What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-05 compared with 2020-08-05 · 250 added, 113 removed, 267 unchanged (58% of the section changed)

31 unchanged sentences

Versace’s design team is led by Donatella Versace, who has been the brand’s artistic director for over 20 years.

Versace distributes its products through a worldwide distribution network, which includes boutiques in some of the world’s most glamorous cities, its e-commerce site, as well as through the most prestigious department and specialty stores worldwide.

Versace distributes its products through a worldwide distribution network, which includes boutiques located in the world’s most glamorous cities, its e-commerce site, as well as through the most prestigious department and specialty stores worldwide.

Our Jimmy Choo brand offers a distinctive, glamorous and fashion-forward product range, enabling it to develop into a leading global luxury accessories brand, whose core product offering is women’s luxury shoes, complemented by accessories, including handbags, small leather goods, scarves and belts, as well as a growing men’s luxury shoes and accessory business.

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Our performance is affected by trends in the luxury goods industry, as well as shifts in demographics and changes in lifestyle preferences.

Although the overall consumer spending for personal luxury products has increased in recent years, consumer shopping preferences have continued to shift from physical stores to on-line shopping.

Although overall consumer spending for personal luxury products has increased in recent years, consumer shopping preferences have continued to shift from physical stores to on-line shopping.

We currently expect that this trend will continue in the foreseeable future.

2 unchanged sentences

Over this time period, we expect to incur approximately $75 million of one-time costs associated with these store closures.

During the first quarter of Fiscal 2021, we closed 28 of our retail stores, which have been incorporated into the Capri Retail Store Optimization Program, at a cost of $3 million.

Foreign currency fluctuation.

13 unchanged sentences

On May 10, 2019, the U.S.

increased the sanction tariffs rate from 10% to 25% on $200 billion of imports of select product categories (Tranche 3), which includes handbags and travel goods from China, and effective September 1, 2019, a 10% tariff on an additional $300 billion of goods from China, including ready-to-wear, footwear and men’s products, went into effect.

increased the sanction tariffs rate from 10% to 25% on $200 billion of imports of select product categories (Tranche 3), which includes handbags and travel goods from China, and effective February 14, 2020, a 7.5% tariff on certain additional goods from China, including ready-to-wear, footwear and men’s products, went into effect.

If additional tariffs or trade restrictions are implemented by the U.S.

6 unchanged sentences

We operate in three reportable segments, which are as follows:

We generate revenue through the sale of Versace luxury ready-to-wear, accessories, footwear and home furnishings through directly operated Versace boutiques throughout North America (United States and Canada), EMEA (Europe, Middle East and Africa) and certain parts of Asia, as well as through Versace outlet stores and e-commerce sites.

In addition, revenue is generated through wholesale sales to distribution partners (including geographic licensing arrangements), multi-brand department stores and specialty stores worldwide, as well as through product license agreements in connection with the manufacturing and sale of jeans, fragrances, watches, jewelry and eyewear.

We generate revenue through the sale of Jimmy Choo luxury goods to end clients through directly operated Jimmy Choo stores throughout the Americas (United States, Canada and Latin America), EMEA and certain parts of Asia, through our e-commerce sites, as well as through wholesale sales of luxury goods to distribution partners (including geographic licensing arrangements that allow third parties to use the Jimmy Choo tradename in connection with retail and/or wholesale sales of Jimmy Choo branded products in specific geographic regions), multi-brand department stores and specialty stores worldwide.

In addition, revenue is generated through product licensing agreements, which allow third parties to use the Jimmy Choo brand name and trademarks in connection with the manufacturing and sale of fragrances, sunglasses and eyewear.

We generate revenue through the sale of Versace luxury ready-to-wear, accessories, footwear and home furnishings through directly operated Versace boutiques throughout North America (United States and Canada), EMEA (Europe, Middle East and Africa) and certain parts of Asia, including Australia, as well as through Versace outlet stores and e-commerce sites.

We generate revenue through the sale of Jimmy Choo luxury goods to end clients through directly operated Jimmy Choo retail and outlet stores throughout the Americas (United States, Canada and Latin America), EMEA and certain parts of Asia, including Australia, through our e-commerce sites, as well as through wholesale sales of luxury goods to distribution partners (including geographic licensing arrangements that allow third parties to use the Jimmy Choo tradename in connection with retail and/or wholesale sales of Jimmy Choo branded products in specific geographic regions), multi-brand department stores and specialty stores worldwide.

We generate revenue through the sale of Michael Kors products through four primary Michael Kors retail store formats:

“Collection” stores, “Lifestyle” stores (including concessions), outlet stores and e-commerce, through which we sell our products, as well as licensed products bearing our name, directly to the end consumer throughout the Americas, Europe and certain parts of Asia.

Our Michael Kors e-commerce business includes e-commerce sites in the U.S., Canada and certain parts of Europe and Asia.

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Such costs primarily include certain administrative, corporate occupancy and information systems expenses, including ERP system implementation costs.

In addition, certain other costs are not allocated to segments, including restructuring and other charges (including transaction and transition costs related to our recent acquisitions), impairment costs and COVID-19 related charges.

In addition, certain other costs are not allocated to segments, including restructuring and other charges (including transaction and transition costs related to our acquisitions), impairment costs and COVID-19 related charges.

The segment structure is consistent with how our chief operating decision maker plans and allocates resources, manages the business and assesses performance.

The following table presents our total revenue and (loss) income from operations by segment for the three months ended June 27, 2020 and June 29, 2019 (in millions):

Three Months Ended

2020 June 29,

The following table presents our total revenue and income (loss) from operations by segment for the three and six months ended September 26, 2020 and September 28, 2019 (in millions):

Three Months Ended Six Months Ended

September 26,

2020 September 28,

2019 September 26,

2020 September 28,

Total revenue:

3 unchanged sentences

Total revenue $ 1,110 $ 1,442 $ 1,561 $ 2,788

(Loss) income from operations:

Income (loss) from operations:

Versace $ 20 $ 9 $ (21) $ 6

1 unchanged sentence

Michael Kors 190 222 142 423

Total segment (loss) income from operations (118) 209

Total segment income from operations 210 221 92 430

Corporate expenses (30) (35) (61) (68)

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COVID-19 related charges (1)

Total (loss) income from operations $ (162) $ 64

Total income (loss) from operations $ 153 $ 75 $ (9) $ 139

___________________

(1) COVID-19 related charges primarily relate to severance costs, partially offset by a credit loss of $(6) million.

(1) COVID-19 related charges for the three months ended September 26, 2020 primarily relate to an inventory reserve credit as a result of improved sell through of excess inventory, partially offset by increased credit losses.

COVID-19 related charges for the six months ended September 26, 2020 primarily relate to severance and other COVID-19 related operating expenses, partially offset by a reduction to COVID-19 related inventory reserves.

The following table presents our global network of retail stores and wholesale doors by brand:

2020 June 29,

September 26,

2020 September 28,

Number of full price retail stores (including concessions):

12 unchanged sentences

The following table presents our retail stores by geographic location:

June 27, 2020 June 29, 2019

September 26, 2020 September 28, 2019

Versace Jimmy Choo Michael Kors Versace Jimmy Choo Michael Kors

6 unchanged sentences

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

Three Months Ended

June 27, 2020 June 29, 2019

Three Months Ended Six Months Ended

September 26, 2020 September 28, 2019 September 26, 2020 September 28, 2019

Total revenue $ 1,110 $ 1,442 $ 1,561 $ 2,788

Gross profit as a percent of total revenue 64.0 % 60.6 % 64.8 % 61.3 %

(Loss) income from operations $ (162) $ 64

(Loss) income from operations as a percent of total revenue

(35.9) % 4.8 %

Income (loss) from operations $ 153 $ 75 $ (9) $ 139

Income (loss) from operations as a percent of total revenue 13.8 % 5.2 % (0.6) % 5.0 %

We experience certain effects of seasonality with respect to our business.

10 unchanged sentences

Results of Operations

Comparison of the three months ended June 27, 2020 with the three months ended June 29, 2019

The following table details the results of our operations for the three months ended June 27, 2020 and June 29, 2019, and expresses the relationship of certain line items to total revenue as a percentage (dollars in millions):

Comparison of the three months ended September 26, 2020 with the three months ended September 28, 2019

The following table details the results of our operations for the three months ended September 26, 2020 and September 28, 2019, and expresses the relationship of certain line items to total revenue as a percentage (dollars in millions):

Three Months Ended $ Change % Change % of Total Revenue for

the Three Months Ended

2020 June 29,

2019 June 27,

2020 June 29,

September 26,

2020 September 28,

2019 September 26,

2020 September 28,

Statements of Operations Data:

4 unchanged sentences

Depreciation and amortization 54 65 (11) (16.9) % 4.9 % 4.5 %

Impairment of assets — 97 (97) NM — % 7.2 %

Impairment of assets 20 104 (84) (80.8) % 1.8 % 7.2 %

Restructuring and other charges 9 7 2 28.6 % 0.8 % 0.5 %

Total operating expenses 557 799 (242) (30.3) % 50.2 % 55.4 %

(Loss) income from operations (162) 64 (226) NM (35.9) % 4.8 %

Income from operations 153 75 78 104.0 % 13.8 % 5.2 %

Other income, net — (1) 1 (100.0) % — % (0.1) %

Interest expense, net 17 13 4 30.8 % 3.8 % 1.0 %

Foreign currency (gain) loss (3) 2 (5) NM (0.7) % 0.1 %

(Loss) income before provision for income taxes

(175) 51 (226) NM (38.8) % 3.8 %

Provision for income taxes 5 6 (1) (16.7) % 1.1 % 0.4 %

Net (loss) income attributable to Capri $ (180) $ 45 $ (225) NM

Interest expense, net 12 3 9 NM 1.1 % 0.2 %

Foreign currency loss — 4 (4) (100.0) % — % 0.3 %

Income before provision for income taxes 141 69 72 104.3 % 12.7 % 4.8 %

Provision for (benefit from) income taxes 20 (4) 24 NM 1.8 % (0.3) %

Net income 121 73 48 65.8 %

Net loss attributable to noncontrolling interest (1) — (1) NM

Net income attributable to Capri $ 122 $ 73 $ 49 67.1 %

___________________

1 unchanged sentence

Total Revenue

Total revenue decreased $895 million, or 66.5%, to $451 million for the three months ended June 27, 2020, compared to $1.346 billion for the three months ended June 29, 2019, which included net unfavorable foreign currency effects of approximately $4 million, primarily related to the weakening of the Chinese Renminbi and Euro against the U.S.

Dollar during the three months ended June 27, 2020 as compared to the same prior year period.

Total revenue decreased $332 million, or 23.0%, to $1.110 billion for the three months ended September 26, 2020, compared to $1.442 billion for the three months ended September 28, 2019, which included net favorable foreign currency effects of approximately $23 million, primarily related to the strengthening of the Euro, Chinese Renminbi and British Pound against the U.S.

Dollar during the three months ended September 26, 2020 as compared to the same prior year period.

On a constant currency basis, our total revenue decreased $355 million, or 24.6%.

The decrease is attributable to lower revenues from all three brands, as compared to the prior year, reflecting the adverse impact of COVID-19.

Gross profit decreased $532 million, or 63.8%, to $302 million for the three months ended June 27, 2020, compared to $834 million for the three months ended June 29, 2019, which included net unfavorable foreign currency effects of $3 million.

Gross profit as a percentage of total revenue increased 500 basis points to 67.0% during the three months ended June 27, 2020, compared to 62.0% during the three months ended June 29, 2019.

The increase in our gross profit margin was primarily attributable to higher gross profit margin for Michael Kors primarily driven by lower promotional activity and favorable channel mix, including a higher proportion of sales in Asia during the three months ended June 27, 2020, as compared to the three months ended June 29, 2019.

The decrease is attributable to lower revenues across all three brands, as compared to the prior year, reflecting the adverse impact of COVID-19.

Gross profit decreased $164 million, or 18.8%, to $710 million for the three months ended September 26, 2020, compared to $874 million for the three months ended September 28, 2019, which included net favorable foreign currency effects of $11 million.

Gross profit as a percentage of total revenue increased 340 basis points to 64.0% during the three months ended September 26, 2020, compared to 60.6% during the three months ended September 28, 2019.

The increase in our gross profit margin was primarily attributable to higher gross profit margin for Michael Kors primarily driven by a higher average unit price and favorable channel mix during the three months ended September 26, 2020, as compared to the three months ended September 28, 2019.

Total Operating Expenses

Total operating expenses decreased $306 million, or 39.7%, to $464 million during the three months ended June 27, 2020, compared to $770 million for the three months ended June 29, 2019.

Our operating expenses included a net favorable foreign currency impact of approximately $2 million.

Total operating expenses increased to 102.9% as a percentage of total revenue for the three months ended June 27, 2020, compared to 57.2% for the three months ended June 29, 2019.

Total operating expenses decreased $242 million, or 30.3%, to $557 million during the three months ended September 26, 2020, compared to $799 million for the three months ended September 28, 2019.

Our operating expenses included a net unfavorable foreign currency impact of approximately $16 million.

Total operating expenses decreased to 50.2% as a percentage of total revenue for the three months ended September 26, 2020, compared to 55.4% for the three months ended September 28, 2019.

The components that comprise total operating expenses are explained below.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased $196 million, or 32.8%, to $402 million during the three months ended June 27, 2020, compared to $598 million for the three months ended June 29, 2019, primarily due to lower variable costs, as well as decreases from our cost reduction initiatives as a result of COVID-19.

Selling, general, and administrative expenses as a percentage of total revenue increased to 89.1% for the three months ended June 27, 2020, compared to 44.4% for the three months ended June 29, 2019, primarily due to the adverse impacts of COVID-19 and increased retail store and e-commerce related costs as a percentage of total revenue during the three months ended June 27, 2020, as compared to the three months ended June 29, 2019.

Corporate unallocated expenses, which are included within selling, general and administrative expenses discussed above, but are not directly attributable to a reportable segment, decreased $2 million, or 6.1%, to $31 million during the three months ended June 27, 2020 as compared to $33 million for the three months ended June 29, 2019.

Selling, general and administrative expenses decreased $149 million, or 23.9%, to $474 million during the three months ended September 26, 2020, compared to $623 million for the three months ended September 28, 2019, primarily due to lower variable costs, as well as decreased costs from our cost reduction initiatives as a result of COVID-19.

Selling, general, and administrative expenses as a percentage of total revenue decreased to 42.7% for the three months ended September 26, 2020, compared to 43.2% for the three months ended September 28, 2019, primarily due to our cost reduction initiatives, such as advertising expenses, as a result of COVID-19, during the three months ended September 26, 2020, as compared to the three months ended September 28, 2019.

Corporate unallocated expenses, which are included within selling, general and administrative expenses discussed above, but are not directly attributable to a reportable segment, decreased $5 million, or 14.3%, to $30 million during the three months ended September 26, 2020 as compared to $35 million for the three months ended September 28, 2019, primarily due to a reduction in ERP system implementation costs, as well as our cost reduction initiatives as a result of COVID-19.

Depreciation and Amortization

Depreciation and amortization decreased $6 million, or 10.0%, to $54 million during the three months ended June 27, 2020, compared to $60 million for the three months ended June 29, 2019.

Depreciation and amortization decreased $11 million, or 16.9%, to $54 million during the three months ended September 26, 2020, compared to $65 million for the three months ended September 28, 2019.

The decrease in depreciation and amortization expense was primarily attributable to lower depreciation due to previously recorded property and equipment impairment charges.

Depreciation and amortization increased to 12.0% as a percentage of total revenue during the three months ended June 27, 2020, compared to 4.5% for the three months ended June 29, 2019.

Depreciation and amortization increased to 4.9% as a percentage of total revenue during the three months ended September 26, 2020, compared to 4.5% for the three months ended September 28, 2019.

Impairment of Assets

During the three months ended June 27, 2020, we did not recognize any asset impairment charges.

During the three months ended June 29, 2019, we recognized asset impairment charges of approximately $97 million, which were primarily related to determining asset groups for our premier store locations at an individual store level, as well as operating lease right-of-use assets as part of our quarterly impairment assessments.

During the three months ended September 26, 2020, we recognized asset impairment charges of $20 million, primarily related to operating lease right-of-use assets at our Michael Kors store locations (see Note 11 to the accompanying consolidated financial statements for additional information).

During the three months ended September 28, 2019, we recognized asset impairment charges of approximately $104 million, which primarily related to operating lease right-of-use assets largely driven by the unfavorable operating results in Hong Kong.

Restructuring and Other Charges

During the three months ended June 27, 2020, we recognized restructuring and other charges of $8 million, which included other costs of $5 million primarily related to equity awards associated with the acquisition of Versace (see Note 8 to the accompanying consolidated financial statements for additional information) and $3 million related to our Capri Retail Store Optimization Program.

During the three months ended June 29, 2019, we recognized restructuring and other charges of $15 million, which were comprised of $12 million of other costs and restructuring charges of $3 million, of which $2 million was recorded in connection with Jimmy Choo lease termination charges and $1 million related to our Michael Kors Retail Fleet Optimization Plan.

The other costs recorded during the three months ended June 29, 2019 included $7 million in connection with the acquisition of Versace and $5 million in connection with the Jimmy Choo acquisition.

Restructuring and other charges are not evaluated as part of our reportable segments’ results (See Segment Information above for additional information).

(Loss) Income from Operations

As a result of the foregoing, income from operations decreased $226 million, to a loss from operations of $162 million during three months ended ended June 27, 2020, compared to income from operations of $64 million for the three months ended June 29, 2019.

Income from operations as a percentage of total revenue decreased to (35.9)% during the three months ended June 27, 2020, compared to 4.8% for the three months ended June 29, 2019.

During the three months ended September 26, 2020, we recognized restructuring and other charges of $9 million, which included other costs of $7 million primarily related to equity awards associated with the acquisition of Versace (see Note 8 to the accompanying consolidated financial statements for additional information) and $2 million related to our Capri Retail Store Optimization Program.

During the three months ended September 28, 2019, we recognized restructuring and other charges of $7 million, which primarily included other costs of $6 million primarily related to equity awards associated with the acquisition of Versace.

Income from Operations

As a result, income from operations increased $78 million, to $153 million during three months ended September 26, 2020, compared to $75 million for the three months ended September 28, 2019.

Income from operations as a percentage of total revenue increased to 13.8% during the three months ended September 26, 2020, compared to 5.2% for the three months ended September 28, 2019.

See Segment Information above for a reconciliation of our segment operating income to total operating income.

Interest Expense, net

Interest expense, net, increased $4 million to $17 million during the three months ended June 27, 2020, compared to $13 million for the three months ended June 29, 2019, primarily due to a decrease to interest income as a result of the Company’s early termination of its net investment hedges related to its Euro-denominated subsidiaries during the fourth quarter.

The decrease to interest income was largely offset by a decrease in interest expense attributable to lower average borrowings outstanding in the current year (see Note 9 and Note 12 to the accompanying consolidated financial statements for additional information).

Foreign Currency (Gain) Loss

During the three months ended June 27, 2020, we recognized a net foreign currency gain of $3 million, primarily attributable to the revaluation and settlement of certain of our accounts payable in currencies other than the functional currency, as well as the remeasurement of dollar-denominated intercompany loans with certain of our subsidiaries.

During the three months ended June 29, 2019, we recognized a net foreign currency loss of $2 million, primarily attributable to the revaluation and settlement of certain of our accounts payable in currencies other than the functional currency.

Provision for Income Taxes

The provision for incomes taxes was $5 million during the three months ended June 27, 2020, compared to $6 million for the three months ended June 29, 2019.

Our effective tax rate for the three months ended June 27, 2020, was (2.9)%, compared to 11.8% for the three months ended June 29, 2019.

The decrease in our effective tax rate was primarily related to the impact of a valuation allowance on a portion of our consolidated pre-tax loss and a tax detriment related to share based compensation for the three months ended June 27, 2020, compared to three months ended June 29, 2019.

These decreases were partially offset by the impact of the favorable effects related to global financing activities on our consolidated pre-tax loss.

Interest expense, net, increased $9 million to $12 million during the three months ended September 26, 2020, compared to $3 million for the three months ended September 28, 2019, primarily due to a decrease of interest income attributable to lower average net investment hedges outstanding in the current year.

The decrease in interest income was largely offset by a decrease in interest expense attributable to lower average borrowings outstanding in the current year and the addition of an interest rate swap in the current year which converts the one-month Adjusted LIBOR interest rate on these borrowings to a fixed interest rate of 0.237% through December 2022 (see Note 9 and Note 12 to the accompanying consolidated financial statements for additional information).

Foreign Currency Loss

During the three months ended September 26, 2020, we recognized an immaterial net foreign currency loss.

During the three months ended September 28, 2019, we recognized a net foreign currency loss of $4 million, primarily attributable to the revaluation and settlement of certain of our accounts payable in currencies other than the functional currency, as well as the remeasurement of dollar-denominated intercompany loans with certain of our subsidiaries.

Provision for (Benefit from) Income Taxes

The provision for incomes taxes was $20 million during the three months ended September 26, 2020, compared to a $4 million tax benefit for the three months ended September 28, 2019.

Our effective tax rate were 14.2% and (5.8)% for the three months ended September 26, 2020 and September 28, 2019, respectively.

The increase in our effective tax rate was primarily related to the impact from the realization of previously unrecognized tax benefits for the three months ended September 28, 2019 and the tax rate change in the United Kingdom on the Company's net deferred tax liabilities recorded for the three months ended September 26, 2020.

Our effective tax rate may fluctuate from time to time due to the effects of changes in U.S.

1 unchanged sentence

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) Income Attributable to Capri

As a result of the foregoing, our net income decreased $225 million to a net loss of $180 million during the three months ended June 27, 2020, compared to net income of $45 million for the three months ended June 29, 2019.

Net Loss Attributable to Noncontrolling Interest

During the three months ended September 26, 2020, we recorded a net loss attributable to the noncontrolling interest in our joint ventures of $1 million.

This loss represents the share of income that is not attributable to the Company.

Net Income Attributable to Capri

As a result of the foregoing, our net income increased $49 million to a net income of $122 million during the three months ended September 26, 2020, compared to net income of $73 million for the three months ended September 28, 2019.

Segment Information

Three Months Ended % Change

(dollars in millions) June 27,

2020 June 29,

(dollars in millions) September 26,

2020 September 28,

2019 $ Change As Reported Constant

Revenues $ 195 $ 228 $ (33) (14.5) % (18.9) %

Income from operations 20 9 11 NM

Operating margin 10.3 % 3.9 %

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NM Not meaningful

Versace revenues decreased $33 million, or 14.5%, to $195 million during the three months ended September 26, 2020, compared to $228 million for the three months ended September 28, 2019, which included favorable foreign currency effects of $10 million.

On a constant currency basis, revenue decreased $43 million, or 18.9%, primarily reflecting the adverse impacts related to COVID-19.

Income from Operations

During the three months ended September 26, 2020, Versace recorded income from operations of $20 million, compared to $9 million for the three months ended September 28, 2019.

Operating margin increased from 3.9% for the three months ended September 28, 2019, to 10.3% during the three months ended September 26, 2020, primarily due to our cost reduction initiatives as a result of COVID-19 and favorable channel mix.

Three Months Ended % Change

(dollars in millions) September 26,

2020 September 28,

2019 $ Change As

Reported Constant

Revenues $ 122 $ 125 $ (3) (2.4) % (6.4) %

Loss from operations — (10) 10 NM

2 unchanged sentences

NM Not meaningful

Versace revenues decreased $114 million, or 55.1%, to $93 million during the three months ended June 27, 2020, compared to $207 million for the three months ended June 29, 2019, which included unfavorable foreign currency effects of $2 million.

On a constant currency basis, revenue decreased $112 million, or 54.1%, primarily reflecting adverse impacts related to COVID-19.

Jimmy Choo revenues decreased $3 million, or 2.4%, to $122 million during the three months ended September 26, 2020, compared to $125 million for the three months ended September 28, 2019, which included favorable foreign currency effects of $5 million.

On a constant currency basis, revenue decreased $8 million, or 6.4%, primarily reflecting the adverse impacts related to COVID-19.

Loss from Operations

During the three months ended June 27, 2020 Versace recorded a loss from operations of $41 million during the three months ended June 27, 2020, compared to $3 million for the three months ended June 29, 2019.

Operating margin declined from (1.4)% for the three months ended June 29, 2019, to (44.1)% during the three months ended June 27, 2020, primarily due to the adverse impacts related to COVID-19.

During the three months ended September 26, 2020, Jimmy Choo recorded immaterial income from operations, compared to loss from operations of $10 million for the three months ended September 28, 2019.

Operating margin improved to 0.0% from (8.0)% for the three months ended September 28, 2019 due to our costs reduction initiatives as a result of COVID-19 and reduction in expense as our strategic investments have normalized.

Three Months Ended % Change

(dollars in millions) June 27,

2020 June 29,

(dollars in millions) September 26,

2020 September 28,

2019 $ Change As

1 unchanged sentence

Revenues $ 793 $ 1,089 $ (296) (27.2) % (27.9) %

Income from operations 190 222 (32) (14.4) %

Operating margin 24.0 % 20.4 %

Michael Kors revenues decreased $296 million, or 27.2%, to $793 million during the three months ended September 26, 2020, compared to $1.089 billion for the three months ended September 28, 2019, which included favorable foreign currency effects of $8 million.

On a constant currency basis, revenue decreased $304 million, or 27.9%, primarily reflecting the adverse impacts related to COVID-19.

Income from Operations

During the three months ended September 26, 2020, Michael Kors recorded income from operations of $190 million, compared to $222 million for the three months ended September 28, 2019.

Operating margin increased from 20.4% for the three months ended September 28, 2019, to 24.0% during the three months ended September 26, 2020, primarily due to a higher average unit price and favorable channel mix.

Results of Operations

Comparison of the six months ended September 26, 2020 with the six months ended September 28, 2019

The following table details the results of our operations for the six months ended September 26, 2020 and September 28, 2019, and expresses the relationship of certain line items to total revenue as a percentage (dollars in millions):

Six Months Ended $ Change % Change % of Total Revenue for

the Six Months Ended

September 26,

2020 September 28,

2019 September 26, 2020 September 28, 2019

Statements of Operations Data:

Total revenue $ 1,561 $ 2,788 $ (1,227) (44.0) %

Cost of goods sold 549 1,080 (531) (49.2) % 35.2 % 38.7 %

Gross profit 1,012 1,708 (696) (40.7) % 64.8 % 61.3 %

Selling, general and administrative expenses 876 1,221 (345) (28.3) % 56.1 % 43.8 %

Depreciation and amortization 108 125 (17) (13.6) % 6.9 % 4.5 %

Impairment of assets 20 201 (181) (90.0) % 1.3 % 7.2 %

Restructuring and other charges 17 22 (5) (22.7) % 1.1 % 0.8 %

Total operating expenses 1,021 1,569 (548) (34.9) % 65.4 % 56.3 %

(Loss) income from operations (9) 139 (148) (106.5) % (0.6) % 5.0 %

Other income, net (1) (3) 2 (66.7) % (0.1) % (0.1) %

Interest expense, net 29 16 13 81.3 % 1.9 % 0.6 %

Foreign currency (gain) loss (3) 6 (9) NM (0.2) % 0.2 %

(Loss) income before provision for income taxes (34) 120 (154) NM (2.2) % 4.3 %

Provision for income taxes

25 2 23 NM 1.6 % 0.1 %

Net (loss) income (59) 118 (177) NM

Net loss attributable to noncontrolling interest (1) — (1) NM

Net (loss) income attributable to Capri $ (58) $ 118 $ (176) NM

___________________

NM Not meaningful

Total Revenue

Total revenue decreased $1.227 billion, or 44.0%, to $1.561 billion for the six months ended September 26, 2020, compared to $2.788 billion for the six months ended September 28, 2019, which included net favorable foreign currency effects of approximately $19 million, primarily related to the strengthening of the Euro and British Pound against the U.S.

Dollar during the six months ended September 26, 2020 as compared to the same prior year period.

On a constant currency basis, our total revenue decreased $1.246 billion, or 44.7%.

The decrease is attributable to lower revenues across all three brands, as compared to the prior year, reflecting the adverse impact of COVID-19.

Gross profit decreased $696 million, or 40.7%, to $1.012 billion for the six months ended September 26, 2020, compared to $1.708 billion for the six months ended September 28, 2019, which included net favorable foreign currency effects of $8 million.

Gross profit as a percentage of total revenue increased 350 basis points to 64.8% during the six months ended September 26, 2020, compared to 61.3% during the six months ended September 28, 2019.

The increase in gross profit margin was primarily attributable to higher gross profit margin for Michael Kors driven by a higher average unit price and favorable channel mix during the six months ended September 26, 2020, as compared to the six months ended September 28, 2019.

Total Operating Expenses

Total operating expenses decreased $548 million, or 34.9%, to $1.021 billion during the six months ended September 26, 2020, compared to $1.569 billion for the six months ended September 28, 2019.

Our operating expenses included a net unfavorable foreign currency impact of approximately $14 million.

Total operating expenses increased to 65.4% as a percentage of total revenue for the six months ended September 26, 2020, compared to 56.3% for the six months ended September 28, 2019.

The components that comprise total operating expenses are explained below.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased $345 million, or 28.3%, to $876 million during the six months ended September 26, 2020, compared to $1.221 billion for the six months ended September 28, 2019, primarily due to lower variable costs, as well as decreases from our cost reduction initiatives as a result of COVID-19.

Selling, general and administrative expenses as a percentage of total revenue increased to 56.1% during the six months ended September 26, 2020, compared to 43.8% for the six months ended September 28, 2019, primarily due to the adverse impacts of COVID-19 and increased retail store and e-commerce related costs as a percentage of total revenue during the six months ended September 26, 2020, as compared to the six months ended September 28, 2019.

Corporate unallocated expenses, which are included within selling, general and administrative expenses discussed above, but are not directly attributable to a reportable segment, decreased $7 million, or 10.3%, to $61 million during the six months ended September 26, 2020 as compared to $68 million for the six months ended September 28, 2019, primarily due to a reduction in ERP system implementation costs, as well as our cost reduction initiatives as a result of COVID-19.

Depreciation and Amortization

Depreciation and amortization decreased $17 million, or 13.6%, to $108 million during the six months ended September 26, 2020, compared to $125 million for the six months ended September 28, 2019.

The decrease in depreciation and amortization expense was primarily attributable to lower depreciation due to previously recorded property and equipment impairment charges.

Depreciation and amortization increased to 6.9% as a percentage of total revenue during the six months ended September 26, 2020, compared to 4.5% for the six months ended September 28, 2019 primarily due to lower revenues during the six months ended September 26, 2020 as a result of COVID-19.

Impairment of Assets

During the six months ended September 26, 2020, we recognized asset impairment charges of $20 million, which primarily related to operating lease right-of-use assets at our Michael Kors store locations (see Note 11 to the accompanying consolidated financial statements for additional information).

During the six months ended September 28, 2019, we recognized asset impairment charges of approximately $201 million, which primarily related to operating lease right-of-use assets.

Restructuring and Other Charges

During the six months ended September 26, 2020, we recognized restructuring and other charges of $17 million, which included other costs of $12 million primarily related to equity awards associated with the acquisition of Versace (see Note 8 to the accompanying consolidated financial statements for additional information) and $5 million related to our Capri Retail Store Optimization Program.

During the six months ended September 28, 2019, we recognized restructuring and other charges of $22 million, which were primarily comprised of $18 million of other costs and restructuring charges of $4 million primarily related to Jimmy Choo lease-related charges and our previous Michael Kors Retail Fleet Optimization Plan.

The other costs recorded during the six months ended September 28, 2019 included $13 million, primarily related to equity awards associated with the acquisition of Versace and $5 million, primarily related to equity awards associated with the acquisition of Jimmy Choo.

Restructuring and other charges are not evaluated as part of our reportable segments’ results (See Segment Information above for additional information).

(Loss) Income from Operations

As a result of the foregoing, income from operations decreased $148 million or 106.5%, to a net loss from operations of $9 million during the six months ended September 26, 2020, compared to income from operations of $139 million for the six months ended September 28, 2019.

(Loss) income from operations as a percentage of total revenue decreased to (0.6)% during the six months ended September 26, 2020, compared to 5.0% for the six months ended September 28, 2019 (see Segment Information above for a reconciliation of our segment operating income to total operating income).

Interest Expense,net

Interest expense, net, increased $13 million to $29 million during the six months ended September 26, 2020, compared to $16 million for the six months ended September 28, 2019, primarily due to a decrease to interest income attributable to lower average net investment hedges outstanding in the current year.

The decrease to interest income was largely offset by a decrease in interest expense attributable to lower average borrowings outstanding in the current year and the addition of an interest rate swap in the current year which converts the one-month Adjusted LIBOR interest rate on these borrowings to a fixed interest rate of 0.237% through December 2022 (see Note 9 and Note 12 to the accompanying consolidated financial statements for additional information).

Foreign Currency (Gain) Loss

During the six months ended September 26, 2020, we recognized a net foreign currency gain of $3 million, primarily attributable to the revaluation and settlement of certain of our accounts payable in currencies other than the functional currency, as well as the remeasurement of dollar-denominated intercompany loans with certain of our subsidiaries.

During the six months ended September 28, 2019, we recognized a net foreign currency loss of $6 million, primarily attributable to the revaluation and settlement of certain of our accounts payable in currencies other than the functional currency, as well as the remeasurement of dollar-denominated intercompany loans with certain of our subsidiaries.

Provision for Income Taxes

We recognized $25 million of income tax expense during the six months ended September 26, 2020, compared to $2 million of income tax expense for the six months ended September 28, 2019.

Our effective tax rates were (73.5)% and 1.7% for the six months ended September 26, 2020 and September 28, 2019, respectively.

The change in our effective tax rate was primarily related to the impact of a valuation allowance on a portion of our consolidated pre-tax loss, a tax detriment related to share based compensation and the impact of the tax rate change in the United Kingdom on the Company's net deferred tax liabilities recorded for the six months ended September 26, 2020, compared to six months ended September 28, 2019.

These impacts were partially offset by the effects related to global financing activities on our consolidated pre-tax loss.

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 the six months ended September 26, 2020, we recorded a net loss attributable to the noncontrolling interest in our joint ventures of $1 million .

This loss represents the share of income that is not attributable to the Company.

Net (Loss) Income Attributable to Capri

As a result of the foregoing, our net income decreased $176 million to a net loss of $58 million during the six months ended September 26, 2020, compared to net income of $118 million for the six months ended September 28, 2019.

Segment Information

Six Months Ended % Change

(dollars in millions) September 26,

2020 September 28,

2019 $ Change As

Reported Constant

Revenues $ 288 $ 435 $ (147) (33.8) % (35.6) %

(Loss) income from operations (21) 6 (27) NM

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NM Not meaningful

Jimmy Choo revenues decreased $107 million, or 67.7%, to $51 million during the three months ended June 27, 2020, compared to $158 million for the three months ended June 29, 2019, primarily reflecting adverse impacts related to COVID-19.

Versace revenues decreased $147 million, or 33.8%, to $288 million during the six months ended September 26, 2020, compared to $435 million for the six months ended September 28, 2019, which included favorable foreign currency effects of $8 million.

On a constant currency basis, revenue decreased $155 million, or 35.6%, primarily reflecting the adverse impacts related to COVID-19.

(Loss) Income from Operations

During the three months ended June 27, 2020, Jimmy Choo recorded a loss from operations of $29 million during the three months ended June 27, 2020, compared to income from operations of $11 million for the three months ended June 29, 2019.

Operating margin declined from 7.0% for the three months ended June 29, 2019, to (56.9)% during the three months ended June 27, 2020, primarily due to the adverse impacts related to COVID-19.

Three Months Ended % Change

(dollars in millions) June 27,

2020 June 29,

During the six months ended September 26, 2020, Versace recorded a loss from operations of $21 million, compared to income from operations of $6 million for the six months ended September 28, 2019.

Operating margin declined from 1.4% for the six months ended September 28, 2019, to (7.3)% during the six months ended September 26, 2020, primarily due to the adverse impacts related to COVID-19.

Six Months Ended % Change

(dollars in millions) September 26,

2020 September 28,

2019 $ Change As

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NM Not meaningful

Michael Kors revenues decreased $674 million, or 68.7%, to $307 million during the three months ended June 27, 2020, compared to $981 million for the three months ended June 29, 2019, which included unfavorable foreign currency effects of $2 million.

On a constant currency basis, revenue decreased $672 million, or 68.5%, primarily due to adverse impacts related to COVID-19.

Revenue from Jimmy Choo decreased $110 million, or 38.9%, to $173 million during the six months ended September 26, 2020, compared to $283 million for the six months ended September 28, 2019, which included favorable foreign currency effects of $5 million.

On a constant currency basis, revenue decreased $115 million, or 40.6%, primarily reflecting the adverse impacts related to COVID-19.

(Loss) income from Operations

During the three months ended June 27, 2020, Michael Kors recorded a loss from operations of $48 million during the three months ended June 27, 2020, compared to income from operations of $201 million for the three months ended June 29, 2019.

Operating margin declined from 20.5% for the three months ended June 29, 2019, to (15.6)% during the three months ended June 27, 2020, primarily due to adverse impacts related to COVID-19.

During the six months ended September 26, 2020, Jimmy Choo recorded a loss from operations of $29 million, compared to income from operations of $1 million for the six months ended September 28, 2019.

Operating margin declined from 0.4% for the six months ended September 28, 2019, to (16.8)% during the six months ended September 26, 2020, primarily due to the adverse impacts related to COVID-19.

Six Months Ended % Change

(dollars in millions)

September 26,

2020 September 28,

2019 $ Change As

Reported Constant

Revenues $ 1,100 $ 2,070 $ (970) (46.9) % (47.1) %

Income from operations 142 423 (281) (66.4) %

Operating margin 12.9 % 20.4 %

Michael Kors revenues decreased $970 million, or 46.9%, to $1.100 billion during the six months ended September 26, 2020, compared to $2.070 billion for the six months ended September 28, 2019, which included favorable foreign currency effects of $6 million.

On a constant currency basis, revenue decreased $976 million, or 47.1%, primarily due to the adverse impacts related to COVID-19.

Income from Operations

During the six months ended September 26, 2020, Michael Kors recorded income from operations of $142 million, compared to $423 million for the six months ended September 28, 2019.

Operating margin declined from 20.4% for the six months ended September 28, 2019, to 12.9% during the six months ended September 26, 2020, primarily due to adverse impacts related to COVID-19, partially offset by higher gross profit margins related to a higher average unit price and favorable channel mix.

Liquidity and Capital Resources

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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 $32 million on capital expenditures during the three months ended June 27, 2020.

We spent $59 million on capital expenditures during the six months ended September 26, 2020.

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

September 26,

2020 March 28,

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Long-term debt $ 1,581 $ 2,012

Three Months Ended

2020 June 29,

Six Months Ended

September 26,

2020 September 28,

Cash Flows Provided By (Used In):

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Effect of exchange rate changes 1 (4)

Net decrease in cash and cash equivalents and restricted cash $ (385) $ (12)

Net (decrease) increase in cash and cash equivalents and restricted cash $ (354) $ 7

Cash Provided by Operating Activities

Net cash provided by operating activities decreased $91 million to $67 million during the three months ended June 27, 2020, as compared to $158 million for the three months ended June 29, 2019, as a result of a decrease in our net income after non-cash adjustments, partially offset by increases related to changes in our working capital, primarily attributable to the timing of payments and receipts due to the impact of COVID-19.

Net cash provided by operating activities decreased $106 million to $137 million during the six months ended September 26, 2020, as compared to $243 million for the six months ended September 28, 2019, as a result of a decrease in our net income after non-cash adjustments, partially offset by increases related to changes in our working capital, primarily attributable to the timing of payments and receipts due to the impact of COVID-19.

Cash Used in Investing Activities

Net cash used in investing activities was $32 million during the three months ended June 27, 2020, as compared to $32 million during the three months ended June 29, 2019, which was primarily attributable to an increase of $23 million related to the settlement of a net investment hedge during the three months ended June 29, 2019, offset by lower capital expenditures of $22 million compared to prior year.

Net cash used in investing activities was $71 million during the six months ended September 26, 2020, as compared to $75 million during the six months ended September 28, 2019, which was primarily attributable to lower capital expenditures of $46 million compared to prior year, offset by an increase of $31 million related to the settlement of a net investment hedge during the six months ended September 28, 2019 and an increase of $11 million due to asset acquisitions during the six months ended September 26, 2020.

Cash Used in Financing Activities

Net cash used in financing activities was $420 million during the three months ended June 27, 2020, as compared to $138 million during the three months ended June 29, 2019.

The increase of cash used in financing activities of $282 million was primarily attributable to increased debt repayments.

Net cash used in financing activities was $421 million during the six months ended September 26, 2020, as compared to $157 million during the six months ended September 28, 2019.

The increase of cash used in financing activities of $264 million was primarily attributable to increased net debt repayments.

Debt Facilities

The following table presents a summary of our borrowing capacity and amounts outstanding as of June 27, 2020 and March 28, 2020 (dollars in millions):

The following table presents a summary of our borrowing capacity and amounts outstanding as of September 26, 2020 and March 28, 2020 (dollars in millions):

September 26,

2020 March 28,

Senior Unsecured Revolving Credit Facility:

Senior Secured Revolving Credit Facility:

Revolving Credit Facility (excluding up to a $500 million accordion feature) (1)

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Remaining availability $ — $ —

364 Credit Facility ($230 million)

Total availability $ 230 $ —

Remaining availability $ 230 $ —

4.000% Senior Notes

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Borrowings outstanding (85 million Hong Kong Dollars) (3)

Bank guarantees outstanding (4 million Hong Kong Dollars) 1 1

Bank guarantees outstanding (3 million and 4 million Hong Kong Dollars) — 1

Remaining availability (12 million and 96 million Hong Kong Dollars) $ 2 $ 13

4 unchanged sentences

Total availability (1.0 billion Japanese Yen) $ 9 $ 9

Borrowings outstanding (223 million Japanese Yen) (3)

Remaining availability (777 million and 1.0 billion Japanese Yen) $ 7 $ 9

Borrowings outstanding (1.0 billion Japanese Yen) (3)

Remaining availability (1.0 billion Japanese Yen) $ — $ 9

Versace Uncommitted Credit Facilities:

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When this financial covenant is reinstated, the applicable ratio will be calculated net of our unrestricted cash and cash equivalents to the extent in excess of $100 million and shall exclude up to $150 million of supply chain financings, and the maximum permitted net leverage ratio will be 4.00 to 1.0.

As of June 27, 2020 and March 28, 2020, we were in compliance with all covenants related to our agreements then in effect governing our debt.

(2) Recorded as long-term debt in our consolidated balance sheets as of June 27, 2020 and March 28, 2020, except for the current portion of $128 million outstanding under the 2018 Term Loan Facility, which was recorded within short-term debt at both June 27, 2020 and March 28, 2020.

(3) Recorded as short-term debt in our consolidated balance sheets as of June 27, 2020 and March 28, 2020.

As of September 26, 2020 and March 28, 2020, we were in compliance with all covenants related to our agreements then in effect governing our debt.

See Note 9 to the accompanying consolidated financial statements for additional information.

(2) Recorded as long-term debt in our consolidated balance sheets as of September 26, 2020 and March 28, 2020, except for the current portion of $128 million outstanding under the 2018 Term Loan Facility, which was recorded within short-term debt at both September 26, 2020 and March 28, 2020.

(3) Recorded as short-term debt in our consolidated balance sheets as of September 26, 2020 and March 28, 2020.

We believe that our 2018 Credit Facility is adequately diversified with no undue concentration in any one financial institution.

As of June 27, 2020, there were 26 financial institutions participating in the facility, with none maintaining a maximum commitment percentage in excess of 10%.

As of September 26, 2020, there were 27 financial institutions participating in the facility, with none maintaining a maximum commitment percentage in excess of 10%.

We have no reason to believe that the participating institutions will be unable to fulfill their obligations to provide financing in accordance with the terms of the 2018 Credit Facility.

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Share Repurchase Program

The following table presents our treasury share repurchases during the three months ended June 27, 2020 and June 29, 2019 (dollars in millions):

Three Months Ended

2020 June 29,

The following table presents our treasury share repurchases during the six months ended September 26, 2020 and September 28, 2019 (dollars in millions):

Six Months Ended

September 26,

2020 September 28,

Cost of shares repurchased under share repurchase program $ — $ —

5 unchanged sentences

During the first quarter of Fiscal 2021, we suspended our $500 million share-repurchase program in response to the continued impact of the COVID-19 pandemic.

As of June 27, 2020, the remaining availability under our share repurchase program was $400 million.

As of September 26, 2020, the remaining availability under our share repurchase program was $400 million.

Share repurchases may be made in open market or privately negotiated transactions, subject to market conditions, applicable legal requirements, trading restrictions under our insider trading policy, and other relevant factors.

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We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating our business.

Our off-balance sheet commitments relating to our outstanding letters of credit were $27 million at June 27, 2020, including $5 million in letters of credit issued outside of the 2018 Credit Facility.

In addition, as of June 27, 2020, bank guarantees of approximately $18 million were supported by the Versace Credit Facilities.

Our off-balance sheet commitments relating to our outstanding letters of credit were $28 million at September 26, 2020, including $6 million in letters of credit issued outside of the 2018 Credit Facility.

In addition, as of September 26, 2020, bank guarantees of approximately $28 million were supported by our various credit facilities.

We do not have any other off-balance sheet arrangements or relationships with entities that are not consolidated into our financial statements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.

2 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis