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. Forward-looking statements include information concerning the Company’s goals, future plans and strategies, including with respect to ESG goals, initiatives and ambitions as well as the Company’s possible or assumed future results of operations, including descriptions of its business strategy. 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, including that our estimates could materially differ if retail stores are forced to close, or if there are further supply chain disruptions, including production delays and increased costs, changes in consumer traffic and retail trends; higher consumer debt levels, recession and inflationary pressures; 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/or pursuant to Rule 10b5-1 trading plans, 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; 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; extreme weather conditions and natural disasters; political or economic instability in principal markets; adverse outcomes in litigation; and general, local and global economic, political, business and market conditions including acts of war and other geopolitical conflicts, as well as those risks set forth in Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended April 2, 2022, filed with the Securities and Exchange Commission on June 1, 2022. Overview Our Business Capri Holdings is a global fashion luxury group consisting of iconic, founder-led brands Versace, Jimmy Choo and Michael Kors. Our commitment to glamorous style and craftsmanship is at the heart of each of our luxury brands. We have built our reputation on designing exceptional, innovative products that cover the full spectrum of fashion luxury categories. Our strength lies in the unique DNA and heritage of each of our brands, the diversity and passion of our people and our dedication to the clients and communities we serve. 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 sites, as well as through the most prestigious department and specialty stores worldwide. 31 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 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 over 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 Macroeconomic conditions and inflationary pressures. Our business is affected by global economic conditions and the related impact on levels of consumer spending worldwide. While our business in Russia and Ukraine represented less than 1% of our total net sales for Fiscal 2022, the war in Ukraine that began in February 2022 has created significant economic uncertainty in the region. We stopped all wholesale shipments to Russia and our third-party partners are winding down retail operations in Russia, including through the closure of our retail stores in the territory. The war has also caused broader macroeconomic implications that we expect to continue for the foreseeable future, including the continued weakening of the Euro against the US dollar and other foreign currency volatility, increases in fuel prices, volatility in the financial markets and a decline in consumer spending which may negatively impact our business, financial condition, and results of operations for Fiscal 2023. In addition, inflationary pressures, including increased labor, raw materials, and freight costs are adversely impacting our earnings. Purchases of discretionary luxury items, such as the accessories, footwear and apparel that we produce, tend to decline when disposable income is lower or when there are recessions, inflationary pressures or other economic uncertainty. COVID-19 Pandemic. The Company's performance during fiscal 2023 was adversely impacted due to lockdowns in certain regions, most notably in Greater China, as a result of an increase in infections due to variants of COVID-19. These lockdowns resulted in store closures and an overall decline in demand in the region. The situation continues to be very volatile and infection rates and government restrictions may continue to persist in Greater China or elsewhere. Luxury goods trends 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 mid-single digit rate over the past 20 years. However, in 2020, due to the impact of the COVID-19 crisis, the personal luxury goods market declined 22%. The personal luxury goods market experienced a strong rebound in 2021, with sales exceeding pre-pandemic levels. Market studies forecast the personal luxury goods industry will increase at low-double-digit compound annual growth rate between 2020 and 2025. Future growth is expected to be driven by e-commerce, Chinese consumers and younger generations; however, growth may be limited by concerns over inflation, the possibility of a global recession, foreign currency volatility or worsening economic conditions. Retail Fleet Optimization . We also continue to adjust our retail operating strategy to the changing business environment. We have finalized the planned store closures under the Capri Retail Store Optimization Program as of the end of Fiscal 2022. At the end of Fiscal 2022, we closed a total of 167 stores and recorded total net restructuring charges of $14 million relating to the program. We recorded net restructuring charges of $9 million and $5 million during Fiscal 2022 and Fiscal 2021, respectively, relating to the plan. Collectively, we continue to anticipate ongoing savings as a result of the store closures and lower depreciation associated with the impairment charges being recorded. 32 Foreign currency fluctuation. Our consolidated operations are impacted by the relationships between our reporting currency, the U.S. Dollar, and those of our non-United States subsidiaries whose functional/local currency is other than the U.S. Dollar, primarily 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-United States subsidiaries in the future, when translated to the U.S. Dollar. 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 factory closures which may continue during Fiscal 2023. 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 and increased transportation costs, 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 April 2, 2022 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. We are also subject to government import regulations, including United States 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 United States 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 (Asia and Oceania), 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 33 and certain parts of Asia. Our Michael Kors e-commerce business includes e-commerce sites in the United States, Canada, EMEA and Asia. We also sell Michael Kors products directly to department stores, primarily located across the Americas and EMEA, 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 and Capri transformation program costs. In addition, certain other costs are not allocated to segments, including restructuring and other charges 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 from operations by segment for the three and nine months ended December 31, 2022 and December 25, 2021 (in millions): Three Months Ended Nine Months Ended December 31, 2022 December 25, 2021 December 31, 2022 December 25, 2021 Total revenue: Versace $ 249 $ 251 $ 832 $ 773 Jimmy Choo 168 178 482 457 Michael Kors 1,095 1,180 2,970 2,932 Total revenue $ 1,512 $ 1,609 $ 4,284 $ 4,162 Income from operations: Versace $ 24 $ 32 $ 138 $ 135 Jimmy Choo 18 16 45 28 Michael Kors 251 335 721 795 Total segment income from operations 293 383 904 958 Less: Corporate expenses (56) (37) (171) (123) Impairment of assets (1) (1) — (12) (33) Restructuring and other charges (5) (14) (11) (25) COVID-19 related charges 2 (1) 6 7 Impact of war in Ukraine 3 — 3 — Total income from operations $ 236 $ 331 $ 719 $ 784 (1) Impairment of assets during the nine months ended December 31, 2022 and December 25, 2021, respectively, primarily related to operating lease right-of-use assets at certain Michael Kors store locations. 34 The following table presents our global network of retail stores and wholesale doors by brand: As of December 31, 2022 December 25, 2021 Number of full price retail stores (including concessions): Versace 161 150 Jimmy Choo 186 184 Michael Kors 520 535 867 869 Number of outlet stores: Versace 64 62 Jimmy Choo 56 56 Michael Kors 307 299 427 417 Total number of retail stores 1,294 1,286 Total number of wholesale doors: Versace 788 803 Jimmy Choo 517 456 Michael Kors 2,840 2,931 4,145 4,190 The following table presents our retail stores by geographic location: As of As of December 31, 2022 December 25, 2021 Versace Jimmy Choo Michael Kors Versace Jimmy Choo Michael Kors Store count by region: The Americas 41 45 328 39 46 346 EMEA 59 72 173 55 74 176 Asia 125 125 326 118 120 312 225 242 827 212 240 834 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 Nine Months Ended December 31, 2022 December 25, 2021 December 31, 2022 December 25, 2021 Total revenue $ 1,512 $ 1,609 $ 4,284 $ 4,162 Gross profit as a percent of total revenue 66.5 % 65.1 % 66.7 % 67.0 % Income from operations $ 236 $ 331 $ 719 $ 784 Income from operations as a percent of total revenue 15.6 % 20.6 % 16.8 % 18.8 % 35 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 April 2, 2022. There have been no significant changes in our critical accounting policies and estimates since April 2, 2022. 36 Results of Operations Comparison of the three months ended December 31, 2022 with the three months ended December 25, 2021 The following table details the results of our operations for the three months ended December 31, 2022 and December 25, 2021, 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 December 31, 2022 December 25, 2021 December 31, 2022 December 25, 2021 Statements of Operations Data: Total revenue $ 1,512 $ 1,609 $ (97) (6.0) % Cost of goods sold 507 561 (54) (9.6) % 33.5 % 34.9 % Gross profit 1,005 1,048 (43) (4.1) % 66.5 % 65.1 % Selling, general and administrative expenses 720 656 64 9.8 % 47.6 % 40.8 % Depreciation and amortization 43 47 (4) (8.5) % 2.8 % 2.9 % Impairment of assets 1 — 1 NM 0.1 % — % Restructuring and other charges 5 14 (9) (64.3) % 0.3 % 0.9 % Total operating expenses 769 717 52 7.3 % 50.9 % 44.6 % Income from operations 236 331 (95) (28.7) % 15.6 % 20.6 % Other income, net (1) — (1) NM (0.1) % — % Interest expense (income), net 12 (7) 19 NM 0.8 % (0.4) % Foreign currency gain (3) (4) 1 (25.0) % (0.2) % (0.2) % Income before income taxes 228 342 (114) (33.3) % 15.1 % 21.3 % Provision for income taxes 3 19 (16) (84.2) % 0.2 % 1.2 % Net income 225 323 (98) (30.3) % Less: Net income attributable to noncontrolling interest — 1 (1) NM Net income attributable to Capri $ 225 $ 322 $ (97) (30.1) % NM Not meaningful Total Revenue Total revenue decreased $97 million, or 6.0%, to $1.512 billion for the three months ended December 31, 2022, compared to $1.609 billion for the three months ended December 25, 2021, which included net unfavorable foreign currency effects of approximately $89 million as a result of the strengthening of the U.S. dollar compared to all major currencies in which we operate for the three months ended December 31, 2022. On a constant currency basis, our total revenue decreased $8 million, or 0.5%. The decrease is attributable to lower wholesale revenues throughout the Americas and EMEA and decreased revenues in Greater China due to COVID-19 related disruptions for each of our brands. Gross Profit Gross profit decreased $43 million, or 4.1%, to $1.005 billion for the three months ended December 31, 2022, compared to $1.048 billion for the three months ended December 25, 2021, which included net unfavorable foreign currency effects of $60 million. Gross profit as a percentage of total revenue was 66.5% and 65.1% for the three months ended December 31, 2022 and December 25, 2021, respectively. Our gross profit margin increased primarily due to lower supply chain costs for the three months ended December 31, 2022, as compared to the three months ended December 25, 2021. Total Operating Expenses Total operating expenses increased $52 million, or 7.3%, to $769 million for the three months ended December 31, 2022, compared to $717 million for the three months ended December 25, 2021. Our operating expenses included a net favorable foreign currency impact of approximately $55 million. Total operating expenses increased to 50.9% as a percentage of total revenue for the three months ended December 31, 2022, compared to 44.6% for the three months ended December 25, 2021. The components that comprise total operating expenses are explained below. 37 Selling, General and Administrative Expenses Selling, general and administrative expenses increased $64 million, or 9.8%, to $720 million for the three months ended December 31, 2022, compared to $656 million for the three months ended December 25, 2021, primarily due to increased marketing and unallocated corporate expenses for the three months ended December 31, 2022. Selling, general, and administrative expenses as a percentage of total revenue increased to 47.6% for the three months ended December 31, 2022, compared to 40.8% for the three months ended December 25, 2021, primarily due to deleverage of costs on lower revenue for the three months ended December 31, 2022, as compared to the three months ended December 25, 2021. Unallocated corporate expenses, which are included within selling, general and administrative expenses discussed above, but are not directly attributable to a reportable segment, increased $19 million, or 51.4%, to $56 million for the three months ended December 31, 2022 as compared to $37 million for the three months ended December 25, 2021, primarily due to an increase in professional fees and information technology costs related to the ongoing ERP system implementation and Capri transformation projects. Depreciation and Amortization Depreciation and amortization decreased $4 million, or 8.5%, to $43 million for the three months ended December 31, 2022, compared to $47 million for the three months ended December 25, 2021. As a percentage of total revenue, depreciation and amortization decreased to 2.8% for the three months ended December 31, 2022, compared to 2.9% for the three months ended December 25, 2021. Impairment of Assets During the three months ended December 31, 2022, we recognized asset impairment charges of $1 million, which primarily related to operating lease right-of-use assets at a Jimmy Choo store location. During the three months ended December 25, 2021, we did not recognize any impairment charges. See Note 11 to the accompanying consolidated financial statements for additional information. Restructuring and Other Charges We recognized restructuring and other charges of $5 million and $14 million for the three months ended December 31, 2022 and December 25, 2021, respectively. The charges are primarily related to equity awards associated with the acquisition of Versace. See Note 8 to the accompanying consolidated financial statements for additional information. Restructuring and other charges are not evaluated as part of our reportable segments’ results (See Segment Information above for additional information). Income from Operations As a result of the foregoing, income from operations decreased $95 million, to $236 million for three months ended December 31, 2022, compared to $331 million for the three months ended December 25, 2021. Income from operations as a percentage of total revenue decreased to 15.6% for the three months ended December 31, 2022, compared to 20.6% for the three months ended December 25, 2021. See Segment Information above for a reconciliation of our segment operating income to total operating income. Interest Expense (Income), net For the three months ended December 31, 2022, we recognized $12 million of interest expense compared to $7 million of interest income for the three months ended December 25, 2021. The $19 million increase in interest expense (income), net, is primarily due to higher effective interest rates on our outstanding debt, higher average borrowings outstanding and lower interest income from our net investment hedges, partially offset by higher interest income earned on our cash and cash equivalents (see Note 9 and Note 12 to the accompanying consolidated financial statements for additional information). Foreign Currency Gain For the three months ended December 31, 2022 and December 25, 2021, we recognized a net foreign currency gain of $3 million and $4 million, respectively, primarily attributable to intercompany transactions among our subsidiaries. 38 Provision for Income Taxes The provision for income taxes was $3 million for the three months ended December 31, 2022, compared to $19 million for the three months ended December 25, 2021. Our effective tax rates were 1.3% and 5.6% for the three months ended December 31, 2022 and December 25, 2021, respectively. In the current year, the decrease in our effective tax rate was primarily related to the release of a valuation allowance in the United Kingdom. In the prior year, our effective tax rate included a favorable impact from a net operating loss carryback claim made in the United States as a result of COVID-19 related losses. See Note 15 to the accompanying consolidated financial statements for additional information regarding the effective tax rate for the third quarter of Fiscal 2023. Our effective tax rate may fluctuate from time to time due to the effects of changes in United States federal, state and local taxes and tax rates in foreign jurisdictions. In addition, factors such as the geographic mix of earnings, enacted tax legislation and the results of various global tax strategies, may also impact our effective tax rate in future periods. Net Income Attributable to Capri As a result of the foregoing, our net income decreased $97 million to $225 million for the three months ended December 31, 2022, compared to $322 million for the three months ended December 25, 2021. Segment Information Versace Three Months Ended % Change (dollars in millions) December 31, 2022 December 25, 2021 $ Change As Reported Constant Currency Revenues $ 249 $ 251 $ (2) (0.8) % 11.2 % Income from operations $ 24 $ 32 $ (8) (25.0) % Operating margin 9.6 % 12.7 % Revenues Versace revenues decreased $2 million, or 0.8%, to $249 million for the three months ended December 31, 2022, compared to $251 million for the three months ended December 25, 2021, which included unfavorable foreign currency effects of $30 million. On a constant currency basis, revenue increased $28 million, or 11.2%, primarily attributable to increased retail revenue and higher wholesale shipments in EMEA, partially offset by decreased revenues in Greater China due to COVID-19 related disruptions. Income from Operations For the three months ended December 31, 2022, Versace recorded income from operations of $24 million, compared to $32 million for the three months ended December 25, 2021. Operating margin decreased from 12.7% for the three months ended December 25, 2021, to 9.6% for the three months ended December 31, 2022, primarily due to higher employee costs. Jimmy Choo Three Months Ended % Change (dollars in millions) December 31, 2022 December 25, 2021 $ Change As Reported Constant Currency Revenues $ 168 $ 178 $ (10) (5.6) % 3.4 % Income from operations $ 18 $ 16 $ 2 12.5 % Operating margin 10.7 % 9.0 % Revenues Jimmy Choo revenues decreased $10 million, or 5.6%, to $168 million for the three months ended December 31, 2022, compared to $178 million for the three months ended December 25, 2021, which included unfavorable foreign currency effects of $16 million. On a constant currency basis, revenue increased $6 million, or 3.4%, primarily attributable to increased revenue in the Americas and EMEA, partially offset by decreased revenues in Greater China due to COVID-19 related disruptions. 39 Income from Operations For the three months ended December 31, 2022, Jimmy Choo recorded income from operations of $18 million, compared to $16 million for the three months ended December 25, 2021. Operating margin increased from 9.0% for the three months ended December 25, 2021 to 10.7% for the three months ended December 31, 2022, primarily due to higher average unit price partially offset by deleverage of expense on lower revenues. Michael Kors Three Months Ended % Change (dollars in millions) December 31, 2022 December 25, 2021 $ Change As Reported Constant Currency Revenues $ 1,095 $ 1,180 $ (85) (7.2) % (3.6) % Income from operations $ 251 $ 335 $ (84) (25.1) % Operating margin 22.9 % 28.4 % Revenues Michael Kors revenues decreased $85 million, or 7.2%, to $1.095 billion for the three months ended December 31, 2022, compared to $1.180 billion for the three months ended December 25, 2021, which included unfavorable foreign currency effects of $43 million. On a constant currency basis, revenue decreased $42 million, or 3.6%, primarily due to decreased wholesale revenues throughout the Americas and EMEA and decreased revenues in Greater China due to COVID-19 related disruptions. Income from Operations For the three months ended December 31, 2022, Michael Kors recorded income from operations of $251 million, compared to $335 million for the three months ended December 25, 2021. Operating margin decreased from 28.4% for the three months ended December 25, 2021, to 22.9% for the three months ended December 31, 2022, primarily due to increased marketing investments and deleverage of expenses on lower revenues partially offset by lower supply chain costs. 40 Results of Operations Comparison of the nine months ended December 31, 2022 with the nine months ended December 25, 2021 The following table details the results of our operations for the nine months ended December 31, 2022 and December 25, 2021, and expresses the relationship of certain line items to total revenue as a percentage (dollars in millions): Nine Months Ended $ Change % Change % of Total Revenue for the Nine Months Ended December 31, 2022 December 25, 2021 December 31, 2022 December 25, 2021 Statements of Operations Data: Total revenue $ 4,284 $ 4,162 $ 122 2.9 % Cost of goods sold 1,427 1,374 53 3.9 % 33.3 % 33.0 % Gross profit 2,857 2,788 69 2.5 % 66.7 % 67.0 % Selling, general and administrative expenses 1,984 1,800 184 10.2 % 46.3 % 43.2 % Depreciation and amortization 131 146 (15) (10.3) % 3.1 % 3.5 % Impairment of assets 12 33 (21) (63.6) % 0.3 % 0.8 % Restructuring and other charges 11 25 (14) (56.0) % 0.3 % 0.6 % Total operating expenses 2,138 2,004 134 6.7 % 49.9 % 48.1 % Income from operations 719 784 (65) (8.3) % 16.8 % 18.8 % Other income, net (2) (2) — — % — % — % Interest expense (income), net 13 (11) 24 NM 0.3 % (0.3) % Foreign currency (gain) loss (10) 1 (11) NM (0.2) % — % Income before income taxes 718 796 (78) (9.8) % 16.8 % 19.1 % Provision for income taxes 66 54 12 22.2 % 1.5 % 1.3 % Net income 652 742 (90) (12.1) % Less: Net income attributable to noncontrolling interest 2 1 1 100.0 % Net income attributable to Capri $ 650 $ 741 $ (91) (12.3) % NM Not meaningful Total Revenue Total revenue increased $122 million, or 2.9%, to $4.284 billion for the nine months ended December 31, 2022, compared to $4.162 billion for the nine months ended December 25, 2021, which included net unfavorable foreign currency effects of approximately $288 million, as a result of the strengthening of the U.S. dollar compared to all major currencies in which we operate for the nine months ended December 31, 2022. On a constant currency basis, our total revenue increased $410 million, or 9.9%. The increase is attributable to increased retail and wholesale revenues throughout the Americas and EMEA, partially offset by decreased revenues in Greater China due to COVID-19 related disruptions for each of our brands. Gross Profit Gross profit increased $69 million, or 2.5%, to $2.857 billion for the nine months ended December 31, 2022, compared to $2.788 billion for the nine months ended December 25, 2021, which included net unfavorable foreign currency effects of $201 million. Gross profit as a percentage of total revenue was 66.7% for the nine months ended December 31, 2022, compared to 67.0% for the nine months ended December 25, 2021. The decrease in gross profit margin was primarily attributable to increased supply chain costs and unfavorable channel mix for the nine months ended December 31, 2022, as compared to the nine months ended December 25, 2021. 41 Total Operating Expenses Total operating expenses increased $134 million, or 6.7%, to $2.138 billion for the nine months ended December 31, 2022, compared to $2.004 billion for the nine months ended December 25, 2021. Our operating expenses included a net favorable foreign currency impact of approximately $167 million. Total operating expenses increased to 49.9% as a percentage of total revenue for the nine months ended December 31, 2022, compared to 48.1% for the nine months ended December 25, 2021. The components that comprise total operating expenses are explained below. Selling, General and Administrative Expenses Selling, general and administrative expenses increased $184 million, or 10.2%, to $1.984 billion for the nine months ended December 31, 2022, compared to $1.800 billion for the nine months ended December 25, 2021, primarily due to increased marketing and unallocated corporate expenses for the nine months ended December 31, 2022. Selling, general and administrative expenses as a percentage of total revenue increased to 46.3% for the nine months ended December 31, 2022, compared to 43.2% for the nine months ended December 25, 2021, primarily due to increased marketing investments and unallocated corporate expenses as a percentage of revenue for the nine months ended December 31, 2022, as compared to the nine months ended December 25, 2021. Unallocated corporate expenses, which are included within selling, general and administrative expenses discussed above, but are not directly attributable to a reportable segment, increased $48 million, or 39.0%, to $171 million for the nine months ended December 31, 2022 as compared to $123 million for the nine months ended December 25, 2021, primarily due to an increase in professional fees and information technology costs related to the ongoing ERP system implementation and Capri transformation projects. Depreciation and Amortization Depreciation and amortization decreased $15 million, or 10.3%, to $131 million for the nine months ended December 31, 2022, compared to $146 million for the nine months ended December 25, 2021. Depreciation and amortization decreased to 3.1% as a percentage of total revenue for the nine months ended December 31, 2022, compared to 3.5% for the nine months ended December 25, 2021. The decrease in depreciation and amortization expense was primarily attributable to lower depreciation due to lower capital expenditures in Fiscal 2022 and Fiscal 2021. Impairment of Assets For the nine months ended December 31, 2022 and December 25, 2021, we recognized asset impairment charges of $12 million and $33 million, respectively, which are 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. Restructuring and Other Charges We recognized restructuring and other charges of $11 million and $25 million for the nine months ended December 31, 2022 and December 25, 2021, respectively. These charges are primarily related to equity awards associated with the acquisition of Versace. See Note 8 to the accompanying consolidated financial statements for additional information. Restructuring and other charges are not evaluated as part of our reportable segments’ results (see Segment Information above for additional information). Income from Operations As a result of the foregoing, income from operations decreased $65 million, to $719 million for the nine months ended December 31, 2022, compared to $784 million for the nine months ended December 25, 2021. Income from operations as a percentage of total revenue decreased to 16.8% for the nine months ended December 31, 2022, compared to 18.8% for the nine months ended December 25, 2021. See Segment Information above for a reconciliation of our segment operating income to total operating income. Interest Expense (Income), net For the nine months ended December 31, 2022, we recognized $13 million of interest expense compared to $11 million of interest income for the nine months ended December 25, 2021. The $24 million increase in interest expense (income), net, is primarily due to higher effective interest rates on our outstanding debt, higher average borrowings outstanding and lower 42 interest income from our net investment hedges, partially offset by higher interest income earned on our cash and cash equivalents (see Note 9 and Note 12 to the accompanying consolidated financial statements for additional information). Foreign Currency (Gain) Loss For the nine months ended December 31, 2022, we recognized a net foreign currency gain of $10 million, primarily attributable to a gain related to an undesignated forward foreign currency exchange contract partially offset by losses attributable to intercompany transactions among our subsidiaries. For the nine months ended December 25, 2021, we recognized a net foreign currency loss of $1 million, primarily attributable to the remeasurement of dollar-denominated intercompany loans with certain of our subsidiaries. Provision for Income Taxes For the nine months ended December 31, 2022, we recognized $66 million of income tax expense compared to $54 million for the nine months ended December 25, 2021. Our effective tax rate was 9.2% and 6.8% for the nine months ended December 31, 2022 and December 25, 2021, respectively. In the current year, our effective tax rate benefited from the release of a valuation allowance in the United Kingdom. In the prior year, our effective tax rate included a favorable impact from a net benefit recognized as a result of newly enacted tax legislation in Italy and a net operating loss carryback claim made in the United States as a result of COVID-19 related losses. See Note 15 to the accompanying consolidated financial statements for additional information regarding the effective tax rate for the current fiscal year. Our effective tax rate may fluctuate from time to time due to the effects of changes in United States federal, state and local taxes and tax rates in foreign jurisdictions. In addition, factors such as the geographic mix of earnings, enacted tax legislation and the results of various global tax strategies, may also impact our effective tax rate in future periods. Net Income Attributable to Capri As a result of the foregoing, our net income decreased $91 million to $650 million for the nine months ended December 31, 2022, compared to $741 million for the nine months ended December 25, 2021. Segment Information Versace Nine Months Ended % Change (dollars in millions) December 31, 2022 December 25, 2021 $ Change As Reported Constant Currency Revenues $ 832 $ 773 $ 59 7.6 % 22.9 % Income from operations $ 138 $ 135 $ 3 2.2 % Operating margin 16.6 % 17.5 % Revenues Versace revenues increased $59 million, or 7.6%, to $832 million for the nine months ended December 31, 2022, compared to $773 million for the nine months ended December 25, 2021, which included unfavorable foreign currency effects of $118 million. On a constant currency basis, revenue increased $177 million, or 22.9%, primarily attributable to increased retail revenue and wholesale shipments in the Americas and EMEA, partially offset by decreased revenues in Greater China due to COVID-19 related disruptions. Income from Operations For the nine months ended December 31, 2022, Versace recorded income from operations of $138 million, compared to $135 million for the nine months ended December 25, 2021. Operating margin decreased from 17.5% for the nine months ended December 25, 2021, to 16.6% for the nine months ended December 31, 2022, primarily due to unfavorable channel mix offset by higher average unit price. 43 Jimmy Choo Nine Months Ended % Change (dollars in millions) December 31, 2022 December 25, 2021 $ Change As Reported Constant Currency Revenues $ 482 $ 457 $ 25 5.5 % 15.1 % Income from operations $ 45 $ 28 $ 17 60.7 % Operating margin 9.3 % 6.1 % Revenues Jimmy Choo revenues increased $25 million, or 5.5%, to $482 million for the nine months ended December 31, 2022, compared to $457 million for the nine months ended December 25, 2021, which included unfavorable foreign currency effects of $44 million. On a constant currency basis, revenue increased $69 million, or 15.1%, primarily attributable to increased retail revenue and wholesale shipments in the Americas and EMEA, partially offset by decreased revenue in Greater China due to the impact of COVID-19 related disruptions. Income from Operations For the nine months ended December 31, 2022, Jimmy Choo recorded income from operations of $45 million, compared to $28 million for the nine months ended December 25, 2021. Operating margin increased from 6.1% for the nine months ended December 25, 2021, to 9.3% for the nine months ended December 31, 2022, primarily due to higher average unit price and leveraging of operating expenses on higher revenue. Michael Kors Nine Months Ended % Change (dollars in millions) December 31, 2022 December 25, 2021 $ Change As Reported Constant Currency Revenues $ 2,970 $ 2,932 $ 38 1.3 % 5.6 % Income from operations $ 721 $ 795 $ (74) (9.3) % Operating margin 24.3 % 27.1 % Revenues Michael Kors revenues increased $38 million, or 1.3%, to $2.970 billion for the nine months ended December 31, 2022, compared to $2.932 billion for the nine months ended December 25, 2021, which included unfavorable foreign currency effects of $126 million. On a constant currency basis, revenue increased $164 million, or 5.6%, primarily due to higher wholesale shipments and increased retail revenue in the Americas and EMEA, partially offset by decreased revenue in Greater China due to the impact of COVID-19 related disruptions. Income from Operations For the nine months ended December 31, 2022, Michael Kors recorded income from operations of $721 million, compared to $795 million for the nine months ended December 25, 2021. Operating margin decreased from 27.1% for the nine months ended December 25, 2021, to 24.3% for the nine months ended December 31, 2022, primarily due to increased supply chain costs, unfavorable regional mix and increased marketing investments. 44 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, investments in corporate and distribution facilities, continued systems development, e-commerce and marketing initiatives. We spent $168 million on capital expenditures during the nine months ended December 31, 2022. The following table sets forth key indicators of our liquidity and capital resources (in millions): As of December 31, 2022 April 2, 2022 Balance Sheet Data: Cash and cash equivalents $ 281 $ 169 Working capital $ 525 $ 325 Total assets $ 7,554 $ 7,480 Short-term debt $ 19 $ 29 Long-term debt $ 1,521 $ 1,131 Nine Months Ended December 31, 2022 December 25, 2021 Cash Flows Provided By (Used In): Operating activities $ 616 $ 713 Investing activities $ 241 $ (26) Financing activities $ (651) $ (663) Effect of exchange rate changes $ (94) $ 6 Net increase in cash and cash equivalents $ 112 $ 30 Cash Provided by Operating Activities Net cash provided by operating activities decreased $97 million to $616 million during the nine months ended December 31, 2022, as compared to $713 million for the nine months ended December 25, 2021, as a result of a decrease in our net income after non-cash adjustments partially offset by deceleration of inventory receipts compared to prior year. Cash Provided by (Used in) Investing Activities Net cash provided by investing activities was $241 million during the nine months ended December 31, 2022, as compared to net cash used in investing activities of $26 million during the nine months ended December 25, 2021. The increase in net cash provided by investing activities were primarily attributable to the higher settlement of net investment hedges of $350 million during the nine months ended December 31, 2022 partially offset by higher capital expenditures of $83 million compared to prior year. Cash Used in Financing Activities Net cash used in financing activities was $651 million during the nine months ended December 31, 2022, as compared to $663 million during the nine months ended December 25, 2021. The decrease of cash used in financing activities of $12 million was primarily attributable to an increase in net debt borrowing of $657 million, partially offset by a $604 million increase in cash payments to repurchase our ordinary shares compared to prior year. 45 Debt Facilities The following table presents a summary of our borrowing capacity and amounts outstanding as of December 31, 2022 and April 2, 2022 (in millions): As of December 31, 2022 April 2, 2022 Senior Unsecured Revolving Credit Facility: Revolving Credit Facility (excluding up to a $500 million accordion feature) (1) Total availability $ 1,500 $ 1,000 Borrowings outstanding (2) 580 175 Letter of credit outstanding 15 21 Remaining availability $ 905 $ 804 2018 Term Loan ($1.6 billion) Borrowings outstanding, net of debt issuance costs (3) $ — $ 495 Versace Term Loan (450 million Euro) Borrowings outstanding, net of debt issuance costs (4) $ 481 $ — Senior Notes due 2024 Borrowings outstanding, net of debt issuance costs and discount amortization (2) $ 448 $ 448 Other Borrowings (5) $ 31 $ 42 Hong Kong Uncommitted Credit Facility: Total availability (100 million and 80 million Hong Kong Dollars) (6) $ 13 $ 10 Borrowings outstanding — — Remaining availability (100 million and 80 million Hong Kong Dollars) $ 13 $ 10 China Uncommitted Credit Facility: Total availability (75 million and 45 million Chinese Yuan) (6) $ 11 $ 7 Borrowings outstanding — — Total and remaining availability (75 million and 45 million Chinese Yuan) $ 11 $ 7 Japan Credit Facility: Total availability (1.0 billion Japanese Yen) $ 8 $ 8 Borrowings outstanding — — Remaining availability (1.0 billion Japanese Yen) $ 8 $ 8 Versace Uncommitted Credit Facilities: Total availability (40 million Euro and 48 million Euro) (6) $ 43 $ 52 Borrowings outstanding — — Remaining availability (40 million Euro and 48 million Euro) $ 43 $ 52 Total borrowings outstanding (1) $ 1,540 $ 1,160 Total remaining availability $ 980 $ 881 46 (1) The financial covenant in our 2022 Credit Facility requires us to comply with the quarterly maximum net leverage ratio test of 4.00 to 1.0. As of December 31, 2022 and April 2, 2022, 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) As of December 31, 2022 and April 2, 2022, all amounts are recorded as long-term debt in our consolidated balance sheets. (3) As of December 31, 2022, we no longer had an outstanding balance under the 2018 Term Loan as it was repaid. As of April 2, 2022, all amounts are recorded as long-term debt in our consolidated balance sheets. (4) On December 5, 2022, Gianni Versace S.r.l., our wholly owned subsidiary, entered into a credit facility, which provides a senior unsecured term loan in an aggregate principal amount of €450 million (approximately $482 million). As of December 31, 2022 all amounts are recorded as long-term debt in our consolidated balance sheets. (5) The balance as of December 31, 2022 consists of $18 million related to our supplier financing program recorded within short-term debt in our consolidated balance sheets, $11 million related to the sale of certain Versace tax receivables, with $1 million and $10 million, respectively, recorded within short-term debt and long-term debt in our consolidated balance sheets and $2 million of other loans recorded as long-term debt in our consolidated balance sheets. The balance as of April 2, 2022 consists of $21 million related to our supplier finance program recorded within short-term debt in our consolidated balance sheets, $18 million related to the sale of certain Versace tax receivables, with $8 million and $10 million, respectively, 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. (6) The balance as of December 31, 2022 and April 2, 2022 represents the total availability of the credit facility, which excludes bank guarantees. We believe that our 2022 Credit Facility is adequately diversified with no undue concentration in any one financial institution. As of December 31, 2022, there were 17 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 2022 Credit Facility. See Note 9 in the accompanying financial statements and Note 11 in our Fiscal 2022 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 nine months ended December 31, 2022 and December 25, 2021 (dollars in millions): Nine Months Ended December 31, 2022 December 25, 2021 Cost of shares repurchased under share repurchase program $ 950 $ 350 Fair value of shares withheld to cover tax obligations for vested restricted share awards 14 10 Total cost of ordinary shares repurchased $ 964 $ 360 Shares repurchased under share repurchase program 18,921,459 5,934,244 Shares withheld to cover tax withholding obligations 300,722 193,322 19,222,181 6,127,566 During the first quarter of Fiscal 2022, the Company reinstated its $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. Subsequently, on November 3, 2021, the Company announced that its Board of Directors had terminated the Company’s existing $500 million share repurchase program (the “Prior Plan”), which had $250 million of availability remaining at the time, and authorized a new share repurchase program (the “Fiscal 2022 Plan”) pursuant to which the Company was permitted, from time to time, to repurchase up to $1.0 billion of its outstanding ordinary shares within a period of two years from the effective date of the program. On June 1, 2022, the Company announced that its Board of Directors had terminated the Fiscal 2022 Plan, with $500 million of availability remaining, and authorized a new share repurchase program (the “Fiscal 2023 Plan”) pursuant to 47 which the Company may, from time to time, repurchase up to $1.0 billion of its outstanding ordinary shares within a period of 2 years from the effective date of the program. On November 9, 2022, the Company announced that its Board of Directors approved a new share repurchase program (the “Existing Share Repurchase Plan”) of up to $1 billion of its outstanding ordinary shares, providing additional capacity to return cash to shareholders over the longer term. This new two-year program replaced the Fiscal 2023 Plan which had $250 million of availability remaining. Share repurchases may be made in open market or privately negotiated transactions and/or pursuant to Rule 10b5-1 trading plans, subject to market conditions, applicable legal requirements, trading restrictions under the Company’s insider trading policy and other relevant factors. The program may be suspended or discontinued at any time. 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 2022 Form 10-K for a detailed disclosure of our other contractual obligations and commitments as of April 2, 2022. 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 $35 million at December 31, 2022, including $20 million in letters of credit issued outside of the 2022 Credit Facility. In addition, as of December 31, 2022, 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. 48