangements. We feel this is an efficient method for continued penetration into the global luxury goods market, especially for markets where we have yet to establish a substantial presence. In addition, our growth strategy includes assuming direct control of certain international operations, which allows us to better manage our growth opportunities in the related regions. During the second quarter of Fiscal 2016, we made additional capital contributions to our Latin American joint venture, MK (Panama) Holdings, S.A. and subsidiaries (“MK Panama”), obtaining a 75% controlling interest in MK Panama, and began to consolidate MK Panama into our operations beginning with the second quarter of Fiscal 2016. On January 1, 2016, we acquired the previously licensed business in South Korea. On May 31, 2016, we further expanded our global presence by acquiring the previously licensed operations in the Greater China region (please refer to Note 3 to the accompanying consolidated financial statements for additional information).

27


Channel Shift and Demand for Our Accessories and Related Merchandise. Our performance is affected by trends in the luxury goods industry, as well as shifts in demographics and changes in lifestyle preferences. In addition, the accessible luxury retail and wholesale industry has been recently challenged by lower consumer traffic trends, a promotional selling environment resulting from a channel shift, and other political and economic factors. During Fiscal 2017, we began to strategically reduce shipments to decrease promotional activity within our wholesale channel, which we believe is necessary to appropriately position our brand long-term. Consumer spending has been increasingly constrained due to a decrease in tourist travel and a shift in consumer spending from luxury products to luxury experiences. In addition, consumer shopping preferences have continued to shift from physical stores to on-line shopping. While this trend has resulted in an increase in our e-commerce sales, it has had a negative impact on our brick and mortar stores. We currently expect that this trend will continue in the foreseeable future. As a result, we recorded impairment charges of $199.2 million during Fiscal 2017, as compared to $10.9 million during Fiscal 2016 and $0.8 million in Fiscal 2015, primarily associated with underperforming full-price retail stores (please refer to Notes 11 and 18 to the accompanying consolidated financial statements for additional information). We continue to adjust our operating strategy to the changing business environment and on May 31, 2017, we announced that we plan to close between 100 and 125 of our full-price retail stores over the next two years in order to improve the profitability of our retail store fleet. Over this time period, we expect to incur approximately $100 - $125 million of one-time costs associated with these store closures. Collectively, we anticipate ongoing annual savings of approximately $60 million as a result of the store closures and the lower depreciation and amortization associated with the impairment charges recorded during Fiscal 2017.
Currency fluctuation and the Strengthening U.S. Dollar. Our consolidated operations are impacted by the relationships between our reporting currency, the U.S. Dollar, and those of our non-U.S. subsidiaries whose functional/local currency is other than the U.S. Dollar. Our Fiscal 2017 results have been negatively impacted by the declines in value of the British Pound relative to the U.S. Dollar of approximately 13%, compared to the same prior year period, following the affirmative vote by the United Kingdom to leave the European Union earlier this fiscal year as well as by the increased volatility of the Euro. Conversely, our results have been positively impacted by increases in the value of the Japanese Yen relative to the U.S. Dollar of approximately 11%.
Disruptions in shipping and distribution. Our operations are subject to the impact of shipping disruptions as a result of changes or damage to our distribution infrastructure, as well as due to external factors. Any future disruptions in our shipping and distribution network could have a negative impact on our results of operations.
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.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States ("U.S. GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Critical accounting policies are those that are the most important to the portrayal of our financial condition and results of operations and that require our most difficult, subjective and complex judgments to make estimates about the effect of matters that are inherently uncertain. In applying such policies, we must make certain assumptions based on our informed judgments, assessments of probability and best estimates. Estimates, by their nature, are subjective and are based on analysis of available information, including current and historical factors and the experience and judgment of management. We evaluate our assumptions and estimates on an ongoing basis. While our significant accounting policies are detailed in Note 2 to the accompanying financial statements, our critical accounting policies are discussed below and include revenue recognition, inventories, impairment of long-lived assets, goodwill, share-based compensation, derivatives and income taxes.
Revenue Recognition
Revenue is recognized when there is persuasive evidence of an arrangement, delivery has occurred, the price has been fixed and determinable and collectability is reasonably assured. We recognize retail store revenue upon sale of our products to retail consumers, net of estimated returns. Revenue from sales through our e-commerce sites is recognized at the time of delivery to the customer, reduced by an estimate of 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 customer returns, as well as by a provision for estimated future

28


customer returns, which is based on management’s review of historical and current customer returns. The amounts reserved for retail sales returns were $7.3 million, $4.7 million and $2.5 million at April 1, 2017April 2, 2016 and March 28, 2015, respectively. To arrive at net sales for wholesale, gross sales are reduced by provisions for estimated future returns based on current expectations, as well as trade discounts, markdowns, allowances, operational chargebacks, and certain cooperative selling expenses. Total sales reserves for wholesale were $96.7 million, $110.9 million and $87.5 million at April 1, 2017April 2, 2016 and March 28, 2015, respectively. These estimates are based on such factors as historical trends, actual and forecasted performance, and market conditions, which are reviewed by management on a quarterly basis. Our historical estimates of these costs were not materially different from actual results.
Royalty revenue generated from product licenses, which includes contributions for advertising, is based on reported sales of licensed products bearing our tradenames 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 it is earned under the licensing agreements based on reported sales of licensees applicable to specified periods, as outlined in the agreements. These agreements allow for the use of our tradenames to sell our branded products in specific geographic regions.
Inventories
Our inventory costs include amounts paid to independent manufacturers, plus duties and freight to bring the goods to the Company’s warehouses, which are located in the United States, Holland, Canada, China, Hong Kong, Japan, South Korea and Taiwan. We continuously evaluate the composition of our inventory and make adjustments when the cost of inventory is not expected to be fully recoverable. The net realizable value of our inventory is estimated based on historical experience, current and forecasted demand and market conditions. In addition, reserves for inventory losses are estimated based on historical experience and inventory counts. Our inventory reserves are estimates, which could vary significantly from actual results if future economic conditions, customer demand or competition differ from expectations. Our historical estimates of these adjustments have not differed materially from actual results.
Long-lived Assets
We evaluate all long-lived assets, including fixed assets and finite-lived intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable. For the purposes of impairment testing, we group our long-lived assets according to their lowest level of use, such as aggregating and capitalizing all construction costs related to a retail store into leasehold improvements and those related to our wholesale business into shop-in-shops. Our leasehold improvements are typically amortized over the life of the store lease, including highly probable renewals, and our shop-in-shops are amortized over a useful life of three or four years. Our impairment testing is based on our best estimate of the future operating cash flows. If the sum of our estimated undiscounted future cash flows associated with the asset is less than the asset’s carrying value, we recognize an impairment charge, which is 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 and future impairments may result if actual cash flows are lower than our expectations. During Fiscal 2017, we recorded impairment charges of $199.2 million, which were primarily related to fixed assets and lease rights for underperforming full-price retail stores. During Fiscal 2016 and Fiscal 2015, we recorded fixed asset impairment charges of $10.9 million and $0.8 million, respectively, primarily related to our retail segment. Please refer to Notes 6, 7, 11 and 18 to the accompanying consolidated audited financial statements for additional information.
Goodwill
We perform an impairment assessment of goodwill on an annual basis, or whenever impairment indicators exist. In the absence of any impairment indicators, goodwill is assessed during the fourth quarter of each fiscal year. These assessments are made with regards to reporting units within our wholesale, retail and licensing segments where our goodwill is recorded, and 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.
We may assess our goodwill for impairment initially using a qualitative approach (“step zero”) to determine whether it is more likely than not that the fair value of goodwill is greater than its carrying value. If the results of the qualitative assessment indicate that it is not more likely than not that the fair value of goodwill exceeds its carrying value, a quantitative goodwill analysis would be performed to determine if impairment is required. We may also elect to perform a quantitative analysis of goodwill initially rather than using a qualitative approach. The valuation methods used in the quantitative fair value assessment, discounted cash flow and market multiples methods, require 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 to its carrying value. To compute the implied fair value, we would

29


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’s goodwill exceeded the implied fair value of the reporting unit’s 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. Future events could cause us to conclude the impairment indicators exist and, therefore, that goodwill may be impaired.
During the fourth quarter of Fiscal 2017, we elected to bypass the initial qualitative assessment and performed our annual impairment analysis using a quantitative approach, using the discounted cash flow method to estimate fair value. Based on the results of this assessment, we concluded that the fair values of all reporting units significantly exceeded the related carrying amounts and there were no reporting units at risk of impairment. There were no impairment charges related to goodwill in any of the fiscal periods presented.
Share-based Compensation
We grant share-based awards to certain of our employees and directors. The grant date fair value of share options is calculated using the Black-Scholes option pricing model, which requires us to use subjective assumptions. The closing market price at the grant date is used to determine the grant date fair value of restricted shares, restricted share units, and performance restricted share units. These values are recognized as expense over the requisite service period, net of estimated forfeitures, based on expected attainment of pre-established performance goals for performance grants, or the passage of time for those grants which have only time-based vesting requirements.
Our expected volatility is based on the average volatility rates of similar actively traded companies over the past 4.5-9.5 years, which is our range of estimated expected holding periods. The expected holding period for performance-based options 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. The expected holding period for time-based options is calculated using a simplified method, which uses the vesting term of the options, generally 4 years, and the contractual term of 7 years, resulting in holding periods of 4.5-4.75 years. The simplified method was chosen as a means to determine the Company’s estimated holding period, as prior to December 2011, the Company was privately held and, as such, there is insufficient historical option exercise experience. The risk-free rate is derived from the zero-coupon U.S. Treasury Strips yield curve based on the grant’s estimated holding period. Determining the grant date fair value of share-based awards requires considerable judgment, including estimating expected volatility, expected term, risk-free rate, and forfeitures. If factors change and we employ different assumptions, the fair value of future awards and resulting share-based compensation expense may differ significantly from what we have estimated in the past.
Derivative Financial Instruments
We use forward currency exchange contracts to manage our exposure to fluctuations in foreign currency for certain of our transactions. We are exposed to risks on certain purchase commitments to foreign suppliers based on the value of our purchasing subsidiaries’ local currency relative to the currency requirement of the supplier on the date of the commitment. As such, we enter into forward currency contracts that generally mature in 12 months or less, which is consistent with the related purchase commitments. We designate certain contracts related to the purchase of inventory that qualify for hedge accounting as cash flow hedges, while others remain undesignated. All of our derivative instruments are recorded in our consolidated balance sheets at fair value on a gross basis, regardless of their hedge designation. The effective portion of changes in the fair value for contracts designated as cash flow hedges is recorded in equity as a component of accumulated other comprehensive income (loss) until the hedged item effects earnings. When the inventory related to forecasted inventory purchases that are being hedged is sold to a third party, the gains or losses deferred in accumulated other comprehensive income (loss) are recognized within cost of goods sold. We use regression analysis to assess effectiveness of derivative instruments that are designated as hedges, which compares the change in the fair value of the derivative instrument to the change in the related hedged item. Effectiveness is assessed on a quarterly basis and any portion of the designated hedge contracts deemed ineffective is recorded to foreign currency gain (loss). If the hedge is no longer expected to be highly effective in the future, future changes in the fair value are recognized in earnings. For those contracts that are not designated as hedges, changes in the fair value are recorded in foreign currency gain (loss) in our consolidated statements of operations.
The Company is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. In order to mitigate counterparty credit risk, the Company only enters into contracts with carefully selected financial institutions based upon their credit ratings and certain other financial factors, adhering to established limits for credit exposure.

30


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.
New Accounting Pronouncements
Please refer to Note 2 to the accompanying consolidated financial statements for detailed information relating to recently adopted and recently issued accounting pronouncements and the associated impacts.
Segment Information
We generate revenue through three business segments: retail, wholesale and licensing. The following table presents our total revenue and income from operations by segment for Fiscal 2017, Fiscal 2016 and Fiscal 2015 (in millions):
 
Fiscal Years Ended
 
April 1,
2017
 
April 2,
2016
 
March 28,
2015
Revenue:
 
 
 
 
 
Net sales: Retail
$
2,572.1

 
$
2,394.9

 
$
2,134.6

Wholesale
1,775.8

 
2,143.9

 
2,065.1

Licensing
145.8

 
173.3

 
171.8

Total revenue
$
4,493.7

 
$
4,712.1

 
$
4,371.5

 
 
 
 
 
 
Income from operations:
 
 
 
 
 
Retail
$
159.8

 
$
501.4

 
$
557.2

Wholesale
468.1

 
584.1

 
610.9

Licensing
62.0

 
89.6

 
88.9

Income from operations
$
689.9

 
$
1,175.1

 
$
1,257.0


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Retail
We have four primary retail store formats: "Collection" stores, "Lifestyle" stores, outlet stores and e-commerce, through which we sell our products, as well as licensed products bearing our name, directly to the end consumer throughout the Americas (excluding Brazil), Europe and certain parts of Asia. In addition to these four retail formats, we operate concessions in a select number of department stores. Our "Collection" stores are located in highly prestigious shopping areas, while our "Lifestyle" stores are located in well-populated commercial shopping locations and leading regional shopping centers. Our outlet stores, which are generally in outlet centers, extend our reach to additional consumer groups. Our e-commerce business includes our existing e-commerce sites in the U.S. and Canada, as well as our recently launched European e-commerce sites in France, Germany, Italy, Spain, Switzerland and the United Kingdom, and our recently launched Asian e-commerce sites in China and Japan. We plan to continue to expand our e-commerce presence to additional countries in Europe and South Korea in Fiscal 2018.
The following table presents the growth in our global network of retail stores during Fiscal 2017, Fiscal 2016, and Fiscal 2015:
 
April 1,
2017
 
April 2,
2016
 
March 28,
2015
Full price retail stores including concessions:
 
 
 
 
 
Number of stores
614

 
492

 
373

Increase during period
122

 
119

 
94

Percentage increase vs. prior year
24.8
%
 
31.9
%
 
33.7
%
Total gross square footage
1,408,775

 
1,140,025

 
859,352

Average square footage per store
2,294

 
2,317

 
2,304

 
 
 
 
 
 
Outlet stores:
 
 
 
 
 
Number of stores
213

 
176

 
153

Increase during period
37

 
23

 
27

Percentage increase vs. prior year
21.0
%
 
15.0
%
 
21.4
%
Total gross square footage
849,184

 
637,325

 
517,308

Average square footage per store
3,987

 
3,621

 
3,381

The following table presents our retail stores by geographic location:
 
April 1,
2017
 
April 2,
2016
 
March 28,
2015
Store count by region:
 
 
 
 
 
The Americas (U.S., Canada and Latin America)
398

(1) 
390

(2) 
343

Europe
201

 
177

 
133

Asia
228

(1) 
101

(2) 
50

Total
827

 
668

 
526

 
 
(1) Store count for Asia includes 111 stores associated with the previously licensed business in Greater China (comprised of China, Hong Kong, Macau and Taiwan) acquired on May 31, 2016, 35 stores associated the previously licensed business in South Korea acquired on January 1, 2016, and 82 stores in Japan. Store count in the Americas includes 6 stores in Latin America, as a result of consolidation of MK Panama into our operations beginning in July 2016 (excluding Brazil operations, which were licensed to another third party during Fiscal 2017).
(2)  
Store count in Asia includes 36 stores in South Korea and 65 stores in Japan; store count in the Americas includes 14 stores in Latin America, due to the consolidation of MK Panama into our operations.
See Note 3 to the accompanying consolidated financial statements for additional information.

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Wholesale
We sell our products directly to department stores primarily located across the Americas (excluding Brazil) 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, as well as to travel retail shops in the Americas, Europe and Asia. We also have wholesale arrangements pursuant to which we sell products to our geographic licensees. We continue to focus our sales efforts and drive sales in existing locations by enhancing presentation with our specialized 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 increase (decrease) in our global network of wholesale doors during Fiscal 2017, Fiscal 2016 and Fiscal 2015:
 
Fiscal Years Ended
 
April 1,
2017
 
April 2,
2016
 
March 28,
2015
Number of full-price wholesale doors
3,607

 
3,889

 
4,038

(Decrease) increase during period
(282
)
 
(149
)
 
310

Percentage (decrease) increase vs. prior year
(7.3
)%
 
(3.7
)%
 
8.3
%
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, jewelry, fragrances and beauty, and eyewear. In our product licensing arrangements, we take an active role in the design, 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. During Fiscal 2016, we acquired a controlling interest in MK Panama on June 28, 2015 and acquired direct control of the previously licensed business in South Korea on January 1, 2016. During Fiscal 2017, we acquired direct control of our licensed operations in the Greater China region on May 31, 2016. The results of the acquired businesses are now being reported as part of our retail and wholesale operations. During the second quarter of Fiscal 2017, the Company licensed the right to operate retail stores bearing the Michael Kors trademark to a third party in Brazil.
Key Performance Indicators and Statistics
We use a number of key indicators of operating results to evaluate our performance, including the following (dollars in millions):
 
Fiscal Years Ended
 
April 1,
2017
 
April 2,
2016
 
March 28,
2015
Total revenue
$
4,493.7

 
$
4,712.1

 
$
4,371.5

Gross profit as a percent of total revenue
59.2
 %
 
59.4
 %
 
60.6
%
Income from operations
$
689.9

 
$
1,175.1

 
$
1,257.0

Retail net sales - The Americas
$
1,713.7

 
$
1,779.0

 
$
1,656.1

Retail net sales - Europe
$
507.7

 
$
509.6

 
$
412.1

Retail net sales - Asia
$
350.7

 
$
106.3

 
$
66.4

(Decrease) increase in comparable store net sales
(8.3
)%
 
(4.2
)%
 
10.3
%
Wholesale net sales - The Americas
$
1,340.9

 
$
1,628.6

 
$
1,662.5

Wholesale net sales - Europe
$
376.5

 
$
406.4

 
$
401.1

Wholesale net sales - Asia
$
58.4

 
$
108.9

 
$
1.5

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.

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Comparable store sales include sales from a retail store or an e-commerce site that has been operating for one full year after the end of the first month of its operation under our ownership. For stores that are closed, sales that were made in the final month of their operations (assuming closure prior to the fiscal month's end), are excluded from the calculation of comparable store sales. Additionally, sales for stores that are either relocated, or expanded by a square footage of 25% or greater, in any given fiscal year, are also excluded from the calculation of comparable store sales at the time of their move or interruption, until such stores have been in their new location, or are operating under their new size/capacity, for at least one full year after the end of the first month of their relocation or expansion. All comparable store sales are presented on a 52-week basis. Comparable store sales are reported on a global basis, which represents management’s view of our Company as an expanding global business.
Constant currency effects are non-U.S. GAAP financial measures, which are provided to supplement our reported operating results to facilitate comparisons of our operating results and trends in our business, excluding the effects of foreign currency rate fluctuations. Because we are a global company, foreign currency exchange rates may have a significant effect on our reported results. We calculate constant currency measures and the related foreign currency impacts by translating the current-year’s reported amounts into comparable amounts using prior year’s foreign exchange rates for each currency. All constant currency performance measures discussed below should be considered a supplement to and not in lieu of our operating performance measures calculated in accordance with U.S. GAAP.
Licensing revenue consists of fees charged on sales of licensed products by our licensees as well as contractual royalty rates for the use of our trademarks in certain geographic territories.
Cost of goods sold includes the cost of inventory sold, freight-in on merchandise and foreign currency exchange gains/losses related to forward contracts for purchase commitments. All retail store operating and occupancy costs are included in Selling, general and administrative expenses (see below), and as a result our cost of goods sold may not be comparable to that of other entities that have chosen to include some or all of those expenses as a component of their cost of goods sold.
Gross profit is total revenue (net sales plus licensing revenue) minus cost of goods sold. As a result of retail store operating and occupancy costs being excluded from our cost of goods sold, our gross profit may not be comparable to that of other entities that have chosen to include some or all of those expenses as a component of their gross profit.
Selling, general and administrative expenses consist of warehousing and distribution costs, rent for our distribution centers, store payroll, store occupancy costs (such as rent, common area maintenance, store pre-opening, real estate taxes and utilities), information technology and systems costs, corporate payroll and related benefits, advertising and promotion expense, transaction costs and other general expenses.
Depreciation and amortization includes depreciation and amortization of fixed and definite-lived intangible assets.
Impairment of long-lived assets consists of charges to write-down fixed assets and finite-lived intangible assets to fair value.
Income from operations consists of gross profit minus total operating expenses.
Other (income) expense, net includes insurance settlements, a gain on acquisition of MK Korea during Fiscal 2016, proceeds received related to our anti-counterfeiting efforts, rental income from our owned distribution center in Europe and equity income or loss earned on our joint venture (prior to obtaining controlling interest in MK Panama). In future periods, it may include any other miscellaneous activities not directly related to our operations.
Interest expense, net represents interest and fees on our revolving credit facilities and letters of credit (see “Liquidity and Capital Resources” for further detail on our credit facilities), as well as amortization of deferred financing costs, offset by interest earned on highly liquid investments (investments purchased with an original maturity of three months or less, classified as cash equivalents).
Foreign currency loss includes net gains or losses related to the mark-to-market (fair value) on our forward currency contracts not designated as accounting hedges and unrealized income or loss from the re-measurement of monetary assets and liabilities denominated in currencies other than the functional currencies of our subsidiaries.
Noncontrolling interest represents the portion of the equity ownership in MK Panama, which is not attributable to the Company. On June 28, 2015, we obtained a controlling interest in MK Panama and began to consolidate its financial results in our operations.

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Results of Operations
Comparison of Fiscal 2017 with Fiscal 2016
The following table details the results of our operations for Fiscal 2017 and Fiscal 2016 and expresses the relationship of certain line items to total revenue as a percentage (dollars in millions):
 
Fiscal Years Ended
 
$ Change
 
% Change
 
% of Total
Revenue for
Fiscal 2017
 
% of Total
Revenue for
Fiscal 2016
 
April 1,
2017
 
April 2,
2016
 
 
 
 
Statements of Operations Data:
 
 
 
 
 
 
 
 
 
 
 
Net sales
$
4,347.9

 
$
4,538.8

 
$
(190.9
)
 
(4.2
)%
 
 
 
 
Licensing revenue
145.8

 
173.3

 
(27.5
)
 
(15.9
)%
 
 
 
 
Total revenue
4,493.7

 
4,712.1

 
(218.4
)
 
(4.6
)%
 
 
 
 
Cost of goods sold
1,832.3

 
1,914.9

 
(82.6
)
 
(4.3
)%
 
40.8
 %
 
40.6
 %
Gross profit
2,661.4

 
2,797.2

 
(135.8
)
 
(4.9
)%
 
59.2
 %
 
59.4
 %
Selling, general and administrative expenses
1,552.5

 
1,428.0

 
124.5

 
8.7
 %
 
34.5
 %
 
30.3
 %
Depreciation and amortization
219.8

 
183.2

 
36.6

 
20.0
 %
 
4.9
 %
 
3.9
 %
Impairment of long-lived assets
199.2

 
10.9

 
188.3

 
NM

 
4.4
 %
 
0.2
 %
Total operating expenses
1,971.5

 
1,622.1

 
349.4

 
21.5
 %
 
43.9
 %
 
34.4
 %
Income from operations
689.9

 
1,175.1

 
(485.2
)
 
(41.3
)%
 
15.4
 %
 
24.9
 %
Other income, net
(5.4
)
 
(3.7
)
 
(1.7
)
 
45.9
 %
 
(0.1
)%
 
(0.1
)%
Interest expense, net
4.1

 
1.7

 
2.4

 
141.2
 %
 
0.1
 %
 
 %
Foreign currency loss
2.6

 
4.8

 
(2.2
)
 
(45.8
)%
 
0.1
 %
 
0.1
 %
Income before provision for income taxes
688.6

 
1,172.3

 
(483.7
)
 
(41.3
)%
 
15.3
 %
 
24.9
 %
Provision for income taxes
137.1

 
334.6

 
(197.5
)
 
(59.0
)%
 
3.1
 %
 
7.1
 %
Net income
551.5

 
837.7

 
(286.2
)
 
(34.2
)%
 
 
 
 
Less: Net loss attributable to noncontrolling interest
(1.0
)
 
(1.4
)
 
0.4

 
(28.6
)%
 
 
 
 
Net income attributable to MKHL
$
552.5

 
$
839.1

 
$
(286.6
)
 
(34.2
)%
 
 
 
 
 
NM
Not meaningful.
 
Total Revenue
Total revenue decreased $218.4 million, or 4.6%, to $4.494 billion for the fiscal year ended April 1, 2017, compared to $4.712 billion for the fiscal year ended April 2, 2016, which included net unfavorable foreign currency effects of $11.7 million primarily related to the weakening of the British Pound and the Euro, partially offset by the strengthening of the Japanese Yen against the U.S. Dollar in Fiscal 2017, as compared to Fiscal 2016. On a constant currency basis, our total revenue decreased by $206.7 million, or 4.4%. The decrease in our total revenue was primarily attributable to lower wholesale and licensing revenues, partially offset by increased revenue from our retail business. Total revenue in Fiscal 2017 included approximately $168.3 million of incremental revenue attributable to our recent acquisitions, including $151.1 million related to our acquisition of the Greater China operations on May 31, 2016 and incremental revenues of $4.0 million and $13.2 million, respectively, resulting from our consolidation of MK Panama and acquisition of MK Korea in Fiscal 2016. Fiscal 2016 included approximately $33.7 million of incremental net retail sales attributable to the inclusion of the 53rd week.

35


The following table details revenues for our three business segments (dollars in millions):
 
Fiscal Years Ended
 
 
 
% Change
 
% of Total
Revenue
for Fiscal
2017
 
% of Total
Revenue
for Fiscal
2016
 
April 1,
2017
 
April 2,
2016
 
$ Change
 
As Reported
 
Constant
Currency
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales: Retail
$
2,572.1

 
$
2,394.9

 
$
177.2

 
7.4
 %
 
7.8
 %
 
57.2
%
 
50.8
%
Wholesale
1,775.8

 
2,143.9

 
(368.1
)
 
(17.2
)%
 
(17.0
)%
 
39.5
%
 
45.5
%
Licensing
145.8

 
173.3

 
(27.5
)
 
(15.9
)%
 
(15.9
)%
 
3.3
%
 
3.7
%
Total revenue
$
4,493.7

 
$
4,712.1

 
$
(218.4
)
 
(4.6
)%
 
(4.4
)%
 
 
 
 
Retail
Net sales from our retail stores increased $177.2 million, or 7.4%, to $2.572 billion for Fiscal 2017, compared to $2.395 billion for Fiscal 2016, which included unfavorable foreign currency effects of $8.7 million. On a constant currency basis, net sales from our retail stores increased $185.9 million, or 7.8%. We operated 827 retail stores, including concessions, as of April 1, 2017, compared to 668 retail stores, including concessions, as of April 2, 2016.
Our comparable store sales decreased $172.7 million, or 8.3%, during Fiscal 2017, which included net unfavorable foreign currency effects of $3.9 million. Our comparable store sales benefited approximately 304 basis points from the inclusion of the North American e-commerce sales in comparable store sales. On a constant currency basis, our comparable store sales decreased $168.8 million, or 8.1%. The decrease in our comparable store sales was primarily attributable to lower sales from our women's accessories, watches and jewelry product categories during Fiscal 2017 compared to Fiscal 2016.
Our non-comparable store sales increased $349.9 million during Fiscal 2017, which included net unfavorable foreign currency effects of $4.8 million. On a constant currency basis, our non-comparable store sales increased $354.7 million. The increase in non-comparable store sales was primarily attributable to operating 159 additional stores since April 2, 2016, including 111 stores associated with our acquisition of the previously licensed operations in Greater China. Our recently acquired and consolidated businesses contributed approximately $226.9 million to our non-comparable store sales for Fiscal 2017, $206.7 million of which related to Greater China, $15.1 million to South Korea and $5.1 million to Latin America. Fiscal 2016 included approximately $33.7 million of incremental net retail sales attributable to the inclusion of the 53rd week.
Wholesale
Net sales to our wholesale customers decreased $368.1 million, or 17.2%, to $1.776 billion for Fiscal 2017, compared to $2.144 billion for Fiscal 2016, which included unfavorable foreign currency effects of $3.0 million. On a constant currency basis, our wholesale net sales decreased $365.1 million, or 17.0%. The decrease in our wholesale net sales was primarily attributable to lower sales from our women's accessories, apparel and footwear product lines, offset in part by increased men's sales during Fiscal 2017 as compared to Fiscal 2016. Approximately $51.2 million of the decrease in wholesale net sales was due to the absence of the prior period wholesale sales to our licensees in Greater China, South Korea and Latin America as a result of our acquisition and consolidation of the related businesses.
Licensing
Royalties earned on our licensing agreements decreased $27.5 million, or 15.9%, to $145.8 million for Fiscal 2017, compared to $173.3 million for Fiscal 2016. This decrease was primarily attributable to lower licensing revenues related to watches and lower revenues from our geographic licensing arrangements in Asia due to our recent acquisitions of the related licensed operations, as well as a decrease in licensing revenues related to jewelry. These decreases were partially offset by higher licensing revenues related to sales of outerwear.
Gross Profit
Gross profit decreased $135.8 million, or 4.9%, to $2.661 billion during Fiscal 2017, compared to $2.797 billion for Fiscal 2016, which included unfavorable foreign currency effects of $2.0 million. Gross profit as a percentage of total revenue declined 20 basis points to 59.2% during Fiscal 2017, compared to 59.4% during Fiscal 2016. The slight decrease in our gross profit margin was primarily driven by a 250 basis point decline in our retail gross margin, primarily attributable to increased promotional activity, which was largely offset by a favorable channel mix due to a higher proportion of retail sales than in the prior fiscal period, as well a 50 basis point improvement in our wholesale gross margin, primarily reflecting lower allowances during Fiscal 2017, as compared to Fiscal 2016.

36


Total Operating Expenses
Total operating expenses increased $349.4 million, or 21.5%, to $1.972 billion during Fiscal 2017, compared to $1.622 billion for Fiscal 2016. Our operating expenses included a net favorable foreign currency impact of approximately $5.4 million. Total operating expenses as a percentage of total revenue increased to 43.9% in Fiscal 2017, compared to 34.4% in Fiscal 2016. The components that comprise total operating expenses are detailed below.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $124.5 million, or 8.7%, to $1.553 billion during Fiscal 2017, compared to $1.428 billion for Fiscal 2016. The increase in selling, general and administrative expenses was primarily due to the following:
 
an increase of $129.9 million due to the inclusion of the recently acquired businesses in the Greater China and South Korea regions in our operating results during Fiscal 2017;
approximately $11.3 million in transaction costs recorded during Fiscal 2017 in connection with our acquisition of the Greater China business; and
an increase of $31.4 million in retail store occupancy costs, excluding expenses related to acquired businesses, primarily attributable to the growth in our retail store network and our global e-commerce business.
These increases were partially offset in part by:
a decrease of $29.9 million in corporate expenses, excluding transaction costs and expenses related to acquired businesses;
a decrease of $12.7 million in selling expenses, excluding acquired businesses; and
lower retail compensation-related expenses of $11.3 million primarily as a result of our cost reduction initiatives.
Selling, general and administrative expenses as a percentage of total revenue increased to 34.5% during Fiscal 2017, compared to 30.3% for Fiscal 2016. The increase as a percentage of total revenue was primarily due to the increase in our retail store-related costs as a percentage of revenue during Fiscal 2017, as compared to Fiscal 2016.
Depreciation and Amortization
Depreciation and amortization increased $36.6 million, or 20.0%, to $219.8 million during Fiscal 2017, compared to $183.2 million for Fiscal 2016. Approximately $31.1 million of this increase was attributable to depreciation and amortization expenses recorded for our newly acquired and consolidated businesses in Greater China, South Korea and Latin America, including amortization of the reacquired rights intangible asset recognized in connection with the acquisition of the Greater China business. The remainder of the increase in depreciation and amortization expense was due to an increase in build-out of our new retail stores and shop-in-shop locations, and investments in our corporate facilities and our information systems infrastructure. Depreciation and amortization increased to 4.9% as a percentage of total revenue during Fiscal 2017, compared to 3.9% for Fiscal 2016.
Impairment of Long-Lived Assets
During Fiscal 2017, we recognized asset impairment charges of approximately $199.2 million, $198.7 million of which related to fixed assets and lease rights for underperforming retail locations that are still in operation and $0.5 million related to our wholesale operations. During Fiscal 2016, fixed asset impairment charges of $10.9 million, $8.6 million of which related to retail locations that are still in operation, $0.4 million related to our wholesale operations and $1.9 million related to a corporate fixed asset that is no longer in service. Please refer to Note 11 and Note 18 to the accompanying consolidated financial statements for additional information.
Income from Operations
As a result of the foregoing, income from operations decreased $485.2 million, or 41.3%, to $689.9 million during Fiscal 2017, compared to $1.175 billion for Fiscal 2016, which included net favorable foreign currency effects of $3.4 million. Income from operations as a percentage of total revenue declined to 15.4% in Fiscal 2017, compared to 24.9% in Fiscal 2016.

37


The following table details income from operations for our three business segments (dollars in millions):
 
 
Fiscal Years Ended
 
$ Change
 
% Change
 
% of Net
Sales/
Revenue for
Fiscal 2017
 
% of Net
Sales/
Revenue for
Fiscal 2016
 
April 1,
2017
 
April 2,
2016
 
 
 
 
Income from operations:
 
 
 
 
 
 
 
 
 
 
 
Retail
$
159.8

 
$
501.4

 
$
(341.6
)
 
(68.1
)%
 
6.2
%
 
20.9
%
Wholesale
468.1

 
584.1

 
(116.0
)
 
(19.9
)%
 
26.4
%
 
27.2
%
Licensing
62.0

 
89.6

 
(27.6
)
 
(30.8
)%
 
42.5
%
 
51.7
%
Income from operations
$
689.9

 
$
1,175.1

 
$
(485.2
)
 
(41.3
)%
 
15.4
%
 
24.9
%
Retail
Income from operations for our retail segment declined $341.6 million, or 68.1%, to $159.8 million during Fiscal 2017, compared to $501.4 million for Fiscal 2016, which included impairment charges relating to underperforming retail stores of $198.7 million and $8.6 million, respectively. Income from operations as a percentage of net retail sales for the retail segment declined from 20.9% in Fiscal 2016 to 6.2% during Fiscal 2017. Approximately 740 basis points of this decline was attributable to the above mentioned impairment charges. The remaining 730 basis point decrease in retail income from operations as a percentage of net retail sales was primarily due to an increase in other operating expenses as a percentage of net retail sales of approximately 480 basis points, as well as a 250 basis point decrease in gross profit margin, as previously discussed, during Fiscal 2017 as compared to Fiscal 2016. The increase in total retail operating expenses as a percentage of net retail sales was largely due to the following: (i) the above-mentioned impairment charges for underperforming retail stores still in operation; (ii) increased retail store-related costs; (iii) higher depreciation expenses associated with the recently acquired businesses and new store openings; (iv) increased corporate allocated expenses primarily due to the inclusion of transaction costs of $11.3 million related to the acquisition of the Greater China business; and (v) amortization of the reacquired rights intangible asset recognized in connection with our acquisition of the Greater China business.
Wholesale
Income from operations for our wholesale segment declined $116.0 million, or 19.9%, to $468.1 million during Fiscal 2017, compared to $584.1 million for Fiscal 2016. Income from operations as a percentage of net wholesale sales decreased approximately 80 basis points to 26.4%. The decrease in wholesale income from operations as a percentage of wholesale net sales was primarily due to higher operating expenses as a percentage of net wholesale sales of approximately 130 basis points, partially offset by a 50 basis point increase in our wholesale gross profit margin, as previously discussed. The increase in operating expenses as a percentage of wholesale sales was primarily attributable to increased distribution, selling and design costs, as well as higher depreciation expenses in Fiscal 2017, partially offset by the absence of prior year write-off related to fixed assets.
Licensing
Income from operations for our licensing segment decreased $27.6 million, or 30.8%, to $62.0 million during Fiscal 2017, compared to $89.6 million for Fiscal 2016. Income from operations as a percentage of licensing revenue declined approximately 920 basis points to 42.5%. The decline in licensing income from operations as a percentage of licensing revenue was due to an increase in operating expenses as a percentage of licensing revenues during Fiscal 2017, as compared to Fiscal 2016. This increase in operating expenses as a percentage of licensing revenue was primarily due to increased advertising expenses, depreciation expenses and corporate allocated expenses, including costs related to protection of our intellectual property, during Fiscal 2017 as compared to Fiscal 2016.
Other Income, net
Other income of $5.4 million during Fiscal 2017 was primarily comprised of $3.8 million in insurance settlements related to the prior-year disruption to our former third party operated e-commerce fulfillment center, $0.9 million of income related to our anti-counterfeiting efforts and $0.7 million of rental income from our owned distribution center in Europe. During Fiscal 2016, other income of $3.7 million was primarily comprised of a $3.7 million gain on acquisition of MK Korea (see Note 3 to the accompanying consolidated financial statements) and $1.0 million in income related to our anti-counterfeiting efforts, partially offset by $1.0 million of losses related to our joint venture, which were recorded under the equity method of accounting prior to obtaining controlling interest in MK Panama during the second quarter of Fiscal 2016.

38


Interest expense, net
Interest expense, net increased $2.4 million to $4.1 million for Fiscal 2017, as compared to $1.7 million for Fiscal 2016, primarily due to higher interest expense due to an increase in borrowings outstanding and lower interest income due to a decline in our short-term investments (cash-equivalents) during Fiscal 2017.
Foreign Currency Loss
We recognized foreign currency losses of $2.6 million and $4.8 million during Fiscal 2017 and Fiscal 2016, respectively, which were primarily attributable to net losses on the revaluation and settlement of certain of our account payable in currencies other than the functional currency of the applicable reporting units, as well as the remeasurement of dollar-denominated intercompany loans with certain of our subsidiaries. The net foreign currency losses for Fiscal 2017 and Fiscal 2016 also included favorable mark-to-market adjustments of $2.6 million and unfavorable mark-to-market adjustments of $2.1 million, respectively, related to our forward foreign currency contracts not designated as accounting hedges.
Provision for Income Taxes
We recognized $137.1 million of income tax expense during Fiscal 2017, compared with $334.6 million for Fiscal 2016. Our effective tax rate for Fiscal 2017 was 19.9%, compared to 28.5% for Fiscal 2016. The decrease in our effective tax rate was primarily due to the favorable effect of global financing activities as well as the increase in taxable income in certain of our non-U.S. subsidiaries (predominantly European operations) during Fiscal 2017, which are subject to lower statutory income tax rates. Due to substantial international growth and expansion over the past several years and our Company being a U.K. tax resident, we believe that it is most appropriate to reconcile our effective tax rate to the U.K. statutory 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 and tax rates in foreign jurisdictions. In addition, factors such as the geographic mix of earnings, enacted tax legislation and the results of various global tax strategies, may also impact our effective tax rate in future periods.
Net Loss Attributable to Noncontrolling Interest
During Fiscal 2017 and Fiscal 2016, we recorded a net loss attributable to our noncontrolling interest in MK Panama of $1.0 million and $1.4 million, respectively. These losses represent the share of MK Panama's net loss that is not attributable to the Company.
Net Income Attributable to MKHL
As a result of the foregoing, our net income attributable to MKHL declined $286.6 million, or 34.2%, to $552.5 million during Fiscal 2017, compared to $839.1 million for Fiscal 2016, which included net favorable foreign currency effects of $2.9 million. Fiscal 2017 net income reflected approximately $148.3 million of impairment charges, net of taxes, primarily related to asset write downs for underperforming retail stores, as described above.

39


Results of Operations
Comparison of Fiscal 2016 with Fiscal 2015
The following table details the results of our operations for Fiscal 2016 and Fiscal 2015 and expresses the relationship of certain line items to total revenue as a percentage (dollars in millions):
 
Fiscal Years Ended
 
$ Change
 
% Change
 
% of Total
Revenue for
Fiscal 2016
 
% of Total
Revenue for
Fiscal 2015
 
April 2,
2016
 
March 28,
2015
 
 
 
 
Statements of Operations Data:
 
 
 
 
 
 
 
 
 
 
 
Net sales
$
4,538.8

 
$
4,199.7

 
$
339.1

 
8.1
 %
 
 
 
 
Licensing revenue
173.3

 
171.8

 
1.5

 
0.9
 %
 
 
 
 
Total revenue
4,712.1

 
4,371.5

 
340.6

 
7.8
 %
 
 
 
 
Cost of goods sold
1,914.9

 
1,723.8

 
191.1

 
11.1
 %
 
40.6
 %
 
39.4
 %
Gross profit
2,797.2

 
2,647.7

 
149.5

 
5.6
 %
 
59.4
 %
 
60.6
 %
Selling, general and administrative expenses
1,428.0

 
1,251.5

 
176.5

 
14.1
 %
 
30.3
 %
 
28.6
 %
Depreciation and amortization
183.2

 
138.4

 
44.8

 
32.4
 %
 
3.9
 %
 
3.2
 %
Impairment of long-lived assets
10.9

 
0.8

 
10.1

 
NM

 
0.2
 %
 
 %
Total operating expenses
1,622.1

 
1,390.7

 
231.4

 
16.6
 %
 
34.4
 %
 
31.8
 %
Income from operations
1,175.1

 
1,257.0

 
(81.9
)
 
(6.5
)%
 
24.9
 %
 
28.8
 %
Other income, net
(3.7
)
 
(1.6
)
 
(2.1
)
 
131.3
 %
 
(0.1
)%
 
(0.1
)%
Interest expense, net
1.7

 
0.2

 
1.5

 
750.0
 %
 
 %
 
 %
Foreign currency loss
4.8

 
2.6

 
2.2

 
84.6
 %
 
0.1
 %
 
0.1
 %
Income before provision for income taxes
1,172.3

 
1,255.8

 
(83.5
)
 
(6.6
)%
 
24.9
 %
 
28.7
 %
Provision for income taxes
334.6

 
374.8

 
(40.2
)
 
(10.7
)%
 
7.1
 %
 
8.6
 %
Net income
837.7

 
881.0

 
(43.3
)
 
(4.9
)%
 
 
 
 
Less: Net loss attributable to noncontrolling interest
(1.4
)
 

 
(1.4
)
 
NM

 
 
 
 
Net income attributable to MKHL
$
839.1

 
$
881.0

 
$
(41.9
)
 
(4.8
)%
 
 
 
 
 
NM
Not meaningful.
 
Total Revenue
Total revenue increased $340.6 million, or 7.8%, to $4.712 billion for the fiscal year ended April 2, 2016, compared to $4.372 billion for the fiscal year ended March 28, 2015, which included unfavorable foreign currency effects of $168.7 million primarily related to the weakening of the Euro, the Canadian Dollar, and the Japanese Yen against the U.S. Dollar in Fiscal 2016, as compared to Fiscal 2015. On a constant currency basis, our total revenue increased by $509.3 million, or 11.7%. Fiscal 2016 also included approximately $33.7 million of incremental net retail sales attributable to the inclusion of the 53rd week, as well as $28.9 million of incremental revenue recorded as a result of consolidating MK Panama and acquiring MK Korea during Fiscal 2016. The increase in our revenues was primarily due to an increase in our non-comparable retail store sales and wholesale sales, partially offset by lower comparable retail store sales.

40


The following table details revenues for our three business segments (dollars in millions):
 
Fiscal Years Ended
 
 
 
% Change
 
% of Total
Revenue
for Fiscal
2016
 
% of Total
Revenue
for Fiscal
2015
 
April 2,
2016
 
March 28,
2015
 
$ Change
 
As Reported
 
Constant
Currency
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales: Retail
$
2,394.9

 
$
2,134.6

 
$
260.3

 
12.2
%
 
17.2
%
 
50.8
%
 
48.8
%
Wholesale
2,143.9

 
2,065.1

 
78.8

 
3.8
%
 
6.8
%
 
45.5
%
 
47.3
%
Licensing
173.3

 
171.8

 
1.5

 
0.9
%
 
0.9
%
 
3.7
%
 
3.9
%
Total revenue
$
4,712.1

 
$
4,371.5

 
$
340.6

 
7.8
%
 
11.7
%
 
 
 
 
Retail
Net sales from our retail stores increased $260.3 million, or 12.2%, to $2.395 billion for Fiscal 2016, compared to $2.135 billion for Fiscal 2015, which included unfavorable foreign currency effects of $107.2 million. On a constant currency basis, net sales from our retail stores increased $367.5 million, or 17.2%. We operated 668 retail stores, including concessions, as of April 2, 2016, compared to 526 retail stores, including concessions, as of March 28, 2015.
Our comparable store sales declined $77.1 million, or 4.2%, during Fiscal 2016, which included unfavorable foreign currency effects of $61.3 million. Our comparable store sales benefited 194 basis points from the inclusion of the U.S. e-commerce sales in comparable store sales beginning with the third quarter of Fiscal 2016. On a constant currency basis, our comparable store sales declined $15.8 million, or 0.9%, primarily driven by lower comparable store sales from our retail business in the Americas, partially offset by increased comparable store sales from our international businesses. The decline in our comparable store sales primarily reflected lower sales of watches, apparel and jewelry, partially offset by increased sales of accessories during Fiscal 2016 compared to Fiscal 2015.
Our non-comparable store sales increased $337.4 million during Fiscal 2016, which included unfavorable foreign currency effects of $45.9 million. On a constant currency basis, our non-comparable store sales increased $383.3 million. Approximately 86% of this sales growth was attributable to operating 142 additional stores since March 28, 2015 (including 14 stores included as a result of obtaining controlling interest in MK Panama and 36 stores acquired in connection with the MK Korea acquisition) and approximately 14% was attributable to non-comparable sales from our e-commerce sites in the Americas, which included our U.S. e-commerce store sales through the second quarter of Fiscal 2016. Fiscal 2016 included approximately $33.7 million of incremental net retail sales attributable to the inclusion of the 53rd week.
Wholesale
Net sales to our wholesale customers increased $78.8 million, or 3.8%, to $2.144 billion for Fiscal 2016, compared to $2.065 billion for Fiscal 2015, which included unfavorable foreign currency effects of $61.5 million. On a constant currency basis, our wholesale net sales increased $140.3 million, or 6.8%. The increase in our wholesale net sales was primarily attributable to increased sales from our accessories and footwear product lines during Fiscal 2016 as compared to Fiscal 2015.
Licensing
Royalties earned on our licensing agreements increased $1.5 million, or 0.9%, to $173.3 million for Fiscal 2016, compared to $171.8 million for Fiscal 2015. The increase was primarily attributable to higher revenues earned on licensing agreements related to the sales of jewelry, eyewear and outerwear, as well as higher revenues from our geographic licensing arrangements in Asia, partially offset by lower licensing revenues related to the sale of watches.
Gross Profit
Gross profit increased $149.5 million, or 5.6%, to $2.797 billion during Fiscal 2016, compared to $2.648 billion for Fiscal 2015, which included unfavorable foreign currency effects of $113.5 million. Gross profit as a percentage of total revenue declined 120 basis points to 59.4% during Fiscal 2016, compared to 60.6% during Fiscal 2015. The decline in gross profit margin was attributable to gross profit margin declines of 230 basis points from our retail segment and 80 basis points from our wholesale segment. The decrease in gross profit margin from our retail segment was primarily due to an increase in promotional activity during Fiscal 2016, as compared to Fiscal 2015. The decrease in gross profit margin from our wholesale segment was primarily due to an increase in wholesale allowances during Fiscal 2016, as compared to Fiscal 2015. These declines were partially offset by a favorable geographic mix in Fiscal 2016, which was driven by a higher proportion of sales outside the U.S. than in prior year.

41


Total Operating Expenses
Total operating expenses increased $231.4 million, or 16.6%, to $1.622 billion during Fiscal 2016, compared to $1.391 billion for Fiscal 2015. Our operating expenses included a net favorable foreign currency impact of approximately $71.5 million. Total operating expenses as a percentage of total revenue increased to 34.4% in Fiscal 2016, compared to 31.8% in Fiscal 2015. The components that comprise total operating expenses are detailed below.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $176.5 million, or 14.1%, to $1.428 billion during Fiscal 2016, compared to $1.252 billion for Fiscal 2015. The increase in selling, general and administrative expenses was primarily due to the following:
 
a $126.4 million increase in retail store-related costs, including $52.0 million in occupancy costs, $37.0 million in compensation-related costs, $12.2 million in store advertising and promotional spending and $6.4 million in freight-related costs. This increase was primarily attributable to our growth to 668 retail stores from 526 in the prior year and operating our e-commerce sites in the United States for the full year in Fiscal 2016;
a $14.3 million increase in corporate employee-related costs, primarily due to an increase in our corporate staff to support our global growth;
a $7.2 million increase in write-offs related to fixed assets;
a $7.1 million increase in selling costs;
a $6.1 million increase in distribution costs; and
a $5.7 million increase in corporate occupancy-related costs.
Selling, general and administrative expenses as a percentage of total revenue increased to 30.3% during Fiscal 2016, compared to 28.6% for Fiscal 2015. The increase as a percentage of total revenue was primarily due to the increase in our retail store costs during Fiscal 2016, as compared to Fiscal 2015.
Depreciation and Amortization
Depreciation and amortization increased $44.8 million, or 32.4%, to $183.2 million during Fiscal 2016, compared to $138.4 million for Fiscal 2015, primarily due to an increase in the build-out of our new retail stores, new shop-in-shop locations, increase in lease rights related to our new European stores, and investments made in our information systems infrastructure to accommodate our growth. Depreciation and amortization increased to 3.9% as a percentage of total revenue during Fiscal 2016, compared to 3.2% for Fiscal 2015.
Impairment of Long-Lived Assets
During Fiscal 2016, we recognized fixed asset impairment charges of approximately $10.9 million, $8.6 million of which primarily related to seven retail locations that are still in operation, $0.4 million related to our wholesale operations and $1.9 million related to a corporate fixed asset that is no longer in service. During Fiscal 2015, fixed asset impairment charges of $0.8 million related to two of our retail locations that were still in operation.
Income from Operations
As a result of the foregoing, income from operations decreased $81.9 million, or 6.5%, to $1.175 billion during Fiscal 2016, compared to $1.257 billion for Fiscal 2015, which included unfavorable foreign currency effects of $42.0 million. Income from operations as a percentage of total revenue declined to 24.9% in Fiscal 2016, compared to 28.8% in Fiscal 2015.

42


The following table details income from operations for our three business segments (dollars in millions):
 
 
Fiscal Years Ended
 
$ Change
 
% Change
 
% of Net
Sales/
Revenue for
Fiscal 2016
 
% of Net
Sales/
Revenue for
Fiscal 2015
 
April 2,
2016
 
March 28,
2015
 
 
 
 
Income from operations:
 
 
 
 
 
 
 
 
 
 
 
Retail
$
501.4

 
$
557.2

 
$
(55.8
)
 
(10.0
)%
 
20.9
%
 
26.1
%
Wholesale
584.1

 
610.9

 
(26.8
)
 
(4.4
)%
 
27.2
%
 
29.6
%
Licensing
89.6

 
88.9

 
0.7

 
0.8
 %
 
51.7
%
 
51.8
%
Income from operations
$
1,175.1

 
$
1,257.0

 
$
(81.9
)
 
(6.5
)%
 
24.9
%
 
28.8
%
Retail
Income from operations for our retail segment declined $55.8 million, or 10.0%, to $501.4 million during Fiscal 2016, compared to $557.2 million for Fiscal 2015. Income from operations as a percentage of net retail sales for the retail segment declined by approximately 520 basis points to 20.9% during Fiscal 2016. The decrease in retail income from operations as a percentage of net retail sales was primarily due to an increase in operating expenses as a percentage of net retail sales of approximately 290 basis points, as well as due to the decrease in gross profit margin, as previously discussed above, during Fiscal 2016, as compared to Fiscal 2015. The increase in operating expenses as a percentage of net retail sales was largely due to increased retail store-related costs and higher depreciation expense primarily attributable to new store openings, as well as fixed asset impairment charges recorded for certain of our retail stores.
Wholesale
Income from operations for our wholesale segment declined $26.8 million, or 4.4%, to $584.1 million during Fiscal 2016, compared to $610.9 million for Fiscal 2015. Income from operations as a percentage of net wholesale sales decreased approximately 240 basis points to 27.2%. This decrease in wholesale income from operations as a percentage of wholesale net sales was due to a net increase in operating expenses as a percentage of net wholesale sales of approximately 160 basis points during Fiscal 2016 as compared to Fiscal 2015, which was largely attributable to higher depreciation expenses, distribution costs, write-offs related to fixed assets and corporate allocated expenses. The increase in wholesale income from operations as a percentage of net sales was also attributable to a lower gross profit margin, as previously discussed.
Licensing
Income from operations for our licensing segment increased $0.7 million, or 0.8%, to $89.6 million during Fiscal 2016, compared to $88.9 million for Fiscal 2015. Income from operations as a percentage of licensing revenue declined approximately 10 basis points to 51.7%. The decline in licensing income from operations as a percentage of licensing revenue was due to an increase in operating expenses as a percentage of licensing revenues during Fiscal 2016, as compared to Fiscal 2015. This increase was largely due to increased costs related to protection of our intellectual property and higher depreciation expenses, partially offset by lower advertising costs as a percentage of licensing revenue.
Other Income, net
Other income of $3.7 million during Fiscal 2016 was primarily comprised of a $3.7 million gain on acquisition of MK Korea (see Note 3 to the accompanying consolidated financial statements) and $1.0 million in income related to our anti-counterfeiting efforts, partially offset by $1.0 million of losses related to our joint venture, which were recorded under the equity method of accounting prior to obtaining controlling interest in MK Panama during the second quarter of Fiscal 2016. During Fiscal 2015, other income of $1.6 million was primarily comprised of $1.5 million in income related to our anti-counterfeiting efforts.
Interest expense, net
Interest expense, net increased $1.5 million to $1.7 million for Fiscal 2016, as compared to $0.2 million for Fiscal 2015, primarily due to lower interest income earned on our short-term investments (cash equivalents), as well as higher interest expense on borrowings during Fiscal 2016.

43


Foreign Currency Loss
We recognized a foreign currency losses of $4.8 million and $2.6 million, respectively, during Fiscal 2016 and Fiscal 2015. These foreign currency losses included mark-to-market adjustments related to our forward foreign currency contracts not designated as accounting hedges, as well as gains and losses on the revaluation and settlement of certain of our accounts payable in currencies other than the functional currency of the applicable reporting units, and the remeasurement of intercompany loans with certain of our subsidiaries.
Provision for Income Taxes
We recognized $334.6 million of income tax expense during Fiscal 2016, compared with $374.8 million for Fiscal 2015. Our effective tax rate for Fiscal 2016 was 28.5%, compared to 29.8% for Fiscal 2015. The decrease in our effective tax rate was primarily due to the increase in taxable income in certain of our non-U.S. subsidiaries (predominantly European operations) during Fiscal 2016, which are subject to lower statutory income tax rates, as well as state tax benefits recognized during Fiscal 2016. Given that certain of our non-U.S. operations have become consistently profitable, we expect this decrease on our combined consolidated effective rate to continue. The Fiscal 2015 effective tax rate was also favorably impacted by the settlement of certain financial instruments in connection with our international income tax structuring.
Our effective tax rate may fluctuate from time to time due to the effects of changes in U.S. federal, state and local taxes and tax rates in foreign jurisdictions. In addition, factors such as the geographic mix of earnings, enacted tax legislation and the results of various global tax strategies, may also impact our effective tax rate in future periods.
Net Loss Attributable to Noncontrolling Interest
During Fiscal 2016, we recorded a net loss attributable to our noncontrolling interest in MK Panama of $1.4 million. This loss represents the share of MK Panama's loss that is not attributable to the Company.
Net Income Attributable to MKHL
As a result of the foregoing, our net income declined $41.9 million, or 4.8%, to $839.1 million during Fiscal 2016, compared to $881.0 million for Fiscal 2015, which included unfavorable foreign currency effects of $38.1 million.
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 (see below discussion regarding “Credit Facilities”) and available cash and cash equivalents. Our primary use of this liquidity is to fund our ongoing cash requirements, including working capital requirements, share repurchases, global retail store construction, expansion and renovation, expansion of our distribution and corporate facilities, construction and renovation of shop-in-shops, investment in information systems infrastructure and other corporate activities. We believe that the cash generated from our operations, together with borrowings available under our revolving credit facility and available cash and cash equivalents, will be sufficient to meet our working capital needs for the next 12 months, including investments made and expenses incurred in connection with our store growth plans, shop-in-shop growth, investments in corporate and distribution facilities, continued systems development, e-commerce and marketing initiatives. We spent $164.8 million on capital expenditures during Fiscal 2017, and expect to spend approximately $200 million during Fiscal 2018. The majority of the Fiscal 2017 expenditures related to our retail operations (including e-commerce), with the remainder related to our corporate offices and enhancements to our distribution and information systems infrastructure, as well as in connection with new shop-in-shops.

44


The following table sets forth key indicators of our liquidity and capital resources (in millions):
 
As of
 
April 1,
2017
 
April 2,
2016
Balance Sheet Data:
 
 
 
Cash and cash equivalents
$
227.7

 
$
702.0

Working capital 
$
598.9

 
$
1,234.3

Total assets
$
2,409.6

 
$
2,566.8

Short-term debt
$
133.1

 
$

Long-term debt
$

 
$
2.3


Cash Flows
 
Fiscal Years Ended
 
April 1,
2017
 
April 2,
2016
 
March 28,
2015
Cash Flows Provided By (Used In):
 
 
 
 
 
Operating activities
$
1,028.0

 
$
1,228.4

 
$
857.9

Investing activities
(650.9
)
 
(381.1
)
 
(388.4
)
Financing activities
(843.6
)
 
(1,128.3
)
 
(434.7
)
Effect of exchange rate changes
(5.9
)
 
4.1

 
(27.1
)
Net (decrease) increase in cash and cash equivalents
$
(472.4
)
 
$
(276.9
)
 
$
7.7


Cash Provided by Operating Activities
Cash provided by operating activities decreased $200.4 million to $1.028 billion during Fiscal 2017, as compared to $1.228 billion for Fiscal 2016. The decrease in cash flows from operating activities was primarily due to a decrease in our net income after non-cash adjustments, as well as a decrease related to changes in our working capital, which was primarily attributable to an unfavorable change in accrued expenses and other current liabilities primarily due to the timing of tax and royalty payments, partially offset by favorable changes in inventory and accounts payable due to lower wholesale inventory purchases and shipments, as well as the timing of payments.
Cash provided by operating activities increased $370.5 million to $1.228 billion during Fiscal 2016, as compared to $857.9 million for Fiscal 2015. The increase in cash flows from operating activities was primarily due to favorable changes in working capital, as well as an increase in our net income after non-cash adjustments. The increase in working capital was largely attributable to: a favorable change in accounts receivable due to higher shipments at the end of Fiscal 2015, as well as improved cash collections; a favorable change in inventories also reflecting higher shipments at the end of Fiscal 2015, partially offset by increased inventory related to new retail stores and wholesale locations (including inventory to support our operations in Panama and South Korea); and increases in accounts payable and accrued expenses and other current liabilities primarily due to the timing of payments, in part due to the inclusion of the 53rd week in Fiscal 2016.
Cash Used in Investing Activities
Net cash used in investing activities increased $269.8 million to $650.9 million during Fiscal 2017, compared to $381.1 million during Fiscal 2016. The decrease in cash was primarily attributable to $480.6 million of cash paid, net of cash acquired, in connection with our acquisition of the previously licensed business in Greater China during Fiscal 2017, partially offset by lower capital expenditures of $204.4 million, attributable to lower corporate expenditures and lower spending to build out new stores and shop-in-shops, partially offset by capital spending related to our newly acquired operations in China and South Korea and increased investments in our e-commerce business.
Net cash used in investing activities was $381.1 million during Fiscal 2016, compared to $388.4 million during Fiscal 2015. The favorable change in cash from investing activities was primarily due to a $17.8 million decline in cash used in connection with lease rights (key money) for new stores, which was partially offset by a $13.0 million increase in capital expenditures, largely attributable to the build-out of our new retail stores and shop-in-shops, as well as investments in new information technology, distribution system enhancements, corporate offices and various other improvements in our infrastructure.

45


Cash Used in Financing Activities
Net cash used in financing activities decreased $284.7 million to $843.6 million during Fiscal 2017, from $1.128 billion during Fiscal 2016, which was primarily attributable to increased borrowings under our 2015 Credit Facility of $153.4 million, net of debt repayments and a decrease of $147.6 million in cash payments to repurchase our ordinary shares.
Net cash used in financing activities was $1.128 billion during Fiscal 2016, compared to $434.7 million during Fiscal 2015. This decline in cash from financing activities was primarily attributable to increased cash payments of $657.1 million in connection with the repurchase of our ordinary shares, as well a $26.8 million decrease in proceeds from our share option arrangements.
Credit Facilities
The following table presents a summary of the Company's borrowing capacity and amounts outstanding as of April 1, 2017 and April 2, 2016 (dollars in millions):