Capri Holdings Ltd 10-Q

ITEM 2. 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 interim report. 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 effect of the COVID-19 pandemic and its potential material and significant impact on the Company’s future financial and operational results if retail stores are forced to close again and the pandemic is prolonged, including that our estimates could materially differ if the severity of the COVID-19 situation worsens, or if there are further supply chain disruptions, including additional production delays and increased costs, the length and severity of such outbreak across the globe and the pace of recovery following 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 such 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 Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended March 27, 2021, filed with the Securities and Exchange Commission on May 26, 2021. 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 accessories, ready-to-wear, 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. 30 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 ready-to-wear 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 select 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 ready-to-wear, 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. See Item 1A — "The COVID-19 pandemic may continue to have a material adverse effect on our business and results of operations" of our Annual Report on Form 10-K for the fiscal year ended March 27, 2021 for additional discussion regarding risks to our business associated with the COVID-19 pandemic. Channel shift, macroeconomic factors, and demand for our accessories and related merchandise . Our performance is affected by trends in the luxury goods industry, global consumer spending, macroeconomic factors, overall levels of consumer travel and spending on discretionary items as well as shifts in demographics and changes in lifestyle preferences. Through 2019, the personal luxury goods market grew at a 5% rate over the past 20 years, with more recent growth driven by stronger Chinese demand from both international and local consumers and demographic and socioeconomic shifts resulting in younger consumers purchasing more luxury goods. Then, in 2020, due to the impact of the COVID-19 crisis, the personal luxury goods market declined 23%. Market studies indicate that the personal luxury goods market is predicted to increase at a 10% compound annual growth rate between 2020 and 2025, and will return to 2019 levels by the end of 2021 or in 2022. Future growth is expected to be driven by e-commerce, Chinese consumers and younger generations. As the personal luxury goods market continues to evolve, Capri is committed to creating engaging luxury experiences globally. In our view, increased customer engagement and tailoring merchandise to customer shopping and communication preferences are key to growing market share. We also continue to adjust our retail operating strategy to the changing business environment. Last year, we announced our Capri Retail Store Optimization Program to close approximately 170 of our retail stores over two fiscal years, which began during Fiscal 2021 and will continue into Fiscal 2022, in order to improve the profitability of our retail store fleet. Over this time period, we initially expected to incur approximately $75 million of one-time costs associated with these store closures, however, based on a reassessment, we expect these costs to be approximately $25 million. As of September 25, 2021, we have closed a total of 127 stores and recorded net restructuring charges of $1 million relating to the program since its inception. 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 or delays in shipping and distribution and other supply chain constraints . We have been experiencing global logistics challenges, including delays as a result of port congestion, vessel availability, container shortages and temporary 31 factory closures which are expected to continue for the duration of Fiscal 2022. Our freight costs have increased as carrier rates for ocean and air shipments have increased significantly, and the supply chain disruptions have caused us to increase our use of air freight with greater frequency than in the past. Any future disruptions in our shipping and distribution network, including impacts on our supply chain due to temporary closures of our manufacturing partners and shipping and fulfillment constraints, 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" of our Annual Report on Form 10-K for the fiscal year ended March 27, 2021 for additional discussion. Costs of manufacturing, tariffs, and import regulations. 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 will continue to experience significant additional duties and our gross margin will continue to 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 accessories, ready-to-wear and footwear through directly operated Versace boutiques throughout North America (United States and Canada), certain parts of EMEA (Europe, Middle East and Africa) and certain parts of Asia (including Australia), 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), certain parts of 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, certain parts of EMEA and certain parts of Asia. Our Michael Kors e-commerce business includes e-commerce sites in the U.S., Canada and EMEA and Asia. We also sell Michael Kors products directly to department stores, primarily located across the Americas and EMEA, 32 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. Unallocated Corporate 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 the three and six months ended September 25, 2021 and September 26, 2020 (in millions): Three Months Ended Six Months Ended September 25, 2021 September 26, 2020 September 25, 2021 September 26, 2020 Total revenue: Versace $ 282 $ 195 $ 522 $ 288 Jimmy Choo 137 122 279 173 Michael Kors 881 793 1,752 1,100 Total revenue $ 1,300 $ 1,110 $ 2,553 $ 1,561 Income (loss) from operations: Versace $ 55 $ 20 $ 103 $ (21) Jimmy Choo 1 — 12 (29) Michael Kors 220 190 460 142 Total segment income from operations 276 210 575 92 Less: Corporate expenses (45) (30) (86) (61) Restructuring and other charges (8) (9) (11) (17) Impairment of assets (33) (20) (33) (20) COVID-19 related charges 5 2 8 (3) Total income (loss) from operations $ 195 $ 153 $ 453 $ (9) 33 The following table presents our global network of retail stores and wholesale doors by brand: As of September 25, 2021 September 26, 2020 Number of full price retail stores (including concessions): Versace 151 154 Jimmy Choo 181 179 Michael Kors 530 548 862 881 Number of outlet stores: Versace 60 52 Jimmy Choo 56 48 Michael Kors 293 280 409 380 Total number of retail stores 1,271 1,261 Total number of wholesale doors: Versace 777 722 Jimmy Choo 454 504 Michael Kors 2,793 2,840 4,024 4,066 The following table presents our retail stores by geographic location: As of As of September 25, 2021 September 26, 2020 Versace Jimmy Choo Michael Kors Versace Jimmy Choo Michael Kors Store count by region: The Americas 37 46 350 33 45 362 EMEA 55 75 176 60 76 176 Asia 119 116 297 113 106 290 211 237 823 206 227 828 Key Consolidated Performance Indicators and Statistics We use a number of key indicators of operating results to evaluate our performance, including the following (dollars in millions): Three Months Ended Six Months Ended September 25, 2021 September 26, 2020 September 25, 2021 September 26, 2020 Total revenue $ 1,300 $ 1,110 $ 2,553 $ 1,561 Gross profit as a percent of total revenue 68.0 % 64.0 % 68.2 % 64.8 % Income (loss) from operations $ 195 $ 153 $ 453 $ (9) Income (loss) from operations as a percent of total revenue 15.0 % 13.8 % 17.7 % (0.6) % 34 Seasonality We experience certain effects of seasonality with respect to our business. We generally experience greater sales during our third fiscal quarter, primarily driven by holiday season sales, and the lowest sales during our first fiscal quarter. Critical Accounting Policies and Estimates 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 consolidated financial statements, our critical accounting policies are disclosed, in full, in the MD&A section of our Annual Report on Form 10-K for the fiscal year ended March 27, 2021. There have been no significant changes in our critical accounting policies and estimates since March 27, 2021. 35 Results of Operations Comparison of the three months ended September 25, 2021 with the three months ended September 26, 2020 The following table details the results of our operations for the three months ended September 25, 2021 and September 26, 2020, 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 September 25, 2021 September 26, 2020 September 25, 2021 September 26, 2020 Statements of Operations Data: Total revenue $ 1,300 $ 1,110 $ 190 17.1 % Cost of goods sold 416 400 16 4.0 % 32.0 % 36.0 % Gross profit 884 710 174 24.5 % 68.0 % 64.0 % Selling, general and administrative expenses 599 474 125 26.4 % 46.1 % 42.7 % Depreciation and amortization 49 54 (5) (9.3) % 3.8 % 4.9 % Impairment of assets 33 20 13 65.0 % 2.5 % 1.8 % Restructuring and other charges 8 9 (1) (11.1) % 0.6 % 0.8 % Total operating expenses 689 557 132 23.7 % 53.0 % 50.2 % Income from operations 195 153 42 27.5 % 15.0 % 13.8 % Other income, net (2) — (2) NM (0.2) % — % Interest (income) expense, net (5) 12 (17) NM (0.4) % 1.1 % Foreign currency loss 4 — 4 NM 0.3 % — % Income before (benefit) provision for income taxes 198 141 57 40.4 % 15.2 % 12.7 % (Benefit) provision for income taxes (2) 20 (22) NM (0.2) % 1.8 % Net income 200 121 79 (65.3) % Less: Net loss attributable to noncontrolling interest — (1) 1 NM Net income attributable to Capri $ 200 $ 122 $ 78 (63.9) % NM Not meaningful Total Revenue Total revenue increased $190 million, or 17.1%, to $1.300 billion for the three months ended September 25, 2021, compared to $1.110 billion for the three months ended September 26, 2020, which included net favorable foreign currency effects of approximately $23 million, primarily related to the strengthening of the Euro, British Pound, Chinese Renminbi and Canadian Dollar against the U.S. Dollar during the three months ended September 25, 2021. On a constant currency basis, our total revenue increased $167 million, or 15.0%. The increase is attributable to the continued recovery from the COVID-19 pandemic. In the prior fiscal year, the Company experienced widespread, temporary store closures and a significant decline in store traffic. Gross Profit Gross profit increased $174 million, or 24.5%, to $884 million for the three months ended September 25, 2021, compared to $710 million for the three months ended September 26, 2020, which included net favorable foreign currency effects of $15 million. Gross profit as a percentage of total revenue increased 400 basis points to 68.0% during the three months ended September 25, 2021, compared to 64.0% during the three months ended September 26, 2020. The increase in our gross profit margin was primarily attributable to a higher average unit price and lower promotional activity, partially offset by increases in supply chain costs during the three months ended September 25, 2021, as compared to the three months ended September 26, 2020. 36 Total Operating Expenses Total operating expenses increased $132 million, or 23.7%, to $689 million during the three months ended September 25, 2021, compared to $557 million for the three months ended September 26, 2020. Our operating expenses included a net unfavorable foreign currency impact of approximately $13 million. Total operating expenses increased to 53.0% as a percentage of total revenue for the three months ended September 25, 2021, compared to 50.2% for the three months ended September 26, 2020. The components that comprise total operating expenses are explained below. Selling, General and Administrative Expenses Selling, general and administrative expenses increased $125 million, or 26.4%, to $599 million during the three months ended September 25, 2021, compared to $474 million for the three months ended September 26, 2020, primarily due to increased retail store, corporate, advertising, and e-commerce costs during the three months ended September 25, 2021. Selling, general, and administrative expenses as a percentage of total revenue increased to 46.1% for the three months ended September 25, 2021, compared to 42.7% for the three months ended September 26, 2020, primarily due to an increase in advertising, e-commerce and corporate costs during the three months ended September 25, 2021, as compared to the three months ended September 26, 2020. Unallocated corporate expenses, which are included within selling, general and administrative expenses discussed above, but are not directly attributable to a reportable segment, increased $15 million, or 50.0%, to $45 million during the three months ended September 25, 2021 as compared to $30 million for the three months ended September 26, 2020, primarily due to an increase in compensation expense and professional fees. Depreciation and Amortization Depreciation and amortization decreased $5 million, or 9.3%, to $49 million during the three months ended September 25, 2021, compared to $54 million for the three months ended September 26, 2020. The decrease in depreciation and amortization expense was primarily attributable to lower depreciation due to lower capital expenditures in Fiscal 2022 and Fiscal 2021. Depreciation and amortization decreased to 3.8% as a percentage of total revenue during the three months ended September 25, 2021, compared to 4.9% for the three months ended September 26, 2020 primarily due to lower revenues during the prior year due to COVID-19. Impairment of Assets During the three months ended September 25, 2021, we recognized asset impairment charges of $33 million, which primarily related to operating lease right-of-use assets at certain Michael Kors store locations (see Note 11 to the accompanying consolidated financial statements for additional information). During the three months ended September 26, 2020, we recognized asset impairment charges of approximately $20 million, primarily related to operating lease right-of-use assets at certain Michael Kors store locations. Restructuring and Other Charges During the three months ended September 25, 2021, we recognized restructuring and other charges of $8 million, which included other costs of $9 million primarily related to equity awards associated with the acquisition of Versace and partially offset by $1 million of gains related to our Capri Retail Store Optimization Program (see Note 8 to the accompanying consolidated financial statements for additional information). 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 and $2 million related to our Capri Retail Store Optimization Program. Restructuring and other charges are not evaluated as part of our reportable segments’ results (See Segment Information below for additional information). 37 Income from Operations As a result of the foregoing, income from operations increased $42 million, to $195 million during three months ended September 25, 2021, compared to $153 million for the three months ended September 26, 2020. Income from operations as a percentage of total revenue increased to 15.0% during the three months ended September 25, 2021, compared to 13.8% for the three months ended September 26, 2020. See Segment Information below for a reconciliation of our segment operating income to total operating income. Interest (Income) Expense, net During the three months ended September 25, 2021, we recognized $5 million of interest income compared to $12 million of interest expense for the three months ended September 26, 2020. The $17 million improvement in interest (income) expense, net is primarily due to an increase of interest income from higher average notional amounts outstanding and more favorable interest rates on our net investment hedges in the current year and a decrease in interest expense attributable to lower average borrowings outstanding (see Note 9 and Note 12 to the accompanying consolidated financial statements for additional information). Foreign Currency Loss During the three months ended September 25, 2021, 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. During the three months ended September 26, 2020, we recognized an immaterial net foreign currency loss. (Benefit) Provision for Income Taxes The benefit for income taxes was $2 million for the three months ended September 25, 2021, compared to a provision of $20 million for the three months ended September 26, 2020. Our effective tax rate was (1.0)% and 14.2% for the three months ended September 25, 2021 and September 26, 2020, respectively. The decrease in our effective tax rate was primarily due to recently enacted tax legislation in Italy which allowed us to reduce our deferred tax liabilities. Specifically, this change allowed us to step up certain intangible assets which will result in lower future cash taxes. 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 three months ended September 25, 2021, we recorded an immaterial net loss and during the three months ended September 26, 2020, we recorded a net loss of $1 million, attributable to the noncontrolling interest in our joint ventures. These losses represent 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 $78 million to $200 million during the three months ended September 25, 2021, compared to a net income of $122 million for the three months ended September 26, 2020. 38 Segment Information Versace Three Months Ended % Change (dollars in millions) September 25, 2021 September 26, 2020 $ Change As Reported Constant Currency Revenues $ 282 $ 195 $ 87 44.6 % 42.6 % Income from operations 55 20 35 175.0 % Operating margin 19.5 % 10.3 % Revenues Versace revenues increased $87 million, or 44.6% to $282 million during the three months ended September 25, 2021, compared to $195 million for the three months ended September 26, 2020, which included favorable foreign currency effects of $4 million. On a constant currency basis, revenue increased $83 million, or 42.6%, primarily attributable to the continued recovery from the COVID-19 pandemic. In the prior fiscal year, the Company experienced widespread, temporary store closures and a significant decline in store traffic. Income from Operations During the three months ended September 25, 2021, Versace recorded income from operations of $55 million, compared to $20 million for the three months ended September 26, 2020. Operating margin increased from 10.3% for the three months ended September 26, 2020, to 19.5% during the three months ended September 25, 2021, primarily due to higher average unit price and leveraging of operating expenses due to higher revenue. Jimmy Choo Three Months Ended % Change (dollars in millions) September 25, 2021 September 26, 2020 $ Change As Reported Constant Currency Revenues $ 137 $ 122 $ 15 12.3 % 4.9 % Income from operations 1 — 1 NM Operating margin 0.7 % 0.0 % NM Not meaningful Revenues Jimmy Choo revenues increased $15 million, or 12.3%, to $137 million during the three months ended September 25, 2021, compared to $122 million for the three months ended September 26, 2020, which included favorable foreign currency effects of $9 million. On a constant currency basis, revenue increased $6 million, or 4.9%, primarily attributable to the continued recovery from the COVID-19 pandemic. In the prior fiscal year, the Company experienced widespread, temporary store closures and a significant decline in store traffic. Income from Operations During the three months ended September 25, 2021, Jimmy Choo recorded income from operations of $1 million, compared to immaterial income from operations for the three months ended September 26, 2020. Operating margin increased from 0.0% for the three months ended September 26, 2020 to 0.7% during the three months ended September 25, 2021, primarily due to lower promotional activity, partially offset by increases in store operating costs and investments in marketing and advertising. 39 Michael Kors Three Months Ended % Change (dollars in millions) September 25, 2021 September 26, 2020 $ Change As Reported Constant Currency Revenues $ 881 $ 793 $ 88 11.1 % 9.8 % Income from operations 220 190 30 15.8 % Operating margin 25.0 % 24.0 % Revenues Michael Kors revenues increased $88 million, or 11.1%, to $881 million during the three months ended September 25, 2021, compared to $793 million for the three months ended September 26, 2020, which included favorable foreign currency effects of $10 million. On a constant currency basis, revenue increased $78 million, or 9.8%, primarily attributable to the continued recovery from the COVID-19 pandemic. In the prior fiscal year, the Company experienced widespread, temporary store closures and a significant decline in store traffic. Income from Operations During the three months ended September 25, 2021, Michael Kors recorded income from operations of $220 million, compared to $190 million for the three months ended September 26, 2020. Operating margin increased from 24.0% for the three months ended September 26, 2020, to 25.0% during the three months ended September 25, 2021, primarily due to a higher average unit price, partially offset by increases in our supply chain costs and an increase in marketing and advertising as a percentage of revenue. 40 Results of Operations Comparison of the six months ended September 25, 2021 with the six months ended September 26, 2020 The following table details the results of our operations for the six months ended September 25, 2021 and September 26, 2020, 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 25, 2021 September 26, 2020 September 25, 2021 September 26, 2020 Statements of Operations Data: Total revenue $ 2,553 $ 1,561 $ 992 63.5 % Cost of goods sold 813 549 264 48.1 % 31.8 % 35.2 % Gross profit 1,740 1,012 728 71.9 % 68.2 % 64.8 % Selling, general and administrative expenses 1,144 876 268 30.6 % 44.8 % 56.1 % Depreciation and amortization 99 108 (9) (8.3) % 3.9 % 6.9 % Impairment of assets 33 20 13 65.0 % 1.3 % 1.3 % Restructuring and other charges 11 17 (6) (35.3) % 0.4 % 1.1 % Total operating expenses 1,287 1,021 266 26.1 % 50.4 % 65.4 % Income (loss) from operations 453 (9) 462 NM 17.7 % (0.6) % Other income, net (2) (1) (1) 100.0 % (0.1) % (0.1) % Interest (income) expense, net (4) 29 (33) NM (0.2) % 1.9 % Foreign currency loss (gain) 5 (3) 8 NM 0.2 % (0.2) % Income (loss) before provision for income taxes 454 (34) 488 NM 17.8 % (2.2) % Provision for income taxes 35 25 10 40.0 % 1.4 % 1.6 % Net income (loss) 419 (59) 478 NM Less: Net loss attributable to noncontrolling interest — (1) 1 NM Net income (loss) attributable to Capri $ 419 $ (58) $ 477 NM NM Not meaningful Total Revenue Total revenue increased $992 million, or 63.5%, to $2.553 billion for the six months ended September 25, 2021, compared to $1.561 billion for the six months ended September 26, 2020, which included net favorable foreign currency effects of approximately $86 million, primarily related to the strengthening of the Euro, British Pound, Chinese Renminbi and Canadian Dollar against the U.S. Dollar during the six months ended September 25, 2021. On a constant currency basis, our total revenue increased $906 million, or 58.0%. The increase is attributable to the continued recovery from the COVID-19 pandemic. In the prior fiscal year, the Company experienced widespread, temporary store closures and a significant decline in store traffic. Gross Profit Gross profit increased $728 million, or 71.9%, to $1.740 billion for the six months ended September 25, 2021, compared to $1.012 billion for the six months ended September 26, 2020, which included net favorable foreign currency effects of $58 million. Gross profit as a percentage of total revenue increased 340 basis points to 68.2% during the six months ended September 25, 2021, compared to 64.8% during the six months ended September 26, 2020. The increase in gross profit margin was primarily attributable to a higher average unit price and lower promotional activity, partially offset by increases in our supply chain costs during the six months ended September 25, 2021, as compared to the six months ended September 26, 2020. 41 Total Operating Expenses Total operating expenses increased $266 million, or 26.1%, to $1.287 billion during the six months ended September 25, 2021, compared to $1.021 billion for the six months ended September 26, 2020. Our operating expenses included a net unfavorable foreign currency impact of approximately $51 million. Total operating expenses decreased to 50.4% as a percentage of total revenue for the six months ended September 25, 2021, compared to 65.4% for the six months ended September 26, 2020. The components that comprise total operating expenses are explained below. Selling, General and Administrative Expenses Selling, general and administrative expenses increased $268 million, or 30.6%, to $1.144 billion during the six months ended September 25, 2021, compared to $876 million for the six months ended September 26, 2020, primarily due to increased retail store, corporate, e-commerce, and advertising costs during the six months ended September 25, 2021. Selling, general and administrative expenses as a percentage of total revenue decreased to 44.8% during the six months ended September 25, 2021, compared to 56.1% for the six months ended September 26, 2020, primarily due to leveraging of operating expenses as a result of higher revenue during the six months ended September 25, 2021, as compared to the six months ended September 26, 2020. Unallocated corporate expenses, which are included within selling, general and administrative expenses discussed above, but are not directly attributable to a reportable segment, increased $25 million, or 41.0%, to $86 million during the six months ended September 25, 2021 as compared to $61 million for the six months ended September 26, 2020, primarily due to an increase in compensation expense and professional fees. Depreciation and Amortization Depreciation and amortization decreased $9 million, or 8.3%, to $99 million during the six months ended September 25, 2021, compared to $108 million for the six months ended September 26, 2020. The decrease in depreciation and amortization expense was primarily attributable to lower depreciation due to lower capital expenditures in Fiscal 2022 and Fiscal 2021. Depreciation and amortization decreased to 3.9% as a percentage of total revenue during the six months ended September 25, 2021, compared to 6.9% for the six months ended September 26, 2020 primarily due to higher revenues during the six months ended September 25, 2021 as a result of COVID-19. Impairment of Assets During the six months ended September 25, 2021, we recognized asset impairment charges of $33 million, which primarily related to operating lease right-of-use assets at certain Michael Kors store locations (see Note 11 to the accompanying consolidated financial statements for additional information). During the six months ended September 26, 2020, we recognized asset impairment charges of approximately $20 million, which primarily related to operating lease right-of-use assets at certain Michael Kors store locations. Restructuring and Other Charges During the six months ended September 25, 2021, we recognized restructuring and other charges of $11 million, which included other costs of $15 million primarily related to equity awards associated with the acquisition of Versace and partially offset by $4 million of gains related to our Capri Retail Store Optimization Program (see Note 8 to the accompanying consolidated financial statements for additional information). During the six months ended September 26, 2020, we recognized restructuring and other charges of $17 million, which were primarily comprised of $12 million primarily related to equity awards associated with the acquisition of Versace and $5 million related to our Capri Retail Store Optimization Program. Income (loss) from Operations As a result of the foregoing, income from operations increased $462 million, to $453 million during the six months ended September 25, 2021, compared to a loss from operations of $9 million for the six months ended September 26, 2020. Income from operations as a percentage of total revenue increased to 17.7% during the six months ended September 25, 2021, compared to a loss from operations of (0.6)% for the six months ended September 26, 2020. See Segment Information below for a reconciliation of our segment operating income to total operating income. 42 Interest (Income) Expense, net During the six months ended September 25, 2021, we recognized $4 million of interest income compared to $29 million of interest expense for the six months ended September 26, 2020. The $33 million improvement in interest (income) expense, net is primarily due to an increase of interest income from higher average notional amounts outstanding and more favorable interest rates on our net investment hedges in the current year and a decrease in interest expense attributable to lower average borrowings outstanding (see Note 9 and Note 12 to the accompanying consolidated financial statements for additional information). Foreign Currency Loss (Gain) During the six months ended September 25, 2021 and September 26, 2020, we recognized a net foreign currency loss of $5 million and a net foreign currency gains of $3 million, respectively, 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 $35 million of income tax expense during the six months ended September 25, 2021, compared to $25 million for the six months ended September 26, 2020. Our effective tax rate was 7.7% and (73.5)% for the six months ended September 25, 2021 and September 26, 2020, respectively. Our effective tax rate for the six months ended September 25, 2021 was significantly higher than our effective tax rate for the six months ended September 26, 2020 and not a meaningful or comparable metric, primarily due to the relationship between income tax expense and pre-tax loss in the prior period. The increase in income tax expense primarily related to the increase in earnings during the six months ended September 25, 2021 compared to the six months ended September 26, 2020. This increase was partially offset by the favorable effects of recently enacted tax legislation in Italy which allowed us to reduce our deferred tax liabilities. Specifically, this change allowed us to step up certain intangible assets which will result in lower future cash taxes. 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 25, 2021, we recorded an immaterial net loss and during the six months ended September 26, 2020, we recorded a net loss of $1 million, attributable to the noncontrolling interest in our joint ventures. These losses represent the share of income that is not attributable to the Company. Net Income (Loss) Attributable to Capri As a result of the foregoing, our net income increased $477 million to a net income of $419 million during the six months ended September 25, 2021, compared to net loss of $58 million for the six months ended September 26, 2020. 43 Segment Information Versace Six Months Ended % Change (dollars in millions) September 25, 2021 September 26, 2020 $ Change As Reported Constant Currency Revenues $ 522 $ 288 $ 234 81.3 % 72.6 % Income (loss) from operations 103 (21) 124 590.5 % Operating margin 19.7 % (7.3) % Revenues Versace revenues increased $234 million, or 81.3%, to $522 million during the six months ended September 25, 2021, compared to $288 million for the six months ended September 26, 2020, which included favorable foreign currency effects of $25 million. On a constant currency basis, revenue increased $209 million, or 72.6%, primarily attributable to the continued recovery from the COVID-19 pandemic. In the prior fiscal year, the Company experienced widespread, temporary store closures and a significant decline in store traffic. Income (Loss) from Operations During the six months ended September 25, 2021, Versace recorded income from operations of $103 million, compared to a loss from operations of $21 million for the six months ended September 26, 2020. Operating margin improved from (7.3)% for the six months ended September 26, 2020, to 19.7% during the six months ended September 25, 2021, primarily due to lower promotional activity and leveraging of operating expenses due to higher revenue. Jimmy Choo Six Months Ended % Change (dollars in millions) September 25, 2021 September 26, 2020 $ Change As Reported Constant Currency Revenues $ 279 $ 173 $ 106 61.3 % 46.8 % Income (loss) from operations 12 (29) 41 141.4 % Operating margin 4.3 % (16.8) % Revenues Jimmy Choo revenues increased $106 million, or 61.3%, to $279 million during the six months ended September 25, 2021, compared to $173 million for the six months ended September 26, 2020, which included favorable foreign currency effects of $25 million. On a constant currency basis, revenue increased $81 million, or 46.8%, primarily attributable to the continued recovery from the COVID-19 pandemic. In the prior fiscal year, the Company experienced widespread, temporary store closures and a significant decline in store traffic. Income (Loss) from Operations During the six months ended September 25, 2021, Jimmy Choo recorded income from operations of $12 million, compared to a loss from operations of $29 million for the six months ended September 26, 2020. Operating margin improved from (16.8)% for the six months ended September 26, 2020, to 4.3% during the six months ended September 25, 2021, primarily due to lower promotional activity and leveraging of operating expenses due to higher revenue. 44 Michael Kors Six Months Ended % Change (dollars in millions) September 25, 2021 September 26, 2020 $ Change As Reported Constant Currency Revenues $ 1,752 $ 1,100 $ 652 59.3 % 56.0 % Income from operations 460 142 318 223.9 % Operating margin 26.3 % 12.9 % Revenues Michael Kors revenues increased $652 million, or 59.3%, to $1.752 billion during the six months ended September 25, 2021, compared to $1.100 billion for the six months ended September 26, 2020, which included favorable foreign currency effects of $36 million. On a constant currency basis, revenue increased $616 million, or 56.0%, primarily attributable to the continued recovery from the COVID-19 pandemic. In the prior fiscal year, the Company experienced widespread, temporary store closures and a significant decline in store traffic. Income from Operations During the six months ended September 25, 2021, Michael Kors recorded income from operations of $460 million, compared to $142 million for the six months ended September 26, 2020. Operating margin improved from 12.9% for the six months ended September 26, 2020, to 26.3% during the six months ended September 25, 2021, primarily due to a higher average unit price and leveraging of operating expenses due to higher revenue, partially offset by increases in our supply chain costs. 45 Liquidity and Capital Resources Liquidity Our primary sources of liquidity are the cash flows generated from 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 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 $48 million on capital expenditures during the six months ended September 25, 2021. The following table sets forth key indicators of our liquidity and capital resources (in millions): As of September 25, 2021 March 27, 2021 Balance Sheet Data: Cash and cash equivalents $ 234 $ 232 Working capital $ 152 $ (75) Total assets $ 7,493 $ 7,481 Short-term debt $ 40 $ 123 Long-term debt $ 1,104 $ 1,219 Six Months Ended September 25, 2021 September 26, 2020 Cash Flows Provided By (Used In): Operating activities $ 396 $ 137 Investing activities (48) (71) Financing activities (342) (421) Effect of exchange rate changes (3) 1 Net increase (decrease) in cash and cash equivalents $ 3 $ (354) Cash Provided by Operating Activities Net cash provided by operating activities increased $259 million to $396 million during the six months ended September 25, 2021, as compared to $137 million for the six months ended September 26, 2020, as a result of an increase in our net income after non-cash adjustments, partially offset by decreases related to changes in our working capital. The decreases related to the changes in our working capital are primarily attributable to fluctuations in the timing of payments and receipts and an increase in our inventory levels when compared to the prior year. Cash Used in Investing Activities Net cash used in investing activities was $48 million during the six months ended September 25, 2021, as compared to $71 million during the six months ended September 26, 2020, which was primarily attributable to lower cash paid for asset acquisitions and lower capital expenditures compared to prior year. Cash Used in Financing Activities Net cash used in financing activities was $342 million during the six months ended September 25, 2021, as compared to $421 million during the six months ended September 26, 2020. The decrease of cash used in financing activities of $79 million was primarily attributable to a decrease in net debt repayments of $215 million, partially offset by a $159 million increase in cash payments to repurchase our ordinary shares compared to prior year. 46 Debt Facilities The following table presents a summary of our borrowing capacity and amounts outstanding as of September 25, 2021 and March 27, 2021 (in millions): As of September 25, 2021 March 27, 2021 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) — — Letter of credit outstanding 28 27 Remaining availability $ 972 $ 973 Term Loan Facility ($1.6 billion) Borrowings outstanding, net of debt issuance costs (2) $ 644 $ 865 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 $ 447 Other Borrowings (3) $ 53 $ 21 Hong Kong Uncommitted Credit Facility: Total availability (80 million and 100 million Hong Kong Dollars) $ 10 $ 13 Borrowings outstanding — — Remaining availability (80 million and 100 million Hong Kong Dollars) $ 10 $ 13 China Uncommitted Credit Facility: Total availability (45 million and 100 million Chinese Yuan) $ 7 $ 15 Borrowings outstanding — — Total and remaining availability (45 million and 100 million Chinese Yuan) $ 7 $ 15 Japan Credit Facility: Total availability (1.0 billion Japanese Yen) $ 9 $ 9 Borrowings outstanding (0.0 billion and 1.0 billion Japanese Yen) (4) — 9 Remaining availability (1.0 billion and 0.0 billion Japanese Yen) $ 9 $ — Versace Uncommitted Credit Facilities: Total availability (48 million and 57 million Euro) $ 56 $ 67 Borrowings outstanding (0 million Euro) (4) — — Remaining availability (48 million and 57 million Euro) $ 56 $ 67 Total borrowings outstanding (1) $ 1,144 $ 1,342 Total remaining availability $ 1,054 $ 1,298 47 (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 1.00 had been waived through the fiscal quarter ending June 26, 2021. On May 26, 2021 (the "Election Date"), the company delivered to the administrative agent the certificate required to terminate the Applicable Period. Effective as of the Election Date, the Company is required to comply with the quarterly maximum net leverage ratio test of 4.00 to 1.00. As of September 25, 2021 and March 27, 2021, 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 25, 2021 and March 27, 2021, except for the current portion of $97 million outstanding under the 2018 Term Loan Facility, which was recorded within short-term debt in our consolidated balance sheets at March 27, 2021. (3) The balance as of September 25, 2021 consists of $31 million related to our supplier financing program recorded within short-term debt in our consolidated balance sheets, $19 million related to the sale of certain Versace tax receivables, with $9 million and $10 million, respectively, was recorded within short-term debt and long-term debt in our consolidated balance sheets and $3 million of other loans recorded as long-term debt in our consolidated balance sheets. 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. (4) Recorded as short-term debt in our consolidated balance sheets as of March 27, 2021. We believe that our 2018 Credit Facility is adequately diversified with no undue concentration in any one financial institution. As of September 25, 2021, there were 25 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 9 in the accompanying financial statements and Note 12 in our Fiscal 2021 Annual Report on Form 10-K for detailed information relating to our credit facilities and debt obligations. Share Repurchase Program The following table presents our ordinary share repurchases during the six months ended September 25, 2021 and September 26, 2020 (dollars in millions): Six Months Ended September 25, 2021 September 26, 2020 Cost of shares repurchased under share repurchase program $ 150 $ — Fair value of shares withheld to cover tax obligations for vested restricted share awards 10 1 Total cost of treasury shares repurchased $ 160 $ 1 Shares repurchased under share repurchase program 2,712,275 — Shares withheld to cover tax withholding obligations 193,322 47,635 2,905,597 47,635 During the first quarter of Fiscal 2022, we reinstated our $500 million share repurchase program, which was previously suspended during the first quarter of Fiscal 2021 in response to the impact of the COVID-19 pandemic and the provisions of the Second Amendment of the 2018 Credit Facility. See Note 9 in the accompanying financial statements for additional information. On November 3, 2021, we announced that our Board of Directors has terminated our existing $500 million share repurchase program, with $250 million of availability remaining, and authorized a new share repurchase program pursuant to which we may, from time to time, repurchase up to $1.0 billion of our outstanding ordinary shares within a period of two years from the effective date of the 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. The program may be suspended or discontinued at any time. 48 See Note 13 to the accompanying consolidated financial statements for additional information. Contractual Obligations and Commercial Commitments Please refer to the “Contractual Obligations and Commercial Commitments” disclosure within the “Liquidity and Capital Resources” section of our Fiscal 2021 Form 10-K for a detailed disclosure of our other contractual obligations and commitments as of March 27, 2021. 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. Our off-balance sheet commitments relating to our outstanding letters of credit were $34 million at September 25, 2021, including $6 million in letters of credit issued outside of the 2018 Credit Facility. In addition, as of September 25, 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. Recent Accounting Pronouncements See Note 2 to the accompanying interim consolidated financial statements for recently issued accounting standards, which may have an impact on our financial statements and/or disclosures upon adoption. 49