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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
 
 
FORM 10-Q
 
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 2019
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
 
 
 
 
caprilogo2019a02.jpg
(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 pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on which Registered
Ordinary Shares, no par value
CPRI
New York Stock Exchange
 
 
 
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. 
Yes
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). 
Yes
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
 
 
 
Non-accelerated filer
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
No
As of August 2, 2019, Capri Holdings Limited had 151,579,407 ordinary shares outstanding.
 
 
 

1


TABLE OF CONTENTS
 
 
 
Page
No.
 
PART I FINANCIAL INFORMATION
 
Item 1.
Financial Statements
3

 
 
 
 

 
 
 
 

 
 
 
 

 
 
 
 

 
 
 
 

 
 
 
Item 2.

 
 
 
Item 3.

 
 
 
Item 4.

 
 
 
 
 
 
 
 
Item 1.

 
 
 
Item 1A.

 
 
 
Item 2.

 
 
 
Item 6.

 
 


2




PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CAPRI HOLDINGS LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
(Unaudited)
 
June 29,
2019
 
March 30,
2019
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
160

 
$
172

Receivables, net
310

 
383

Inventories
1,016

 
953

Prepaid expenses and other current assets
224

 
221

Total current assets
1,710

 
1,729

Property and equipment, net
608

 
615

Operating lease right-of-use assets
1,718

 

Intangible assets, net
2,250

 
2,293

Goodwill
1,652

 
1,659

Deferred tax assets
149

 
112

Other assets
221

 
242

Total assets
$
8,308

 
$
6,650

Liabilities, Redeemable Noncontrolling Interest and Shareholders’ Equity
 
 
 
Current liabilities
 
 
 
Accounts payable
$
355

 
$
371

Accrued payroll and payroll related expenses
96

 
133

Accrued income taxes
36

 
34

Current operating lease liabilities
384

 

Short-term debt
514

 
630

Accrued expenses and other current liabilities
283

 
374

Total current liabilities
1,668

 
1,542

Long-term operating lease liabilities
1,754

 

Deferred rent

 
132

Deferred tax liabilities
431

 
438

Long-term debt
1,917

 
1,936

Other long-term liabilities
210

 
166

Total liabilities
5,980

 
4,214

Commitments and contingencies

 

Redeemable noncontrolling interest
4

 
4

Shareholders’ equity
 
 
 
Ordinary shares, no par value; 650,000,000 shares authorized; 216,742,279 shares issued and 151,565,342 outstanding at June 29, 2019; 216,050,939 shares issued and 150,932,306 outstanding at March 30, 2019

 

Treasury shares, at cost (65,176,937 shares at June 29, 2019 and 65,118,633 shares at March 30, 2019)
(3,225
)
 
(3,223
)
Additional paid-in capital
1,039

 
1,011

Accumulated other comprehensive loss
(93
)
 
(66
)
Retained earnings
4,600

 
4,707

Total shareholders’ equity of Capri
2,321

 
2,429

Noncontrolling interest
3

 
3

Total shareholders’ equity
2,324

 
2,432

Total liabilities and shareholders’ equity
$
8,308

 
$
6,650

See accompanying notes to consolidated financial statements.

3



CAPRI HOLDINGS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In millions, except share and per share data)
(Unaudited)
 
Three Months Ended
 
June 29,
2019
 
June 30,
2018
Total revenue
$
1,346

 
$
1,203

Cost of goods sold
512

 
452

Gross profit
834

 
751

Selling, general and administrative expenses
598

 
465

Depreciation and amortization
60

 
56

Impairment of long-lived assets
97

 
4

Restructuring and other charges (1)
15

 
11

Total operating expenses
770

 
536

Income from operations
64

 
215

Other income, net
(2
)
 
(1
)
Interest expense, net
13

 
8

Foreign currency loss
2

 
3

Income before provision for income taxes
51

 
205

Provision for income taxes
6

 
19

Net income attributable to Capri
$
45

 
$
186

 
 
 
 
Weighted average ordinary shares outstanding:
 
 
 
Basic
151,049,572

 
149,502,101

Diluted
152,334,153

 
152,399,655

Net income per ordinary share attributable to Capri:
 
 
 
Basic
$
0.30

 
$
1.25

Diluted
$
0.30

 
$
1.22

 
 
 
 
Statements of Comprehensive Income:
 
 
 
Net income
$
45

 
$
186

Foreign currency translation adjustments
(25
)
 
(103
)
Net (loss) gain on derivatives
(2
)
 
12

Comprehensive income attributable to Capri
$
18

 
$
95

 
(1) 
Restructuring and other charges includes store closure costs recorded in connection with the Michael Kors Retail Fleet Optimization Plan (as defined in Note 10) and other restructuring initiatives, and costs recorded in connection with the acquisitions of Gianni Versace S.r.l and Jimmy Choo Group Limited.
See accompanying notes to consolidated financial statements.

4



CAPRI HOLDINGS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(In millions, except share data which is in thousands)
(Unaudited)
 
 
Ordinary Shares
 
Additional
Paid-in
Capital
 
Treasury Shares
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
 
Total Equity of Capri
 
Non-controlling Interests
 
Total Equity
 
Shares
 
Amounts
 
 
Shares
 
Amounts
 
 
 
Balance at March 30, 2019, as previously reported
216,051

 
$

 
$
1,011

 
(65,119
)
 
$
(3,223
)
 
$
(66
)
 
$
4,707

 
$
2,429

 
$
3

 
$
2,432

Adoption of accounting standards (See Note 2)

 

 

 

 

 

 
(152
)
 
(152
)
 

 
(152
)
Balance as of March 31, 2019
216,051

 

 
1,011

 
(65,119
)
 
(3,223
)
 
(66
)
 
4,555

 
2,277

 
3

 
2,280

Net income

 

 

 

 

 

 
45

 
45

 

 
45

Other comprehensive loss

 

 

 

 

 
(27
)
 

 
(27
)
 

 
(27
)
Total comprehensive income

 

 

 

 

 

 

 
18

 

 
18

Vesting of restricted awards, net of forfeitures
691

 

 

 

 

 

 

 

 

 

Equity compensation expense

 

 
28

 

 

 

 

 
28

 

 
28

Purchase of treasury shares

 

 

 
(58
)
 
(2
)
 

 

 
(2
)
 

 
(2
)
Balance at June 29, 2019
216,742

 
$

 
$
1,039

 
(65,177
)
 
$
(3,225
)
 
$
(93
)
 
$
4,600

 
$
2,321

 
$
3

 
$
2,324


 
Ordinary Shares
 
Additional
Paid-in
Capital
 
Treasury Shares
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
 
Total Equity of MKHL
 
Non-controlling Interests
 
Total Equity
 
Shares
 
Amounts
 
 
Shares
 
Amounts
 
 
 
Balance at March 31, 2018, as previously reported
210,991

 
$

 
$
831

 
(61,293
)
 
$
(3,016
)
 
$
51

 
$
4,152

 
$
2,018

 
$
4

 
$
2,022

Adoption of accounting standard

 

 

 

 

 

 
12

 
12

 

 
12

Balance as of April 1, 2018
210,991

 

 
831

 
(61,293
)
 
(3,016
)
 
51

 
4,164

 
2,030

 
4

 
2,034

Net income

 

 

 

 

 

 
186

 
186

 

 
186

Other comprehensive loss

 

 

 

 

 
(91
)
 

 
(91
)
 

 
(91
)
Total comprehensive income

 

 

 

 

 

 

 
95

 

 
95

Vesting of restricted awards, net of forfeitures
600

 

 

 

 

 

 

 

 

 

Exercise of employee share options
619

 

 
6

 

 

 

 

 
6

 

 
6

Equity compensation expense

 

 
13

 

 

 

 

 
13

 

 
13

Purchase of treasury shares

 

 

 
(1,748
)
 
(106
)
 

 

 
(106
)
 

 
(106
)
Balance at June 30, 2018
212,210

 
$

 
$
850

 
(63,041
)
 
$
(3,122
)
 
$
(40
)
 
$
4,350

 
$
2,038

 
$
4

 
$
2,042


See accompanying notes to consolidated financial statements.

5



CAPRI HOLDINGS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
Three Months Ended
 
June 29,
2019
 
June 30,
2018
Cash flows from operating activities
 
 
 
Net income
$
45

 
$
186

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
60

 
56

Equity compensation expense
28

 
13

Losses on store lease exits

 
2

Deferred income taxes
2

 
13

Impairment of long-lived assets
97

 
4

Changes to lease related balances, net
(16
)
 

Tax deficit (benefit) on exercise of share options
2

 
(11
)
Amortization of deferred financing costs
1

 
1

Foreign currency losses
2

 
3

Change in assets and liabilities:
 
 
 
Receivables, net
73

 
24

Inventories
(63
)
 
(52
)
Prepaid expenses and other current assets
(32
)
 
(21
)
Accounts payable
(8
)
 
(4
)
Accrued expenses and other current liabilities
(51
)
 
(32
)
Other long-term assets and liabilities
18

 
24

Net cash provided by operating activities
158

 
206

Cash flows from investing activities
 
 
 
Capital expenditures
(54
)
 
(41
)
Cash paid for business acquisitions, net of cash acquired
(1
)
 

Settlement of a net investment hedges
23

 

Net cash used in investing activities
(32
)
 
(41
)
Cash flows from financing activities
 
 
 
Debt borrowings
390

 
434

Debt repayments
(526
)
 
(487
)
Repurchase of treasury shares
(2
)
 
(106
)
Exercise of employee share options

 
6

Net cash used in financing activities
(138
)
 
(153
)
Effect of exchange rate changes on cash and cash equivalents

 
(5
)
Net (decrease) increase in cash and cash equivalents
(12
)
 
7

Beginning of period
172

 
163

End of period
$
160

 
$
170

Supplemental disclosures of cash flow information
 
 
 
Cash paid for interest
$
30

 
$
13

Cash paid for income taxes
$
12

 
$
24

Supplemental disclosure of non-cash investing and financing activities
 
 
 
Accrued capital expenditures
$
23

 
$
28

See accompanying notes to consolidated financial statements.

6



CAPRI HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business and Basis of Presentation
The Company was incorporated in the British Virgin Islands (“BVI”) on December 13, 2002 as Michael Kors Holdings Limited and changed its name to Capri Holdings Limited (“Capri,” and together with its subsidiaries, the “Company”) on December 31, 2018. The Company is a holding company that owns brands that are leading designers, marketers, distributors and retailers of branded women’s and men’s accessories, apparel and footwear bearing the Versace, Jimmy Choo and Michael Kors tradenames and related trademarks and logos. The Company completed the acquisition of Gianni Versace S.r.l. (“Versace”) on December 31, 2018. As a result, the Company now operates in three reportable segments: Versace, Jimmy Choo and Michael Kors. See Note 18 for additional information.
The interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and include the accounts of the Company and its wholly-owned or controlled subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The interim consolidated financial statements as of June 29, 2019 and for the three months ended June 29, 2019 and June 30, 2018 are unaudited. In addition, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The interim consolidated financial statements reflect all normal and recurring adjustments, which are, in the opinion of management, necessary for a fair presentation in conformity with U.S. GAAP. The interim consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended March 30, 2019, as filed with the Securities and Exchange Commission on May 29, 2019, in the Company’s Annual Report on Form 10-K. The results of operations for the interim periods should not be considered indicative of results to be expected for the full fiscal year.
The Company utilizes a 52 to 53 week fiscal year ending on the Saturday closest to March 31. As such, the term “Fiscal Year” or “Fiscal” refers to the 52-week or 53-week period, ending on that day. The results for the three months ended June 29, 2019 and June 30, 2018, are based on 13-week periods.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to use judgment and make estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The level of uncertainty in estimates and assumptions increases with the length of time until the underlying transactions are completed. The most significant assumptions and estimates involved in preparing the financial statements include allowances for customer deductions, sales returns, sales discounts and doubtful accounts, estimates of gift card breakage, estimates of inventory recovery, the valuation of share-based compensation, valuation of deferred taxes and the valuation of and the estimated useful lives used for amortization and depreciation of intangible assets and property and equipment. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the prior periods’ financial information in order to conform to the current period’s presentation, including the realignment of the Company’s segment reporting structure in the fourth quarter of Fiscal 2019, as further described in Note 18.
Seasonality
The Company experiences certain effects of seasonality with respect to its business. The Company generally experiences greater sales during its third fiscal quarter, primarily driven by holiday season sales, and the lowest sales during its first fiscal quarter.
Inventories
Inventories mainly consist of finished goods with the exception of raw materials inventory of $23 million and $25 million, respectively, recorded on the Company’s consolidated balance sheets as of June 29, 2019 and March 30, 2019.

7



Derivative Financial Instruments
Forward Foreign Currency Exchange Contracts
The Company uses forward currency exchange contracts to manage its exposure to fluctuations in foreign currency for certain transactions. The Company, in its normal course of business, enters into transactions with foreign suppliers and seeks to minimize risks related to these transactions. The Company employs these forward currency contracts to hedge the Company’s cash flows, as they relate to foreign currency transactions. Certain of these contracts are designated as hedges for accounting purposes, while others remain undesignated. All of the Company’s derivative instruments are recorded in the Company’s consolidated balance sheets at fair value on a gross basis, regardless of their hedge designation.
The Company designates certain contracts related to the purchase of inventory that qualify for hedge accounting as cash flow hedges. Formal hedge documentation is prepared for all derivative instruments designated as hedges, including description of the hedged item and the hedging instrument and the risk being hedged. The changes in the fair value for contracts designated as cash flow hedges is recorded in equity as a component of accumulated other comprehensive income (loss) until the hedged item affects earnings. When the inventory related to forecasted inventory purchases that are being hedged is sold to a third party, the gains or losses deferred in accumulated other comprehensive income (loss) are recognized within cost of goods sold. The Company uses regression analysis to assess effectiveness of derivative instruments that are designated as hedges, which compares the change in the fair value of the derivative instrument to the change in the related hedged item. If the hedge is no longer expected to be highly effective in the future, future changes in the fair value are recognized in earnings. For those contracts that are not designated as hedges, changes in the fair value are recorded to foreign currency (gain) loss in the Company’s consolidated statements of operations and comprehensive income. The Company classifies cash flows relating to its forward foreign currency exchange contracts related to purchase of inventory consistently with the classification of the hedged item, within cash flows from operating activities.
The Company is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. In order to mitigate counterparty credit risk, the Company only enters into contracts with carefully selected financial institutions based upon their credit ratings and certain other financial factors, adhering to established limits for credit exposure. The aforementioned forward contracts generally have a term of no more than 12 months. The period of these contracts is directly related to the foreign transaction they are intended to hedge.
Net Investment Hedges
The Company also uses fixed-to-fixed cross currency swap agreements to hedge its net investments in foreign operations against future volatility in the exchange rates between its U.S. Dollars and these foreign currencies. The Company has elected the spot method of designating these contracts under ASU 2017-12 and has designated these contracts as net investment hedges. The net gain or loss on the net investment hedge is reported within foreign currency translation gains and losses (“CTA”), as a component of accumulated other comprehensive income (loss) on the Company’s consolidated balance sheets. Interest accruals and coupon payments are recognized directly in interest expense in the Company’s statement of operations and comprehensive income. Upon discontinuation of a hedge, all previously recognized amounts remain in CTA until the hedged net investment is sold, diluted, or liquidated.
Net Income per Share
The Company’s basic net income per ordinary share is calculated by dividing net income by the weighted average number of ordinary shares outstanding during the period. Diluted net income per ordinary share reflects the potential dilution that would occur if share option grants or any other potentially dilutive instruments, including restricted shares and restricted share units (“RSUs”), were exercised or converted into ordinary shares. These potentially dilutive securities are included in diluted shares to the extent they are dilutive under the treasury stock method for the applicable periods. Performance-based RSUs are included in diluted shares if the related performance conditions are considered satisfied as of the end of the reporting period and to the extent they are dilutive under the treasury stock method.

8



The components of the calculation of basic net income per ordinary share and diluted net income per ordinary share are as follows (in millions, except share and per share data):
 
 
Three Months Ended
 
 
June 29,
2019
 
June 30,
2018
Numerator:
 
 
 
 
Net income attributable to Capri
 
$
45

 
$
186

Denominator:
 
 
 
 
Basic weighted average shares
 
151,049,572

 
149,502,101

Weighted average dilutive share equivalents:
 
 
 
 
Share options and restricted shares/units, and performance restricted share units
 
1,284,581

 
2,897,554

Diluted weighted average shares
 
152,334,153

 
152,399,655

 
 
 
 
 
Basic net income per share (1)
 
$
0.30

 
$
1.25

Diluted net income per share (1)
 
$
0.30

 
$
1.22


 
 
 
 
 
(1) 
Basic and diluted net income per share are calculated using unrounded numbers.
Share equivalents of 2,374,578 shares and 648,398 shares for the three months ended June 29, 2019 and June 30, 2018, respectively, have been excluded from the above calculations due to their anti-dilutive effect.
See Note 2 in the Company’s Annual Report on Form 10-K for the fiscal year ended March 30, 2019 for a complete disclosure of the Company’s significant accounting policies.
Recently Adopted Accounting Pronouncements
Lease Accounting
On March 31, 2019, the Company adopted ASU 2016-02, “Leases (Topic 842),” which requires lessees to recognize a lease liability and a right-of-use asset on the balance sheet for all leases, except certain short-term leases. In evaluating the impact of ASU 2016-02, the Company considered guidance provided by several additional ASUs issued by the FASB, including ASU 2018-01, “Land Easement Practical Expedient for Transition to Topic 842” in January 2018, ASU 2018-10, “Codification Improvements to Topic 842, Leases” and ASU 2018-11, “Leases (Topic 842): Targeted Improvements,” both issued in July 2018, and ASU 2018-20, “Leases (Topic 842) - Narrow-Scope Improvements for Lessors” issued in December 2018. In connection with its implementation of ASU 2016-02, the Company adopted the package of three practical expedients, allowing it to carry forward its previous lease classification and embedded lease evaluations and not to reassess initial direct costs as of the date of adoption. The Company also adopted, the practical expedient allowing it to combine lease and non-lease components for its real estate leases. Lastly, the Company adopted the practical expedient provided by ASU 2018-11, “Leases (Topic 842): Targeted Improvements,” allowing it to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption without restating the comparative prior year periods.
The Company’s existing lease obligations, which relate to stores, corporate locations, warehouses, and equipment, are subject to the new standard and resulted in recording of lease liabilities and right-of-use assets for operating leases on the Company’s consolidated balance sheet.

9



The below table details the balance sheet adjustments recorded on March 31, 2019 in connection with the Company’s adoption of ASU 2016-02 (in millions):
 
March 30, 2019
As Reported under ASC 840
 
ASC 842 Adjustments
 
March 31, 2019
As Reported Under ASC 842
Assets
 
 
 
 
 
Prepaid expenses and other current assets
$
221

 
$
(23
)
(1) 
$
198

Operating lease right-of-use assets

 
1,856

(2) 
1,856

Intangible assets, net
2,293

 
(20
)
(3) 
2,273

Deferred tax assets
112

 
38

(4) 
150

Liabilities
 
 
 
 
 
Current portion of operating lease liabilities

 
386

(5) 
386

Accrued expenses and other current liabilities
374

 
(72
)
(6) 
302

Long-term portion of operating lease liabilities

 
1,828

(5) 
1,828

Deferred Rent
132

 
(132
)
(7) 

Deferred tax liabilities
438

 
(7
)
(4) 
431

Shareholders’ Equity
 
 
 
 
 
Retained earnings
4,707

 
(152
)
(4) 
4,555

 
 
 
 
 
(1) 
Represents the reclassification of rent paid in advance to current operating lease liabilities.
(2) 
Represents the recognition of operating lease right-of-use assets, reflecting the reclassifications of deferred rent, sublease liabilities, tenant allowances and favorable and unfavorable lease rights. This balance also reflects the initial impairments of the right-of-use assets recorded through retained earnings, as described below.
(3) 
Represents the reclassifications favorable and unfavorable purchase accounting adjustments for leases recorded in conjunction with the Company’s acquisitions to operating lease right-of-use assets.
(4) 
Represents the initial impairment recognized through retained earnings for certain underperforming retail store locations for which fixed assets were previously impaired, net of associated deferred taxes.
(5) 
Represents the recognition of current and non-current lease liabilities for fixed payments associated with the Company’s operating leases.
(6) 
Represents the reclassification of $54 million in sublease liabilities, primarily related to Michael Kors retail stores closed under the Company’s Retail Fleet Optimization Plan as described in Note 10, as well as the reclassification of $18 million of deferred rent and tenant allowances to operating lease right-of-use assets.
(7) 
Represents the reclassification of noncurrent deferred rent and tenant improvement allowances to operating lease right-of-use assets.
See Note 4 for additional disclosures related to the Company’s lease accounting policy.
Recently Issued Accounting Pronouncements
We have considered all new accounting pronouncements and, other than the recent pronouncements discussed below, have concluded that there are no new pronouncements that may have a material impact on our results of operations, financial condition or cash flows based on current information.
Intangibles
In August 2018, the FASB issued ASU 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,” which reduces the complexity for the accounting for costs of implementing a cloud computing service arrangement. The standard aligns the accounting for capitalizing implementation costs of hosting arrangements, regardless of whether or not the contract conveys a license to the hosted software. ASU 2018-15 is effective beginning with the Company’s Fiscal 2021, with early adoption permitted, and can either be presented prospectively or retrospectively. The Company is currently evaluating the impact of ASU 2018-15 on its consolidated financial statements.

10



3. Revenue Recognition
The Company accounts for contracts with its customers when there is approval and commitment from both parties, the rights of the parties and payment terms have been identified, the contract has commercial substance and collectability of consideration is probable. Revenue is recognized when control of the promised goods or services is transferred to the Company’s customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for goods or services.
The Company sells its products through three primary channels of distribution: retail, wholesale and licensing. Within the retail and wholesale channels, substantially all of the Company’s revenues consist of sales of products that represent a single performance obligation, where control transfers at a point in time to the customer. For licensing arrangements, royalty and advertising revenue is recognized over time based on access provided to the Company’s brands.
The Company has chosen to apply the practical expedient allowing it not to disclose the amount of the transaction price allocated to the remaining performance obligations that have an expected duration of 12 months or less.
Retail
The Company generates sales through directly operated stores and e-commerce throughout the Americas (U.S., Canada and Latin America, excluding Brazil), EMEA (Europe, Middle East, and Africa) and certain parts of Asia. Retail revenue is recognized when control of the product is transferred at the point of sale at Company owned stores, including concessions. For e-commerce transactions, control is transferred when products are delivered to the customer, net of estimated returns. To arrive at net sales for retail, gross sales are reduced by actual customer returns, as well as by a provision for estimated future customer returns.
Sales taxes collected from retail customers are presented on a net basis and, as such, are excluded from revenue. Shipping and handling costs that are billed to customers are included in net sales, with the related costs recorded in cost of goods sold. Shipping and handling costs that are not billed to customers are accounted for as fulfillment costs.
Gift Cards. The Company sells gift cards that can be redeemed for merchandise, resulting in a contract liability recorded upon issuance. Revenue is recognized when the gift card is redeemed or upon “breakage” for the estimated portion of gift cards that are not expected to be redeemed. “Breakage” revenue is calculated under the proportional redemption methodology, which considers the historical patterns of redemption in jurisdictions where the Company is not required to remit the value of the unredeemed gift cards as unclaimed property. The Company anticipates that substantially all of its outstanding gift cards will be redeemed within the next 12 months. The contract liability related to gift cards, net of estimated “breakage,” was $12 million and $13 million as of June 29, 2019 and March 30, 2019, respectively, and is included in accrued expenses and other current liabilities in the Company’s consolidated balance sheet.
Loyalty Program. The Company offers a loyalty program, which allows its Michael Kors customers to earn points on qualifying purchases toward monetary and non-monetary rewards, which may be redeemed for purchases at Michael Kors retail stores and e-commerce sites. The Company defers a portion of the initial sales transaction based on the estimated relative fair value of the benefits based on projected timing of future redemptions and historical activity. These amounts include estimated “breakage” for points that are not expected to be redeemed. The contract liability, net of an estimated “breakage,” of $3 million as of both June 29, 2019 and March 30, 2019 is recorded as a reduction to revenue in the consolidated statements of income and comprehensive income and within accrued expenses and other current liabilities in the Company’s consolidated balance sheet and is expected to be recognized within the next 12 months.
Wholesale
The Company’s products are sold primarily to major department stores, specialty stores and travel retail shops throughout the Americas, EMEA and Asia. The Company also has arrangements where its products are sold to geographic licensees in certain parts of EMEA, Asia, and South America. Wholesale revenue is recognized net of estimates for sales returns, discounts, markdowns and allowances, after merchandise is shipped and control of the underlying product is transferred to the Company’s wholesale customers. To arrive at net sales for wholesale, gross sales are reduced by provisions for estimated future returns, as well as trade discounts, markdowns, allowances, operational chargebacks, and certain cooperative selling expenses. These estimates are developed based on the most likely amount using historical trends, actual and forecasted performance and market conditions, and are reviewed by management on a quarterly basis. Unfulfilled, noncancelable purchase orders for products from wholesale customers (including the Company’s geographic licensees) are expected to be fulfilled within the next 12 months.

11



Licensing
The Company provides its third-party licensees with the right to access its Versace, Jimmy Choo and Michael Kors trademarks under product and geographic licensing arrangements. Under product licensing arrangements, the Company allows third parties to manufacture and sell luxury goods, including watches and jewelry, fragrances, sunglasses and eyewear, using the Company’s trademarks. Under geographic licensing arrangements, third party licensees receive the right to distribute and sell products bearing the Company’s trademarks in retail and/or wholesale channels within certain geographical areas, including Brazil, the Middle East, Eastern Europe, South Africa, certain parts of Asia and Australia.
The Company recognizes royalty revenue and advertising contributions based on the percentage of sales made by the licensees. Advertising contributions are received to support the Company’s branded advertising and marketing campaigns and are viewed as part of a single performance obligation with the right to access the Company’s trademarks. Royalty revenue generated from licenses, which includes contributions for advertising, may be subject to contractual minimum levels, as defined in the contract. Such minimums are generally fixed annually, based on the previous year’s sales. Licensing revenue is based on reported current period sales of licensed products at rates that are specified in the license agreements for contracts that are expected to exceed the related guaranteed minimums. If the Company expects the minimum guaranteed amounts to exceed amounts calculated based on actual sales, the guaranteed minimums are recognized ratably over the contractual year to which they relate. Generally the Company’s guaranteed minimum royalty amounts due from licensees relate to contractual periods that do not exceed 12 months, however, some of our guaranteed minimums for Versace are multi-year based. As of June 29, 2019, contractually guaranteed minimum fees from our license agreements expected to be recognized as revenue during future periods were as follows (in millions):
 
 
Contractually Guaranteed Minimum Fees
 
 
Remainder of Fiscal 2020
$
20

 
Fiscal 2021
27

 
Fiscal 2022
27

 
Fiscal 2023
20

 
Fiscal 2024
10

 
Fiscal 2025 and thereafter
36

 
 Total
$
140


Sales Returns
For the sale of goods with a right of return, the Company recognizes revenue for the consideration to which it expects to be entitled and a refund liability for the amount it expects to refund to its customers within accrued expenses and other current liabilities. The refund liability is determined based on the most likely amount and is based on management’s review of historical and current customer returns for its retail and wholesale customers, estimated future returns, adjusted for non-resalable products. The Company also considers its product strategies, as well as the financial condition of its customers, store closings by wholesale customers, changes in the retail environment and other macroeconomic factors. The Company recognizes an asset with a corresponding adjustment to cost of sales for the right to recover the products from its retail and wholesale customers, net of any costs to resell. The refund liability recorded as of June 29, 2019 and March 30, 2019 was $36 million and $35 million, respectively, and the related asset for the right to recover returned product as of June 29, 2019 and March 30, 2019 was $12 million in each period.
Contract Balances
The Company’s contract liabilities are recorded within accrued expenses and other current liabilities and other long-term liabilities in its consolidated balance sheets depending on the short or long-term nature of the payments to be recognized. The Company’s contract liabilities primarily consist of gift card liabilities, loyalty program liabilities and advanced payments from product licensees. Total contract liabilities were $27 million and $31 million as of June 29, 2019 and March 30, 2019, respectively. For the three months ended June 29, 2019, the Company recognized $14 million in revenue which related to contract liabilities that existed at March 30, 2019. There were no contract assets recorded as of June 29, 2019 and March 30, 2019.
There were no changes in historical variable consideration estimates that were materially different from actual results.

12



Disaggregation of Revenue
The following table presents the Company’s segment revenues disaggregated by geographic location (in millions):
 
Three Months Ended
 
June 29,
2019
 
June 30,
2018
Versace revenue - the Americas
$
44

 
$

Versace revenue - EMEA
92

 

Versace revenue - Asia
71

 

 Total Versace
207

 

 
 
 
 
Jimmy Choo revenue - the Americas
30

 
26

Jimmy Choo revenue - EMEA
79

 
102

Jimmy Choo revenue - Asia
49

 
45

Total Jimmy Choo
158

 
173

 
 
 
 
Michael Kors revenue - the Americas
655

 
692

Michael Kors revenue - the EMEA
189

 
200

Michael Kors revenue - the Asia
137

 
138

 Total Michael Kors
981

 
1,030

 
 
 
 
Total revenue - the Americas
729

 
718

Total revenue - EMEA
360

 
302

Total revenue - Asia
257

 
183

Total revenue
$
1,346

 
$
1,203



4. Leases
The Company leases retail stores, office space and warehouse space under operating lease agreements that expire at various dates through September 2043. The Company’s leases generally have terms of up to 10 years, generally require a fixed annual rent and may require the payment of additional rent if store sales exceed a negotiated amount. Although most of the Company’s equipment is owned, the Company has limited equipment leases that expire on various dates through April 2023. The Company acts as sublessor in certain leasing arrangements, primarily related to closed stores under its Retail Fleet Optimization Plan. Fixed sublease payments received are recognized on a straight-line basis of over the sublease term. The Company determines the sublease term based on the date it provides possession to the subtenant through the expiration date of the sublease.
The Company recognizes right-of-use assets and lease liabilities at lease commencement date, based on the present value of fixed lease payments over the expected lease term. The Company uses its incremental borrowing rates to determine the present value of fixed lease payments based on the information available at the lease commencement date, as the rate implicit in the lease is not readily determinable for the Company’s leases. The Company’s incremental borrowing rates are based on the term of the leases, the economic environment of the leases, and reflect the rate it would pay to borrow on a secured basis. Certain leases include one or more renewal options, generally for the same period as the initial term of the lease. The exercise of lease renewal options is generally at the Company’s sole discretion and as such, the Company typically determines that exercise of these renewal options is not reasonably certain. As a result, the Company generally does not include the renewal option period in the expected lease term and the associated lease payments are not included in the measurement of the right-of-use asset and lease liability. Certain leases also contain termination options with an associated penalty. Generally, the Company is reasonably certain not to exercise these options and as such, they are not included in the determination of the expected lease term. The Company recognizes operating lease expense on a straight-line basis over the lease term.
Leases with an initial lease term of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense for its short-term leases on a straight-line basis over the lease term.

13



The Company’s leases generally provide for payments of non-lease components, such as common area maintenance, real estate taxes and other costs associated with the leased property. The Company accounts for lease and non-lease components of its real estate leases together as a single lease component and, as such, includes fixed payments of non-lease components in the measurement of the right-of-use assets and lease liabilities for its real estate leases. Variable lease payments, such as percentage rentals based on location sales, periodic adjustments for inflation, reimbursement of real estate taxes, any variable common area maintenance and any other variable costs associated with the leased property are expensed as incurred as variable lease costs and are not recorded on the balance sheet. The Company’s lease agreements do not contain any material residual value guarantees or material restrictions or covenants.
The following table presents the Company’s supplemental balance sheet information related to leases (in millions):
 
 
Balance Sheet Location
 
June 29,
2019
Assets
 
 
 
 
Operating leases
 
Operating lease right-of-use assets
 
$
1,718

 
 
 
 
 
Liabilities
 
 
 
 
Current:
 
 
 
 
Operating leases
 
Current portion of operating lease liabilities
 
$
384

Non-current:
 
 
 
 
Operating leases
 
Long-term portion of operating lease liabilities
 
$
1,754


The components of net lease costs for the three months ended June 29, 2019 was as follows (in millions):
 
 
 
 
Three Months Ended
 
 
Statement of Operations and Comprehensive Income Location
 
June 29, 2019
Operating lease cost
 
Selling, general and administrative expenses
 
$
109

Short-term lease cost
 
Selling, general and administrative expenses
 
10

Variable lease cost
 
Selling, general and administrative expenses
 
40

Sublease income
 
Selling, general and administrative expenses
 
(1
)
Total lease cost
 
 
 
$
158

The following table presents the Company’s supplemental cash flow information related to leases (in millions):
 
 
 
 
Three Months Ended
 
 
 
 
June 29, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
 
Operating cash flows from operating leases
 
$
120

Non-cash transactions:
 
 
Lease assets obtained in exchange for new lease liabilities
 
$
30


The following tables summarizes the weighted average remaining lease term and weighted average discount rate related to the Company’s right-of-use assets and lease liabilities recorded on the balance sheet as of June 29, 2019:
 
 
 
 
June 29,
2019
Operating leases:
 
 
Weighted average remaining lease term (years)
 
6.6

Weighted average discount rate
 
2.9
%


14



At June 29, 2019, the future minimum lease payments under the terms of these noncancelable operating lease agreements are as follows (in millions):
 
 
 
 
June 29,
2019
Remainder of Fiscal 2020
 
 
 
$
352

Fiscal 2021
 
 
 
432

Fiscal 2022
 
 
 
373

Fiscal 2023
 
 
 
320

Fiscal 2024
 
 
 
268

Thereafter
 
 
 
659

Total lease payments
 
 
 
2,404

Less: interest
 
 
 
(266
)
Total lease liabilities
 
 
 
$
2,138

At June 29, 2019, the future minimum sublease income under the terms of these noncancelable operating lease agreements are as follows (in millions):
 
 
 
 
June 29,
2019
Remainder of Fiscal 2020
 
 
 
$
4

Fiscal 2021
 
 
 
6

Fiscal 2022
 
 
 
5

Fiscal 2023
 
 
 
5

Fiscal 2024
 
 
 
4

Thereafter
 
 
 
16

Total sublease income
 
 
 
$
40

Additionally, the Company had approximately $83 million of future payment obligations related to executed lease agreements for which the related lease has not yet commenced as of June 29, 2019.
5. Acquisitions
Acquisition of Versace
On December 31, 2018, the Company completed the acquisition of Versace for a total enterprise value of approximately 1.753 billion (or approximately $2.005 billion), giving effect to an investment made by the Versace family at acquisition of 2.4 million shares. The acquisition was funded through a combination of borrowings under the Company’s 2018 Term Loan Facility, drawings under the Company’s Revolving Credit Facility and cash on hand (see Note 11 for additional information).
Versace’s results of operations have been included in our consolidated financial statements beginning on December 31, 2018. Versace contributed total revenue of $207 million and a net loss from operations of $3 million, after amortization of non-cash purchase accounting adjustments, for the three months ended May 31, 2019 (reflecting a one-month reporting lag).
As the Company finalizes the fair value of assets acquired and liabilities assumed, additional purchase price adjustments may be recorded during the measurement period. See Note 4 in the Company’s Annual Report on Form 10-K for the fiscal year ended March 30, 2019 for additional disclosures relating to the Company’s acquisitions.

15



6. Receivables, net
Receivables, net, consist of (in millions):
 
June 29,
2019
 
March 30,
2019
Trade receivables (1)
$
387

 
$
459

Receivables due from licensees
16

 
23

 
403

 
482

Less: allowances
(93
)
 
(99
)
 
$
310

 
$
383


 
 
 
 
 
(1) 
As of June 29, 2019 and March 30, 2019, $226 million and $317 million, respectively, of trade receivables were insured.
Receivables are presented net of allowances for discounts, markdowns, operational chargebacks and doubtful accounts. Discounts are based on open invoices where trade discounts have been extended to customers. Allowances are based on wholesale customers’ sales performance, seasonal negotiations with customers, historical deduction trends and an evaluation of current market conditions. Operational chargebacks are based on deductions taken by customers, net of expected recoveries. Such provisions, and related recoveries, are reflected in revenues.
The Company’s allowance for doubtful accounts is determined through analysis of periodic aging of receivables that are not covered by insurance and assessments of collectability based on an evaluation of historic and anticipated trends, the financial condition of the Company’s customers and the impact of general economic conditions. The past due status of a receivable is based on its contractual terms. Amounts deemed uncollectible are written off against the allowance when it is probable the amounts will not be recovered. Allowance for doubtful accounts was $16 million and $18 million, respectively, as of June 29, 2019 and March 30, 2019. The Company had immaterial amounts of bad debt provisions for both periods presented.
7. Property and Equipment, net
Property and equipment, net, consists of (in millions):
 
June 29,
2019
 
March 30,
2019
Leasehold improvements
$
654

 
$
639

Computer equipment and software
305

 
292

Furniture and fixtures
297

 
292

In-store shops
272

 
270

Equipment
125

 
123

Building
48

 
47

Land
18

 
15

 
1,719

 
1,678

Less: accumulated depreciation and amortization
(1,169
)
 
(1,115
)
 
550

 
563

Construction-in-progress
58

 
52

 
$
608

 
$
615


Depreciation and amortization of property and equipment for each of the three months ended June 29, 2019 and June 30, 2018 was $47 million. During the three months ended June 29, 2019, the Company recorded fixed asset impairment charges of $13 million, $11 million of which related to determining asset groups for the Company's premier store locations at an individual store level, $7 million of which related to Michael Kors and $4 million related to Jimmy Choo (see Note 13). During the three months ended June 30, 2018, the Company recorded fixed asset impairment charges of $3 million, which were related to underperforming Michael Kors full-price retail store locations, some of which related to the Retail Fleet Optimization Plan.

16



8. Intangible Assets and Goodwill
The following table details the carrying values of the Company’s intangible assets other than goodwill (in millions):
 
June 29,
2019
 
March 30,
2019
Definite-lived intangible assets:
 
 
 
Reacquired Rights
$
400

 
$
400

Trademarks
23

 
23

Key Money (1)
71

 
96

Customer Relationships
412

(2) 
415

Total definite-lived intangible assets
906

 
934

Less: accumulated amortization
(155
)
 
(143
)
Net definite-lived intangible assets
751

 
791

 
 
 
 
Indefinite-lived intangible assets:
 
 
 
Jimmy Choo brand
557

(2) 
572

Versace brand
942

(2) 
930

 
1,499

 
1,502

 
 
 
 
Total intangible assets, excluding goodwill
$
2,250

 
$
2,293

 
 
 
 
Goodwill
$
1,652

(2) 
$
1,659


 
 
 
 
 
(1) 
The March 30, 2019 balance includes certain lease rights that were reclassified to the right-of-use asset as part of the adoption of ASC 842.
(2) 
The change in the carrying values since March 30, 2019 reflects currency translation.
Amortization expense for the Company’s definite-lived intangible assets for the three months ended June 29, 2019 and June 30, 2018 was $13 million and $9 million, respectively. During the three months ended June 29, 2019, the Company recorded impairment charges of $5 million related to intangible assets associated with its premier Michael Kors store locations (see Note 13 for further information). Impairment charges recorded during the three months ended June 30, 2018 were $1 million. There were no goodwill or other indefinite-lived intangible asset impairment charges recorded during any of the periods presented.
9. Current Assets and Current Liabilities
Prepaid expenses and other current assets consist of the following (in millions):    
 
June 29,
2019
 
March 30,
2019
Prepaid taxes
$
154

 
$
125

Prepaid rent (1)

 
24

Interest receivable related to net investment hedges
7

 
11

Prepaid fixed assets
7

 
7

Prepaid advertising
5

 
5

Other
51

 
49

 
$
224

 
$
221




17



Accrued expenses and other current liabilities consist of the following (in millions):
 
June 29,
2019
 
March 30,
2019
Other taxes payable
$
61

 
$
47

Return liabilities
36

 
35

Accrued capital expenditures
23

 
25

Accrued rent (2)
17

 
34

Gift cards and retail store credits
12

 
13

Professional services
12

 
12

Accrued litigation
12

 
11

Accrued advertising and marketing
9

 
10

Accrued purchases and samples
9

 
29

Advance royalties
9

 
6

Accrued interest
5

 
10

Restructuring liability (1)
5

 
64

Other
73

 
78

 
$
283

 
$
374


 
 
 
 
 
(1) 
In connection with the adoption of ASU 2016-02, certain lease related assets and liabilities were reflected within operating lease right-of-use assets and liabilities as of June 29, 2019. See Note 2 and Note 4 for additional information.
(2) 
The accrued rent balance relates to variable lease payments.
10. Restructuring and Other Charges
Retail Fleet Optimization Plan
On May 31, 2017, the Company announced that it plans to close between 100 and 125 of its Michael Kors retail stores in order to improve the profitability of its retail store fleet (“Retail Fleet Optimization Plan”). The Company anticipates finalizing the remainder of the planned store closures under the Retail Fleet Optimization Plan by the end of Fiscal 2020. The Company expects to incur approximately $100 - $125 million of one-time costs associated with these store closures. Collectively, the Company anticipates lower depreciation and amortization expense as a result of the impairment charges recorded once these initiatives are completed.
During the three months ended June 29, 2019, the Company closed 13 of its Michael Kors retail stores under the Retail Fleet Optimization Plan, for a total of 113 stores closed since plan inception. Restructuring charges recorded in connection with the Retail Fleet Optimization Plan during the three months ended June 29, 2019 were $