Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis (“MD&A”) of our Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and notes thereto included as part of this Annual Report on Form 10-K. Forward-looking statements are prospective in nature and are not based on historical facts, but rather on current expectations and projections of the management of the Company about future events, and are therefore subject to risks and uncertainties which could cause actual results to differ materially from the future results expressed or implied by the forward-looking statements. All statements other than statements of historical facts included herein, may be forward-looking statements. Without limitation, any statements preceded or followed by or that include the words “plans”, “believes”, “expects”, “intends”, “will”, “should”, “could”, “would”, “may”, “anticipates”, “might” or similar words or phrases, are forward-looking statements. These forward-looking statements are not guarantees of future financial performance. Such forward-looking statements involve known and unknown risks and uncertainties that could significantly affect expected results and are based on certain key assumptions, which could cause actual results to differ materially from those projected or implied in any forward-looking statements. These risks, uncertainties and other factors include the impact of the COVID-19 pandemic, levels of cash flow and future availability of credit, compliance with restrictive covenants under the Company’s credit agreement, the Company’s ability to integrate successfully and to achieve anticipated benefits of any acquisition and to successfully execute our growth strategies; the risk of disruptions to the Company’s businesses; risks associated with operating in international markets and our global sourcing activities; the risk of cybersecurity threats and privacy or data security breaches; the negative effects of events on the market price of the Company’s ordinary shares and its operating results; significant transaction costs; unknown liabilities; the risk of litigation and/or regulatory actions related to the Company’s businesses; fluctuations in demand for the Company’s products; levels of indebtedness (including the indebtedness incurred in connection with acquisitions); the timing and scope of future share buybacks, which may be made in open market or privately negotiated transactions, and are subject to market conditions, applicable legal requirements, trading restrictions under the Company’s insider trading policy and other relevant factors, and which share repurchases may be suspended or discontinued at any time, the level of other investing activities and uses of cash; changes in consumer traffic and retail trends; loss of market share and industry competition; fluctuations in the capital markets; fluctuations in interest and exchange rates; the occurrence of unforeseen epidemics and pandemics, disasters or catastrophes; political or economic instability in principal markets; adverse outcomes in litigation; and general, local and global economic, political, business and market conditions, as well as those risks set forth in the Company’s filings with the U.S. Securities and Exchange Commission, including in this Annual Report on Form 10-K, particularly under “Item 1A. Risk Factors”
Overview
Our Business
Capri Holdings Limited is a global fashion luxury group, consisting of iconic brands that are industry leaders in design, style and craftsmanship, led by a world-class management team and renowned designers. Our brands cover the full spectrum of fashion luxury categories, including women’s and men’s accessories, footwear and ready-to-wear, as well as wearable technology, watches, jewelry, eyewear and a full line of fragrance products. Our goal is to continue to extend the global reach of our brands while ensuring that they maintain their independence and exclusive DNA.
Our Versace brand has long been recognized as one of the world’s leading international fashion design houses and is synonymous with Italian glamour and style. Founded in 1978 in Milan, Versace is known for its iconic and unmistakable style and unparalleled craftsmanship, over the past several decades the House of Versace has grown globally from its roots in haute couture, expanding into the design, manufacturing, distribution and retailing of ready-to-wear, accessories, footwear, eyewear, watches, jewelry, fragrance and home furnishings businesses. 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.
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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. In addition, certain categories, such as fragrances and eyewear, are produced under licensing agreements. Jimmy Choo’s design team is led by Sandra Choi, who has been the Creative Director for the brand since its inception in 1996. Jimmy Choo products are unique, instinctively seductive and chic. The brand offers classic and timeless luxury products, as well as innovative products that are intended to set and lead fashion trends. Jimmy Choo is represented through its global store network, its e-commerce sites, as well as through the most prestigious department and specialty stores worldwide.
Our Michael Kors brand was launched 40 years ago by Michael Kors, whose vision has taken the Company from its beginnings as an American luxury sportswear house to a global accessories, footwear and apparel company with a global distribution network that has presence in over 100 countries through Company-operated retail stores and e-commerce sites, leading department stores, specialty stores and select licensing partners. Michael Kors is a highly recognized luxury fashion brand in the Americas and Europe with growing brand awareness in other international markets. Michael Kors features distinctive designs, materials and craftsmanship with a jet-set aesthetic that combines stylish elegance and a sporty attitude. Michael Kors offers three primary collections: the Michael Kors Collection luxury line, the MICHAEL Michael Kors accessible luxury line and the Michael Kors Mens line. The Michael Kors Collection establishes the aesthetic authority of the entire brand and is carried by many of our retail stores, our e-commerce sites, as well as in the finest luxury department stores in the world. MICHAEL Michael Kors has a strong focus on accessories, in addition to offering footwear and apparel, and addresses the significant demand opportunity in accessible luxury goods. We have also been developing our men’s business in recognition of the significant opportunity afforded by the Michael Kors brand’s established fashion authority and the expanding men’s market. Taken together, our Michael Kors collections target a broad customer base while retaining our premium luxury image.
Certain Factors Affecting Financial Condition and Results of Operations
COVID-19 Pandemic. A novel strain of coronavirus commonly referred to as COVID-19 has spread rapidly across the globe, including throughout all major geographies in which we operate (the Americas, EMEA and Asia), resulting in adverse economic conditions and business disruptions, as well as significant volatility in global financial markets. Governments worldwide have imposed varying degrees of preventative and protective actions, such as temporary travel bans, forced business closures, and stay-at-home orders, all in an effort to reduce the spread of the virus. Such factors, among others, have resulted in a significant decline in retail traffic, tourism and consumer spending on discretionary items. Additionally, during this period of uncertainty, companies across a wide array of industries have implemented various initiatives to reduce operating expenses and preserve cash balances, including work furloughs and reduced pay, which could lower consumers’ disposable income levels or willingness to purchase discretionary items. Further, even after such government restrictions and company initiatives are lifted, consumer behavior, spending levels and/or shopping preferences, such as their willingness to congregate in shopping centers or other populated locations, could be adversely affected.
In connection with the COVID-19 pandemic, we have experienced varying degrees of business disruptions and periods of closures of our stores, distribution centers and corporate facilities, as have our wholesale customers, licensing partners, suppliers and vendors. Retail traffic also continues to be challenging in those regions in which our stores are open. Additionally, our stores in the Americas and in Europe closed mid-March 2020, and although the majority of our stores have since reopened, certain stores remain closed due to local government mandates. Our wholesale business has also been adversely affected, particularly in the Americas and Europe, as a result of department store closures and lower traffic and consumer demand.
In response to the COVID-19 pandemic, during Fiscal 2021 we took a number of preemptive actions to preserve cash and strengthen our liquidity, including:
• for Fiscal 2021, our board of directors annual total cash compensation was reduced;
• temporarily foregoing and reducing executive compensation for Fiscal 2021. In addition, the company reduced overall salaries at various levels throughout the organization;
• reducing our corporate workforce in order to generate additional payroll savings;
• temporarily furloughing or reducing work hours for a significant portion of our retail employees who nevertheless remain eligible for employee benefits during such period;
• applying for national payroll subsidy programs in various countries throughout Europe to further reduce payroll expense;
• significantly reducing inventory purchases by reducing or canceling commitments, redeploying inventory and consolidating upcoming seasons;
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• extending payment terms of our payables with our partners in order to maintain our financial flexibility for the long term;
• reducing capital expenditures in Fiscal 2021;
• minimizing operating expenses, including decreasing marketing spend, delaying or canceling select new store openings, reducing external third-party services and halting non-critical systems implementations in order to reduce costs;
• temporarily suspending our ERP project;
• suspending the remaining $400 million under our current share repurchase program; and
• adding a $230 million 364-day Revolver due June 2021 to bolster cash availability.
The COVID-19 pandemic remains highly volatile and continues to evolve on a daily basis. Accordingly, we cannot predict for how long and to what extent this crisis will impact our business operations or the global economy as a whole. We will continue to assess our operations location-by-location, taking into account the guidance of local governments and global health organizations to determine when our operations can return to normal course of business. See Item 1A — "Risk Factors" — “The COVID-19 pandemic may continue to have a material adverse effect on our business and results of operations.” For additional discussion regarding risks to our business associated with the COVID-19 pandemic.
Establishing brand identity and enhancing global presence. We intend to continue to increase our international presence and global brand recognition by growing our existing international operations through the formation of various joint ventures with international partners and continuing with our international licensing arrangements. We feel this is an efficient method for continued penetration into the global luxury goods market, especially for markets where we have yet to establish a substantial presence. In addition, our growth strategy includes assuming direct control of certain licensed international operations to better manage our growth opportunities in the related regions.
Channel shift and demand for our accessories and related merchandise . Our performance is affected by trends in the luxury goods industry, as well as shifts in demographics and changes in lifestyle preferences. 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. We continue to adjust our operating strategy to the changing business environment. In addition, last year we announced our Capri Retail Store Optimization Program to close approximately 170 of our retail stores over the next two years, in order to improve the profitability of our retail store fleet. Over this time period, we expect to incur approximately $75 million of one-time costs associated with these store closures. As of March 27, 2021, we have closed a total of 101 stores relating to the plan. We recorded net restructuring charges of $5 million during Fiscal 2021 relating to the plan. See Item 9B - Other Information for additional information. Collectively, we continue to anticipate ongoing savings as a result of the store closures and lower depreciation associated with the impairment charges being recorded.
Foreign currency fluctuation. Our consolidated operations are impacted by the relationships between our reporting currency, the U.S. dollar, and those of our non-U.S. subsidiaries whose functional/local currency is other than the U.S. dollar, particularly the Euro, the British Pound, the Chinese Renminbi, the Japanese Yen, the Korean Won and the Canadian Dollar, among others. We continue to expect volatility in the global foreign currency exchange rates, which may have a negative impact on the reported results of certain of our non-U.S. subsidiaries in the future, when translated to U.S. Dollars.
Disruptions in shipping and distribution . Our operations are subject to the impact of shipping disruptions as a result of changes or damage to our distribution infrastructure, as well as due to external factors, including the impacts of COVID-19. Any future disruptions in our shipping and distribution network could have a negative impact on our results of operations. See Item 1A — "Risk Factors" — "We primarily use foreign manufacturing contractors and independent third-party agents to source our finished goods and our business is subject to risks inherent in global sourcing activities, including disruptions or delays in manufacturing or shipments." for additional discussion.
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Costs of Manufacturing and Tariffs. Our industry is subject to volatility in costs related to certain raw materials used in the manufacturing of our products. This volatility applies primarily to costs driven by commodity prices, which can increase or decrease dramatically over a short period of time. In addition, our costs may be impacted by sanction tariffs imposed on our products due to changes in trade terms. For example, we have historically received benefits from duty-free imports on certain products from certain countries pursuant to the U.S. Generalized System of Preferences ("GSP") program. The GSP program expired on December 31, 2020. If the GSP program is not renewed or otherwise made retroactive, we could experience significant additional duties and our gross margin could be negatively impacted. Additionally, we are subject to government import regulations, including U.S. Customs and Border Protection ("CBP") withhold release orders. The imposition of taxes, duties and quotas, the withdrawal from or material modification to trade agreements, and/or if CBP detains shipments of our goods pursuant to a withhold release order could have a material adverse effect on our business, results of operations and financial condition. If additional tariffs or trade restrictions are implemented by the U.S. or other countries, the cost of our products could increase which could adversely affect our business. In addition, commodity prices and tariffs may have an impact on our revenues, results of operations and cash flows. We use commercially reasonable efforts to mitigate these effects by sourcing our products as efficiently as possible and diversifying the countries where we produce. In addition, manufacturing labor costs are also subject to degrees of volatility based on local and global economic conditions. We use commercially reasonable efforts to source from localities that suit our manufacturing standards and result in more favorable labor driven costs to our products.
Segment Information
We operate in three reportable segments, which are as follows:
Versace
We generate revenue through the sale of Versace luxury ready-to-wear, accessories and footwear 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 products, including jeans, fragrances, watches, jewelry, eyewear and home furnishings.
Jimmy Choo
We generate revenue through the sale of Jimmy Choo luxury goods through directly operated Jimmy Choo retail and outlet 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 products, including fragrances and eyewear.
Michael Kors
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 consumers 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. We also sell Michael Kors products directly to department stores, primarily located across the Americas and Europe, to specialty stores and travel retail shops in the Americas, Europe and Asia, and to our geographic licensees in certain parts of EMEA, Asia and Brazil. In addition, revenue is generated through product and geographic licensing arrangements, which allow third parties to use the Michael Kors brand name and trademarks in connection with the manufacturing and sale of products, including watches, jewelry, fragrances and eyewear, as well as through geographic licensing arrangements, which allow third parties to use the Michael Kors tradename in connection with the retail and/or wholesale sales of our Michael Kors branded products in specific geographic regions.
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Unallocated Expenses
In addition to the reportable segments discussed above, we have certain corporate costs that are not directly attributable to our brands and, therefore, are not allocated to segments. Such costs primarily include certain administrative, corporate occupancy, shared service 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 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 income (loss) from operations by segment for Fiscal 2021, Fiscal 2020 and Fiscal 2019 (in millions):
Fiscal Years Ended
March 27,
2021 March 28,
2020 March 30,
2019
Total revenue:
Versace $ 718 $ 843 $ 137
Jimmy Choo 418 555 590
Michael Kors 2,924 4,153 4,511
Total revenue $ 4,060 $ 5,551 $ 5,238
Income (loss) from operations:
Versace $ 21 $ (8) $ (11)
Jimmy Choo (55) (13) 20
Michael Kors 595 850 964
Total segment income from operations 561 829 973
Less: Corporate expenses (152) (152) (93)
Impairment of assets (316) (708) (21)
COVID-19 related charges (1)
(42) (119) —
Restructuring and other charges (32) (42) (124)
Total income (loss) from operations $ 19 $ (192) $ 735
(1) COVID-19 related charges during Fiscal 2021 primarily include net incremental inventory reserves and severance expense of $10 million and $24 million, respectively, recorded within costs of goods sold and selling, general and administrative expenses in the consolidated statements of income and comprehensive (loss) income. COVID-19 related charges during Fiscal 2020, primarily include additional inventory reserves and credit losses of $92 million and $25 million, respectively, recorded within costs of goods sold and selling, general and administrative expenses in the consolidated statements of operations and comprehensive (loss) income.
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The following table presents our global network of retail stores and wholesale doors:
As of
March 27,
2021 March 28,
2020 March 30,
2019
Number of full price retail stores (including concessions):
Versace 153 157 146
Jimmy Choo 176 179 169
Michael Kors 529 568 587
858 904 902
Number of outlet stores:
Versace 57 49 42
Jimmy Choo 51 47 39
Michael Kors 291 271 266
399 367 347
Total number of retail stores 1,257 1,271 1,249
Total number of wholesale doors:
Versace 868 824 1,028
Jimmy Choo 450 554 596
Michael Kors 2,852 2,982 3,202
4,170 4,360 4,826
The following table presents our retail stores by geographic location:
As of As of
March 27, 2021 March 28, 2020
Versace Jimmy Choo Michael Kors Versace Jimmy Choo Michael Kors
Store count by region:
The Americas 34 44 353 30 45 380
EMEA 57 74 176 60 76 180
Asia 119 109 291 116 105 279
210 227 820 206 226 839
Key Performance Indicators and Statistics
We use a number of key indicators of operating results to evaluate our performance, including the following (dollars in millions):
Fiscal Years Ended
March 27,
2021 March 28,
2020 March 30,
2019
Total revenue $ 4,060 $ 5,551 $ 5,238
Gross profit as a percent of total revenue 64.0 % 58.9 % 60.7 %
Income (loss) from operations $ 19 $ (192) $ 735
Income (loss) from operations as a percent of total revenue 0.5 % (3.5) % 14.0 %
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Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Critical accounting policies are those that are the most important to the portrayal of our results of operations and financial condition and that require our most difficult, subjective and complex judgments to make estimates about the effect of matters that are inherently uncertain. In applying such policies, we must use certain assumptions that are based on our informed judgments, assessments of probability and best estimates. Estimates, by their nature, are subjective and are based on analysis of available information, including current and historical factors and the experience and judgment of management. We evaluate our assumptions and estimates on an ongoing basis. While our significant accounting policies are detailed in Note 2 to the accompanying financial statements, our critical accounting policies are discussed below and include revenue recognition, inventories, long-lived assets, goodwill and other indefinite-lived intangible assets, share-based compensation, derivatives and income taxes.
Revenue Recognition
Revenue is recognized when control of the promised goods or services is transferred to our customers in an amount that reflects the consideration we expect to be entitled to in exchange for goods or services. We recognize retail store revenue when control of the product is transferred at the point of sale at our owned stores, including concessions. Revenue from sales through our e-commerce sites is recognized at the time of delivery to the customer, reduced by an estimate of returns. Wholesale revenue is recognized net of estimates for sales returns, discounts, markdowns and allowances, after merchandise is shipped and control of the underlying product is transferred to our wholesale customers. To arrive at net sales for retail, gross sales are reduced by actual customer returns, as well as by a provision for estimated future customer returns, which is based on management’s review of historical and current customer returns. The amounts reserved for retail sales returns were $20 million, $12 million and $15 million at March 27, 2021, March 28, 2020 and March 30, 2019, respectively. Net sales for wholesale equals gross sales, reduced by provisions for estimated future returns based on current expectations, as well as trade discounts, markdowns, allowances, operational chargebacks, and certain cooperative selling expenses. Total sales reserves for wholesale were $78 million, $154 million and $112 million at March 27, 2021, March 28, 2020 and March 30, 2019, respectively. These estimates are based on such factors as historical trends, actual and forecasted performance and market conditions, which are reviewed by management on a quarterly basis. Our historical estimates of these costs were not materially different from actual results.
Royalty revenue generated from product licenses, which includes contributions for advertising, is based on reported sales of licensed products bearing our tradenames at rates specified in the license agreements. These agreements are also subject to contractual minimum levels. Royalty revenue generated by geographic licensing agreements is recognized as it is earned under the licensing agreements based on reported sales of licensees applicable to specified periods, as outlined in the agreements. These agreements allow for the use of our tradenames to sell our branded products in specific geographic regions.
Inventories
Our inventory costs include amounts paid to independent manufacturers, plus duties and freight to bring the goods to the Company’s warehouses, as well as shipments to stores. We continuously evaluate the composition of our inventory and make adjustments when the cost of inventory is not expected to be fully recoverable. The net realizable value of our inventory is estimated based on historical experience, current and forecasted demand and market conditions. In addition, reserves for inventory losses are estimated based on historical experience and inventory counts. Our inventory reserves are estimates, which could vary significantly from actual results if future economic conditions, customer demand or competition differ from expectations. Our historical estimates of these adjustments have not differed materially from actual results.
The combined total of raw materials and work in process inventory recorded on the our consolidated balance sheets as of March 27, 2021 and March 28, 2020 were $28 million and $27 million, respectively. The net realizable value of our inventory as of March 27, 2021 includes the adverse impacts related to the COVID-19 pandemic. This includes the impact from temporary retail store closures, wholesale customer store closures, reductions in retail store traffic, international tourism and consumer consumption.
Long-lived Assets
We evaluate all long-lived assets, including operating lease right-of-use assets, property and equipment and definite-lived intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of any
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such asset may not be recoverable. For the purposes of impairment testing, we group long-lived assets at the lowest level of identifiable cash flow. Our leasehold improvements are typically amortized over the life of the store lease, including reasonably assured renewals and our shop-in-shops are amortized over a useful life of three or four years. Our impairment testing is based on our best estimate of the future operating cash flows. If the sum of our estimated undiscounted future cash flows associated with the asset is less than the asset’s carrying value, we would recognize an impairment charge, which is measured as the amount by which the carrying value exceeds the fair value of the asset. The fair values determined by management require significant judgment and include certain assumptions regarding future sales and expense growth rates, discount rates and estimates of real estate market fair values. As such, these estimates may differ from actual results and are affected by future market and economic conditions.
During Fiscal 2021, Fiscal 2020 and Fiscal 2019, we recorded impairment charges of $158 million, $357 million and $21 million, respectively, which were primarily related to operating lease right-of-use assets and fixed assets of our retail store locations. Please refer to Note 8 and Note 14 of the accompanying consolidated audited financial statements for additional information.
Goodwill and Other Indefinite-lived Intangible Assets
We record intangible assets based on their fair value on the date of acquisition. Goodwill is recorded as the difference between the fair value of the purchase consideration and the fair value of the net identifiable tangible and intangible assets acquired. The brand intangible assets recorded in connection with the acquisitions of Versace and Jimmy Choo were determined to be indefinite-lived intangible assets, which are not subject to amortization. We perform an impairment assessment of goodwill, as well as the Versace brand and Jimmy Choo brand intangible assets on an annual basis, or whenever impairment indicators exist. In the absence of any impairment indicators, goodwill, the Versace brand and the Jimmy Choo brand are assessed for impairment during the fourth quarter of each fiscal year. Judgments regarding the existence of impairment indicators are based on market conditions and operational performance of the business.
We may assess our goodwill and our brand indefinite-lived intangible assets for impairment initially using a qualitative approach to determine whether it is more likely than not that the fair value of these assets is greater than their carrying value. When performing a qualitative test, we assess various factors including industry and market conditions, macroeconomic conditions and performance of our businesses. If the results of the qualitative assessment indicate that it is more likely than not that our goodwill and other indefinite-lived intangible assets are impaired, a quantitative impairment analysis is performed to determine if impairment is required. We may also elect to perform a quantitative analysis of goodwill and our indefinite-lived intangible assets initially rather than using a qualitative approach.
The impairment testing for goodwill is performed at the reporting unit level. We use industry accepted valuation models and set criteria that are reviewed and approved by various levels of management and, in certain instances, we engage independent third-party valuation specialists for advice. To determine the fair value of a reporting unit, we use a combination of the income and market approaches, when applicable. We believe the blended use of both models, when applicable, compensates for the inherent risk associated with either model if used on a stand-alone basis, and this combination is indicative of the factors a market participant would consider when performing a similar valuation. If the fair value of a reporting unit exceeds the related carrying value, the reporting unit’s goodwill is considered not to be impaired and no further testing is performed. If the carrying value of a reporting unit exceeds its fair value, an impairment loss is recorded for the difference. These valuations are affected by certain estimates, including future revenue growth rates, future operating expense growth rates, gross margins and discount rates. Future events could cause us to conclude that impairment indicators exist, and goodwill may be impaired.
When performing a quantitative impairment assessment of our brand intangible assets, the fair value of the Versace and the Jimmy Choo brands is estimated using a discounted cash flow analysis based on the "relief from royalty" method, assuming that a third party would be willing to pay a royalty in lieu of ownership for this intangible asset. This approach is dependent on many factors, including estimates of future revenue growth rates, royalty rates and discount rates. Actual future results may differ from these estimates. An impairment loss is recognized when the estimated fair value of the brand intangible assets is less than its carrying amount.
During the fourth quarter of Fiscal 2021, we performed our annual goodwill and indefinite-lived intangible assets impairment analysis for each brand. Based on qualitative impairment assessment of the Michael Kors reporting units, we concluded that it is more likely than not that the fair value of the Michael Kors reporting units exceeded its carrying value and, therefore, was not impaired. We elected to perform quantitative impairment analyses for both the Versace and Jimmy Choo reporting units, using a combination of income and market approaches to estimate the fair values of each brand's reporting units. We also elected to perform an impairment analysis for both the Versace and Jimmy Choo brand intangible assets using an income approach to estimate the fair values. Based on the results of these assessments, we determined there was no impairment
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loss for the Jimmy Choo retail reporting unit as its fair value is approximately 3% higher than the carrying value, which has a goodwill balance of $221 million. We also concluded that the fair values of the Versace reporting units and the brand intangible assets exceeded the related carrying amounts and no impairment was required. The fair value of the Versace retail reporting unit, Versace wholesale reporting unit and Versace licensing reporting unit are at least 20% higher than their respective carrying values. The fair value of the Versace retail brand and Versace wholesale brand are more than 10% higher than their respective carrying values.
However, we concluded that the fair values of the Jimmy Choo wholesale and Jimmy Choo licensing reporting units, along with the Jimmy Choo brand intangible assets, did not exceed their related carrying amounts. These impairment charges were primarily related to higher discount rates in the current year driven by a change in market factors as well as a shift in expected revenue and earnings mix to the retail segment.
Accordingly, we recorded a goodwill impairment charge of $94 million related to the Jimmy Choo wholesale and Jimmy Choo licensing reporting units and $69 million impairment charge related to the Jimmy Choo brand intangible assets during Fiscal 2021. We recorded a goodwill impairment charge of $171 million related to the Jimmy Choo retail and Jimmy Choo licensing reporting units and $180 million impairment charge related to the Jimmy Choo brand intangible assets during Fiscal 2020. The impairment charges were recorded within impairment of assets on our consolidated statement of operations and comprehensive (loss) income for the fiscal years ended March 27, 2021 and March 28, 2020. We did not incur any impairment charges in Fiscal 2019. See Note 9 to the accompanying audited financial statements for information relating to the annual impairment analysis performed during the fourth quarters of Fiscal 2021, Fiscal 2020 and Fiscal 2019.
It is possible that our conclusions regarding impairment or recoverability of goodwill or other indefinite intangible assets could change in future periods if, for example, (i) our businesses do not perform as projected, (ii) overall economic conditions in future years vary from current assumptions, (iii) business conditions or strategies change from our current assumptions, (iv) discount rates change, (v) market multiples change or (vi) the identification of our reporting units change, among other factors. Such changes could result in a future impairment charge of goodwill or other indefinite intangible assets.
Share-based Compensation
We grant share-based awards to certain of our employees and directors. The grant date fair value of share options is calculated using the Black-Scholes option pricing model, which requires us to use subjective assumptions. The closing market price at the grant date is used to determine the grant date fair value of restricted stock units (“RSUs”) and performance-based RSUs. These values are recognized as expense over the requisite service period, net of estimated forfeitures, based on expected attainment of pre-established performance goals for performance grants, or the passage of time for those grants which have only time-based vesting requirements. Compensation expense for performance-based RSUs is recognized over the employees' requisite service period when attainment of the performance goals is deemed probable, which involves judgment as to achievement of certain performance metrics.
We use our own historical experience in determining the expected holding period and volatility of our time-based share option awards. Determining the grant date fair value of share-based awards requires considerable judgment, including estimating expected volatility, expected term, risk-free rate and forfeitures. If factors change and we employ different assumptions, the fair value of future awards and resulting share-based compensation expense may differ significantly from what we have estimated in the past.
Derivative Financial Instruments
Forward Foreign Currency Exchange Contracts
We use forward currency exchange contracts to manage our exposure to fluctuations in foreign currency for certain of our transactions. We are exposed to risks on certain purchase commitments to foreign suppliers based on the value of our purchasing subsidiaries’ local currency relative to the currency requirement of the supplier on the date of the commitment. As such, we enter into forward currency contracts that generally mature in 12 months or less, which is consistent with the related purchase commitments. We designate certain contracts related to the purchase of inventory that qualify for hedge accounting as cash flow hedges. All of our derivative instruments are recorded in our consolidated balance sheets at fair value on a gross basis, regardless of their hedge designation. The effective portion of changes in the fair value for contracts designated as cash flow hedges is recorded in equity as a component of accumulated other comprehensive income (loss) until the hedged item effects earnings. When the inventory related to forecasted inventory purchases that are being hedged is sold to a third party, the gains or losses deferred in accumulated other comprehensive income (loss) are recognized within cost of goods sold. We use regression analysis to assess effectiveness of derivative instruments that are designated as hedges, which compares the change
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in the fair value of the derivative instrument to the change in the related hedged item. Effectiveness is assessed on a quarterly basis and any portion of the designated hedge contracts deemed ineffective is recorded to foreign currency (gain) loss. If the hedge is no longer expected to be highly effective in the future, future changes in the fair value are recognized in earnings. For those contracts that are not designated as hedges, changes in the fair value are recorded in foreign currency (gain) loss in our consolidated statements of operations and comprehensive (loss) income.
Net Investment Hedges
We also use fixed-to-fixed cross currency swap agreements to hedge our net investments in foreign operations against future volatility in the exchange rates between its U.S. Dollars and these foreign currencies. We have elected the spot method of designating these contracts under ASU 2017-12, as defined in Note 2 to the accompanying consolidated financial statements, and have designated these contracts as net investment hedges. The net gain or loss on net investment hedges is reported within foreign currency translation gains and losses (“CTA”), as a component of accumulated other comprehensive income (loss) on our consolidated balance sheets. Interest accruals and coupon payments are recognized directly in interest expense in our consolidated statements of operations and comprehensive (loss) income. Upon discontinuation of a hedge, all previously recognized amounts remain in CTA until the net investment is sold, diluted or liquidated.
We are exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. In order to mitigate counterparty credit risk, we only enter into contracts with carefully selected financial institutions based upon their credit ratings and certain other financial factors, adhering to established limits for credit exposure.
During the fourth quarter of Fiscal 2020, we terminated all of our net investment hedges related to our Euro-denominated subsidiaries. The early termination of these hedges resulted in the receipt of $296 million in cash during the fourth quarter of Fiscal 2020. During Fiscal 2021, the Company resumed its normal hedging program and entered into multiple fixed-to-fixed cross-currency swap agreements with aggregate notional amounts of $3 billion to hedge its net investment in Euro-denominated subsidiaries.
Interest Rate Swap Agreements
We also use interest rate swap agreements to hedge the variability of our cash flows resulting from floating interest rates on our borrowings. When an interest rate swap agreement qualifies for hedge accounting as a cash flow hedge, the changes in the fair value are recorded within equity as a component of accumulated other comprehensive income (loss) and are reclassified into interest expense in the same period during which the hedged transactions affect earnings.
Income Taxes
Deferred income tax assets and liabilities reflect temporary differences between the tax basis and financial reporting basis of our assets and liabilities and are determined using the tax rates and laws in effect for the periods in which the differences are expected to reverse. We periodically assess the realizability of deferred tax assets and the adequacy of deferred tax liabilities, based on the results of local, state, federal or foreign statutory tax audits or our own estimates and judgments.
Realization of deferred tax assets associated with net operating loss and tax credit carryforwards is dependent upon generating sufficient taxable income prior to their expiration in the applicable tax jurisdiction. We periodically review the recoverability of our deferred tax assets and provide valuation allowances as deemed necessary to reduce deferred tax assets to amounts that more-likely-than-not will be realized. This determination involves considerable judgment and our management considers many factors when assessing the likelihood of future realization of deferred tax assets, including recent earnings results within various taxing jurisdictions, expectations of future taxable income, the carryforward periods remaining and other factors. Changes in the required valuation allowance are recorded in income in the period such determination is made. Deferred tax assets could be reduced in the future if our estimates of taxable income during the carryforward period are significantly reduced or alternative tax strategies are no longer viable.
We recognize the impact of an uncertain income tax position taken on our income tax returns at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. The effect of an uncertain income tax position will not be taken into account if the position has less than a 50% likelihood of being sustained. Our tax positions are analyzed periodically (at least quarterly) and adjustments are made as events occur that warrant adjustments for those positions. We record interest expense and penalties payable to relevant tax authorities as income tax expense.
In response to the COVID-19 pandemic, local governments enacted, or are in the process of enacting, measures to provide aid and economic stimulus to companies. On March 27, 2020, the United States government enacted the Coronavirus
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Aid, Relief, and Economic Security Act (the “CARES Act”), which includes various tax provisions aimed at providing economic relief. We realized a slight favorable cash flow impact in Fiscal 2021 as a result of the deferral of income tax payments under the CARES Act and other local government relief initiatives. We also considered the significant adverse impact of COVID-19 on our business in assessing the realizability of our deferred tax assets. Based on this assessment, we determined that valuation allowances of approximately $65 million were needed against a portion of our non-US deferred tax assets in Fiscal 2020 and increased to $95 million in Fiscal 2021. We will continue to monitor the impacts of COVID-19 on our ability to realize our deferred tax assets and on the tax provision. Another provision of the CARES Act applicable to us is the modification to allow for a five-year carryback of net operating losses. We recognized a $13 million benefit from the net operating loss (“NOL”) carryback claim in Fiscal 2021. This reflects our provisional estimate and is subject to adjustment as estimation approaches are refined.
New Accounting Pronouncements
Please refer to Note 2 to the accompanying consolidated financial statements for detailed information relating to recently adopted and recently issued accounting pronouncements and the associated impacts.
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Results of Operations
A discussion regarding our results of operations for Fiscal 2021 compared to Fiscal 2020 is presented below. A discussion regarding our results of operations for Fiscal 2020 compared to Fiscal 2019 can be found under Item 7 in our Annual Report on Form 10-K for the year ended March 28, 2020, filed with the SEC on July 8, 2020, which is available on the SEC’s website at www.sec.gov and our investor website at www.capriholdings.com .
Comparison of Fiscal 2021 with Fiscal 2020
The following table details the results of our operations for Fiscal 2021 and Fiscal 2020 and expresses the relationship of certain line items to total revenue as a percentage (dollars in millions):
Fiscal Years Ended $ Change % Change % of Total
Revenue for
Fiscal 2021
% of Total
Revenue for
Fiscal 2020
March 27,
2021 March 28,
2020
Statements of Operations Data:
Total revenue $ 4,060 $ 5,551 $ (1,491) (26.9) %
Cost of goods sold 1,463 2,280 (817) (35.8) % 36.0 % 41.1 %
Gross profit 2,597 3,271 (674) (20.6) % 64.0 % 58.9 %
Selling, general and administrative expenses 2,018 2,464 (446) (18.1) % 49.7 % 44.4 %
Depreciation and amortization 212 249 (37) (14.9) % 5.2 % 4.5 %
Impairment of assets 316 708 (392) (55.4) % 7.8 % 12.8 %
Restructuring and other charges 32 42 (10) (23.8) % 0.8 % 0.8 %
Total operating expenses 2,578 3,463 (885) (25.6) % 63.5 % 62.4 %
Income (loss) from operations 19 (192) 211 NM 0.5 % (3.5) %
Other income, net (7) (6) (1) (16.7) % (0.2) % (0.1) %
Interest expense, net 43 18 25 NM 1.1 % 0.3 %
Foreign currency (gain) loss (20) 11 (31) NM (0.5) % 0.2 %
Income (loss) before provision for income taxes 3 (215) 218 NM 0.1 % (3.9) %
Provision for income taxes 66 10 56 NM 1.6 % 0.2 %
Net loss (63) (225) 162 (72.0) %
Less: Net loss attributable to noncontrolling interests (1) (2) 1 NM
Net loss attributable to Capri $ (62) $ (223) $ 161 (72.2) %
NM Not meaningful
Total Revenue
Total revenue decreased $1.491 billion, or 26.9%, to $4.060 billion for Fiscal 2021, compared to $5.551 billion for Fiscal 2020, which included net favorable foreign currency effects of $107 million primarily related to the strengthening of the Euro, the Chinese Renminbi and the British Pound against the U.S. Dollar in Fiscal 2021, as compared to Fiscal 2020. On a constant currency basis, our total revenue decreased $1.598 billion, or 28.8%. 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
Gross profit decreased $674 million, or 20.6%, to $2.597 billion during Fiscal 2021, compared to $3.271 billion for Fiscal 2020, which included net favorable foreign currency effects of $64 million. Gross profit as a percentage of total revenue increased 510 basis points to 64.0% during Fiscal 2021, compared to 58.9% during Fiscal 2020. The increase in gross profit margin was primarily attributable to a higher gross profit margin for Michael Kors driven by a higher average unit price and favorable channel mix during Fiscal 2021, as compared to Fiscal 2020.
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Total Operating Expenses
Total operating expenses decreased $885 million, or 25.6%, to $2.578 billion during Fiscal 2021, compared to $3.463 billion for Fiscal 2020. Our operating expenses included a net unfavorable foreign currency impact of approximately $108 million. Total operating expenses as a percentage of total revenue increased to 63.5% in Fiscal 2021, compared to 62.4% in Fiscal 2020. The components that comprise total operating expenses are detailed below.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $446 million, or 18.1%, to $2.018 billion during Fiscal 2021, compared to $2.464 billion for Fiscal 2020, 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 49.7% during Fiscal 2021, compared to 44.4% for Fiscal 2020, primarily due to deleverage on lower revenue and increased e-commerce related costs as a percentage of total revenue.
Corporate unallocated expenses, which are included within selling, general and administrative expenses discussed above, but are not directly attributable to a reportable segment, were $152 million in Fiscal 2021 and Fiscal 2020.
Depreciation and Amortization
Depreciation and amortization decreased $37 million, or 14.9%, to $212 million during Fiscal 2021, compared to $249 million for Fiscal 2020. 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 5.2% as a percentage of total revenue during Fiscal 2021, compared to 4.5% for Fiscal 2020 primarily due to lower revenues during Fiscal 2021 due to COVID-19.
Impairment of Assets
During Fiscal 2021, we recognized asset impairment charges of $316 million. The decrease was primarily related to lower impairment of operating lease right-of-use assets, as well as lower impairment of Jimmy Choo goodwill and its brand intangible assets. During Fiscal 2020, we recognized asset impairment charges of approximately $708 million, which were primarily related to the impairment of operating right-of-use assets, as well as the impairment of Jimmy Choo goodwill and its brand intangible assets as part of our annual assessments (see Note 14 to the accompanying consolidated financial statements for additional information).
Restructuring and Other Charges
During Fiscal 2021, we recognized restructuring and other charges of $32 million, which included other costs of $27 million, primarily related to equity awards associated with the acquisition of Versace and closures of corporate locations during Fiscal 2021 and $5 million related to our Capri Retail Store Optimization Program.
During Fiscal 2020, we recognized restructuring and other charges of $42 million, which included restructuring charges of $8 million, primarily related to our Michael Kors Retail Fleet Optimization Plan and other costs of $34 million. The other costs recorded during Fiscal 2020 primarily related to equity awards associated with the acquisition of Versace and Jimmy Choo (see Note 11 to the accompanying consolidated financial statements for additional information).
Income (Loss) from Operations
As a result of the foregoing, income (loss) from operations increased $211 million to income from operations of $19 million during Fiscal 2021, compared to a loss from operations of $192 million for Fiscal 2020. Income (loss) from operations as a percentage of total revenue increased to 0.5% in Fiscal 2021, compared to (3.5)% in Fiscal 2020. See Note 20 to the accompanying consolidated financial statements for a reconciliation of our segment operating income to total operating income.
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Interest expense, net
Interest expense, net increased $25 million, to $43 million for Fiscal 2021 as compared to $18 million for Fiscal 2020, primarily due to a decrease of interest income attributable to lower average interest rates and lower average notional amount outstanding on our net investment hedges 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 12 and Note 15 to the accompanying consolidated financial statements for additional information).
Foreign Currency (Gain) Loss
We recognized a net foreign currency gain of $20 million during Fiscal 2021, primarily attributable to the remeasurement of U.S. dollar-denominated intercompany payables with certain of our subsidiaries.
We recognized a net foreign currency loss of $11 million during Fiscal 2020, primarily attributable to the revaluation and settlement of certain of our accounts payable in currencies other than their functional currency, as well as the remeasurement of dollar-denominated intercompany loans with certain of our subsidiaries.
Provision for Income Taxes
We recognized $66 million of income tax expense on pre-tax income of $3 million during Fiscal 2021, compared with $10 million of income tax expense on a pre-tax loss of $215 million for Fiscal 2020. Our effective tax rate for Fiscal 2021 was significantly higher than our effective tax rate in Fiscal 2020, and not a meaningful or comparable metric, primarily due to the relationship between our income tax expense and minimal pre-tax income in the current year. The Fiscal 2021 income tax expense was higher than Fiscal 2020 primarily due to tax effects of changes in our geographic mix of earnings, a lower favorable effect of our global financing activities during Fiscal 2021 compared to Fiscal 2020, increases in uncertain tax positions during Fiscal 2021 as well as the impact of the United Kingdom’s increase in the enacted corporate income tax rate during Fiscal 2021. The increase was partially offset by reduced effects of valuation allowances established on a portion of our non-US deferred tax assets, a release of a valuation allowance on a portion of our deferred tax assets, and a lower unfavorable impact of non-tax deductible goodwill impairment during Fiscal 2021, compared to Fiscal 2020. The variance between Fiscal 2021 and Fiscal 2020 effective income tax rates is substantially affected by the material change in our pre-tax (loss) income. As a result, the effect that discrete tax amounts have on the effective income tax rate during the year is not comparable. See Note 18 to the accompanying consolidated financial statements for additional information.
The global financing activities are related to our previously disclosed 2014 move of our principal executive office from Hong Kong to the U.K. and decision to become a U.K. tax resident. In connection with this decision, we funded our international growth strategy through intercompany debt financing arrangements between certain of our U.S., U.K. and Switzerland subsidiaries in December 2015. Accordingly, due to the difference in the statutory income tax rates between these jurisdictions, we realized a lower effective tax rate on consolidated pre-tax income.
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 Capri
As a result of the foregoing, our net loss attributable to Capri decreased $161 million, or 72.2%, to a net loss of $62 million during Fiscal 2021, compared to net loss of $223 million for Fiscal 2020.
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Segment Information
Versace
Fiscal Years Ended % Change
March 27,
2021 March 28,
2020 $ Change As Reported Constant
Currency
Revenues $ 718 $ 843 $ (125) (14.8) % (19.8) %
Income (loss) from operations 21 (8) 29 NM
Operating margin 2.9 % (0.9) %
NM Not meaningful
Revenues
Versace revenues decreased $125 million to $718 million for Fiscal 2021, compared to $843 million for Fiscal 2020, which included favorable foreign currency effects of $42 million. On a constant currency basis, revenue decreased $167 million, or 19.8%, primarily reflecting the adverse impacts related to COVID-19.
Income (loss) from Operations
During Fiscal 2021, Versace recorded income from operations of $21 million compared to a loss from operations of $8 million for Fiscal 2020. Operating margin increased from (0.9)% for Fiscal 2020 to 2.9% for Fiscal 2021, primarily due to a favorable channel mix, partially offset by a decline in revenue as a result of COVID-19.
Jimmy Choo
Fiscal Years Ended % Change
March 27,
2021 March 28,
2020 $ Change As Reported Constant
Currency
Revenues $ 418 $ 555 $ (137) (24.7) % (26.8) %
Loss from operations (55) (13) (42) NM
Operating margin (13.2) % (2.3) %
NM Not meaningful
Revenues
Jimmy Choo revenues decreased $137 million, or 24.7% to $418 million for Fiscal 2021, compared to $555 million for Fiscal 2020, which included favorable foreign currency effects of $12 million. On a constant currency basis, revenue decreased $149 million, or 26.8%, primarily reflecting adverse impacts related to COVID-19.
Loss from Operations
During Fiscal 2021, Jimmy Choo recorded a loss from operations of $55 million compared to $13 million for Fiscal 2020. Operating margin declined from (2.3)% for Fiscal 2020 to (13.2)% for Fiscal 2021, primarily reflecting adverse impacts related to COVID-19.
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Michael Kors
Fiscal Years Ended % Change
March 27,
2021 March 28,
2020 $ Change As Reported Constant
Currency
Revenues $ 2,924 $ 4,153 $ (1,229) (29.6) % (30.9) %
Income from operations 595 850 (255) (30.0) %
Operating margin 20.3 % 20.5 %
Revenues
Michael Kors revenues decreased $1.229 billion, or 29.6%, to $2.924 billion for Fiscal 2021, compared to $4.153 billion for Fiscal 2020, which included favorable foreign currency effects of $53 million. On a constant currency basis, revenue decreased $1.282 billion, or 30.9%, primarily reflecting adverse impacts related to COVID-19.
Income from Operations
During Fiscal 2021, Michael Kors recorded income from operations of $595 million compared to $850 million for Fiscal 2020. Operating margin declined from 20.5% for Fiscal 2020 to 20.3% for Fiscal 2021, primarily due to a decline in revenue related to COVID-19, partially offset by higher gross profit margins related to a higher average unit price and favorable channel mix, as well as our cost reduction initiatives as a result of COVID-19.
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Liquidity and Capital Resources
Our primary sources of liquidity are the cash flows generated from our operations, along with borrowings available under our credit facilities (see below discussion regarding “Revolving Credit Facilities”) and available cash and cash equivalents. Our primary use of this liquidity is to fund the ongoing cash requirements, including our working capital needs and capital investments in our business, debt repayments, acquisitions, returns of capital, including share repurchases and other corporate activities. We believe that the cash generated from our operations, together with borrowings available under our revolving credit facilities and available cash and cash equivalents, will be sufficient to meet our working capital needs for the next 12 months and beyond, 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 $111 million on capital expenditures during Fiscal 2021, and expect to spend approximately $200 million during Fiscal 2022. This anticipated increase reflects continued expenditures related to our retail operations (including e-commerce), ERP system implementation and our corporate offices. The majority of the Fiscal 2021 expenditures related to our retail operations (including e-commerce) and our corporate offices.
The following table sets forth key indicators of our liquidity and capital resources (in millions):
As of
March 27,
2021 March 28,
2020
Balance Sheet Data:
Cash and cash equivalents $ 232 $ 592
Working capital $ (75) $ 493
Total assets $ 7,481 $ 7,946
Short-term debt $ 123 $ 167
Long-term debt $ 1,219 $ 2,012
Fiscal Years Ended
March 27,
2021 March 28,
2020 March 30,
2019
Cash flows provided by (used in):
Operating activities $ 624 $ 859 $ 694
Investing activities (124) 62 (2,125)
Financing activities (870) (497) 1,451
Effect of exchange rate changes 12 (4) (11)
Net (decrease) increase in cash, cash equivalents and restricted cash $ (358) $ 420 $ 9
Cash Provided by Operating Activities
Cash provided by operating activities decreased $235 million to $624 million during Fiscal 2021, as compared to $859 million for Fiscal 2020, which was due to a decrease in our net income after non-cash adjustments, primarily driven by a decrease in impairments and a decrease in net loss, partially offset by increases related to changes in our working capital, primarily attributable to fluctuations in the timing of payments and receipts due to the impact of COVID-19.
Cash provided by operating activities increased $165 million to $859 million during Fiscal 2020, as compared to $694 million for Fiscal 2019, which was primarily due to increases related to changes in our working capital, primarily attributable to decreased inventory purchases, as well as the timing of payments and receipts. The net increase in cash flows also included decreases to our net income after non-cash adjustments.
Cash (Used in) Provided by Investing Activities
Net cash used in investing activities was $124 million during Fiscal 2021, as compared to net cash provided by investing activities of $62 million during Fiscal 2020. The $186 million increase in cash used in investing activities was primarily attributable to a $298 million settlement of net investment hedges during Fiscal 2020, partially offset by a $112 million decrease in capital expenditures compared to prior year.
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Net cash provided by investing activities was $62 million during Fiscal 2020, as compared to net cash used in investing activities of $2.125 billion during Fiscal 2019. The $2.187 billion increase in cash from investing activities was primarily attributable to $1.862 billion of cash paid, net of cash acquired, in connection with our Fiscal 2019 acquisition of the Versace business. The increase in cash from investing activities was also due to a $77 million realized loss related to an undesignated derivative contract during Fiscal 2019 associated with the Versace acquisition and the settlement of net investment hedges of $298 million during Fiscal 2020, partly offset by higher capital expenditures of $42 million, due to higher spending related to the ERP system implementation and expenditures related to corporate infrastructure.
Cash (Used in) Provided by Financing Activities
Net cash used in financing activities was $870 million during Fiscal 2021, as compared to $497 million during Fiscal 2020. The increase in cash used by financing activities of $373 million was primarily due to an increase in net debt repayments of $474 million, partially offset by a decrease of $101 million in cash payments to repurchase our ordinary shares during Fiscal 2021.
Net cash used in financing activities was $497 million during Fiscal 2020, as compared to net cash provided by financing activities of $1.451 billion during Fiscal 2020. The increase in cash used by financing activities of $1.948 billion was due to decreased debt borrowings of $2.038 billion, net of debt repayments, primarily attributable to higher term loan borrowings to finance the acquisition of Versace during Fiscal 2019, partially offset by a decrease of $105 million in cash payments to repurchase our ordinary shares during Fiscal 2020.
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Debt Facilities
The following table presents a summary of the Company’s borrowing capacity and amounts outstanding as of March 27, 2021 and March 28, 2020 (dollars in millions):
Fiscal Years Ended
March 27,
2021 March 28,
2020
Senior Secured Revolving Credit Facility:
Revolving Credit Facility (excluding up to a $500 million accordion feature) (1)
Total Availability $ 1,000 $ 1,000
Borrowings outstanding (2)
— 681
Letter of credit outstanding 27 18
Remaining availability $ 973 $ 301
Term Loan Facility ($1.6 billion)
Borrowings Outstanding, net of debt issuance costs (2)
$ 865 $ 1,010
Remaining availability $ — $ —
364 Credit Facility ($230 million)
Total availability $ 230 $ —
Remaining availability $ 230 $ —
Senior Notes due 2024
Borrowings Outstanding, net of debt issuance costs and discount amortization (2)
$ 447 $ 446
Other Borrowings (3)
$ 21 $ 3
Hong Kong Uncommitted Credit Facility:
Total availability (100 million Hong Kong Dollars) $ 13 $ 14
Borrowings outstanding — —
Bank guarantees outstanding (3 million and 4 million Hong Kong Dollars) — 1
Remaining availability (97 million and 96 million Hong Kong Dollars) $ 13 $ 13
China Uncommitted Credit Facility:
Borrowings outstanding $ — $ —
Remaining availability (100 million Chinese Yuan) $ 15 $ 14
Japan Credit Facility:
Total availability (1.0 billion Japanese Yen) $ 9 $ 9
Borrowings outstanding (1.0 billion and 0.0 billion Japanese Yen) (4)
9 —
Remaining availability (0.0 billion and 1.0 billion Japanese Yen) $ — $ 9
Versace Uncommitted Credit Facility:
Total availability (57 million and 52 million Euro) 67 $ 58
Borrowings outstanding (0 million and 35 million Euro) (4)
— 39
Remaining availability (57 million and 17 million Euro) $ 67 $ 19
Total borrowings outstanding (1)
$ 1,342 $ 2,179
Total remaining availability $ 1,298 $ 356
(1) The financial covenant in our 2018 Credit Facility requiring us to maintain a ratio of the sum of total indebtedness plus the capitalized amount of all operating lease obligations for the last four fiscal quarters to Consolidated EBITDAR of no greater than 3.75 to 1 has been waived through the fiscal quarter ending June 26, 2021. We terminated the waiver period effective May 26, 2021. Effective as of that date, the applicable ratio will be calculated
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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 March 27, 2021 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 March 27, 2021 and March 28, 2020, except for the current portion of $97 million and $128 million, respectively, outstanding under the 2018 Term Loan Facility, which was recorded within short-term debt at March 27, 2021 and March 28, 2020.
(3) The balance as of March 27, 2021 consists of $17 million related to our supplier finance program recorded within short-term debt in our consolidated balance sheets and $4 million of other loans recorded as long-term debt in our consolidated balance sheets. The balance as of March 28, 2020 consists of $3 million of other loans recorded as long-term debt in our consolidated balance sheets.
(4) Recorded as short-term debt in our consolidated balance sheets as of March 27, 2021 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 March 27, 2021, there were 29 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.
See Note 12 and Note 22 in the accompanying consolidated financial statements for detailed information relating to our credit facilities and debt obligations.
Share Repurchase Program
The following table presents our treasury share repurchases during the fiscal years ended March 27, 2021 and March 28, 2020 (dollars in millions):
Fiscal Years Ended
March 27,
2021 March 28,
2020
Cost of shares repurchased under share repurchase program $ — $ 100
Fair value of shares withheld to cover tax obligations for vested restricted share awards 1 2
Total cost of treasury shares repurchased $ 1 $ 102
Shares repurchased under share repurchase program — 2,711,807
Shares withheld to cover tax withholding obligations 48,528 63,958
48,528 2,775,765
During the first quarter of Fiscal 2021, the Company suspended its $500 million share-repurchase program in response to the continued impact of the COVID-19 pandemic. See Note 12 in the accompanying financial statements for additional information.
As of March 27, 2021, the remaining availability under our share repurchase program was $400 million. Under this program, 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. This program may be suspended or discontinued at any time.
See Note 16 and Note 22 to the accompanying consolidated financial statements for additional information.
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Contractual Obligations and Commercial Commitments
As of March 27, 2021, our contractual obligations and commercial commitments were as follows (in millions):
Fiscal Years Fiscal 2022 Fiscal
2023-2024
Fiscal
2025-2026
Fiscal 2027 and thereafter Total
Operating leases $ 502 $ 807 $ 512 $ 493 $ 2,314
Interest, net 9 23 3 — 35
Inventory purchase obligations 688 — — — 688
Other commitments 59 11 — — 70
Short-term debt 123 — — — 123
Long-term debt — 194 1,033 — 1,227
Total $ 1,381 $ 1,035 $ 1,548 $ 493 $ 4,457
Operating lease obligations represent equipment leases and the minimum lease rental payments due under non-cancelable operating leases for our real estate locations globally. In addition to the above amounts, we are typically required to pay real estate taxes, contingent rent based on sales volume and other occupancy costs relating to leased properties for our retail stores.
Interest, net represents the estimated net interest expense associated with our term loan based on the current interest rate and interest from our interest rate swap. It also includes the estimated net interest income from our net investment hedges.
Inventory purchase obligations represent contractual obligations for future purchases of inventory.
Other commitments include non-cancelable contractual obligations related to marketing and advertising agreements, information technology agreements and supply agreements.
Excluded from the above commitments is $107 million of long-term liabilities related to net uncertain tax positions, due to the uncertainty of the timing and nature of resolution.
The above table also excludes current liabilities (other than short-term debt and short-term operating lease liabilities) recorded as of March 27, 2021, as these items will be paid within one year, and non-current liabilities that have no cash outflows associated with them (e.g., deferred taxes).
Off-Balance Sheet Arrangements
We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating our business. In addition to the commitments in the above table, our off-balance sheet commitments relating to our outstanding letters of credit were $33 million at March 27, 2021, including $6 million in letters of credit issued outside of the 2018 Credit Facility. In addition, as of March 27, 2021, bank guarantees of approximately $35 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.