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. This report contains statements which are, or may be deemed to be, “forward-looking statements.” 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 Capri 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, including regarding the proposed transaction. These risks, uncertainties and other factors include changes in consumer traffic and retail trends; high consumer debt levels, recession and inflationary pressures; loss of market share and industry competition; the impact of the COVID-19 pandemic, levels of cash flow and future availability of credit, compliance with restrictive covenants under Capri’s credit agreement, Capri’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 Capri’s businesses; risks associated with operating in international markets and our global sourcing activities, including disruptions or delays in manufacturing or shipments; the risk of cybersecurity threats and privacy of data security breaches; the negative effects of events on the market price of Capri’s ordinary shares and its operating results; significant transaction costs; unknown liabilities; the risk of litigation and/or regulatory actions related to Capri’s businesses; fluctuations in demand for Capri’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 Capri’s insider trading policy and other relevant factors, and which share repurchases may be suspended or discontinued at any time, the level of other investing activities and uses of cash; 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; the timing, receipt and terms and conditions of any required governmental and regulatory approvals for the proposed transaction that could delay or result in the termination of the proposed transaction, the occurrence of any other event, change or other circumstances that could give rise to the termination of the merger agreement entered into in connection with the proposed transaction, the possibility that Capri’s shareholders may not approve the proposed transaction, the risk that the parties to the merger agreement may not be able to satisfy the conditions to the proposed transaction in a timely manner or at all, risks related to disruption of management time from ongoing business operations due to the proposed transaction, the risk that any announcements relating to the proposed transaction could have adverse effects on the market price of Capri’s ordinary shares, the risk of any unexpected costs or expenses resulting from the proposed transaction, the risk of any litigation relating to the proposed transaction, the risk that the proposed transaction and its announcement could have an adverse effect on the ability of Capri to retain customers and retain and hire key personnel and maintain relationships with customers, suppliers, employees, shareholders and other business relationships and on its operating results and business generally, and the risk the pending proposed transaction could divert the attention of Capri’s management; as well as those risks that are outlined in Capri’s disclosure filings and materials, which you can find on http://www.capriholdings.com, such as its Form 10-K, Form 10-Q and Form 8-K reports that have been filed with the SEC. Please consult these documents for a more complete understanding of these risks and uncertainties. Any forward-looking statement in this report speaks only as of the date made and Capri disclaims any obligation to update or revise any forward-looking or other statements contained herein other than in accordance with legal and regulatory obligations. 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. 28 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. 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. Global economic conditions and the related impact on levels of consumer spending worldwide impacted our business in the first quarter of Fiscal 2024, and are likely to continue to impact our business and the accessories, footwear and apparel industry overall for the foreseeable future. Inflation, rising interest rates, higher fuel and energy costs and commodity prices, reductions in net worth based on market declines and uncertainty, home prices, credit availability and consumer debt levels, concerns of a global banking crisis, political instability due to war or other geopolitical factors and other macroeconomic pressures and general uncertainty regarding the overall future economic environment have led to recession fears and created a challenging retail environment, which is expected to continue in the near term. 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 which could negatively affect our financial condition and results of operations. 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. 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, 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. However, 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 returned to 2019 levels in 2021, and the market is predicted to increase at a 10% 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. 29 Foreign currency fluctuation. Our consolidated operations are impacted by the relationships between our reporting currency, the United States dollar, and those of our non-United States subsidiaries whose functional/local currency is other than the United States 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 United States dollar. Disruptions or delays in shipping and distribution and other supply chain constraints . Any disruptions in our shipping and distribution network, including port congestion, vessel availability, container shortages and temporary factory closures, 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 1, 2023 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 rely on free trade agreements and other supply chain initiatives in order to maximize efficiencies relating to product importation. 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 and certain parts of Asia. Our Michael Kors e-commerce business includes e-commerce sites in the United States, Canada, 30 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 income (expense) and COVID-19 related expenses. 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 months ended July 1, 2023 and July 2, 2022 (in millions): Three Months Ended July 1, 2023 July 2, 2022 Total revenue: Versace $ 259 $ 275 Jimmy Choo 183 172 Michael Kors 787 913 Total revenue $ 1,229 $ 1,360 Income from operations: Versace $ 3 $ 52 Jimmy Choo 16 19 Michael Kors 130 222 Total segment income from operations 149 293 Less: Corporate expenses (71) (60) Restructuring and other income (expense) 2 (3) COVID-19 related expenses — 1 Total income from operations $ 80 $ 231 31 The following table presents our global network of retail stores and wholesale doors by brand: As of July 1, 2023 July 2, 2022 Number of full price retail stores (including concessions): Versace 161 148 Jimmy Choo 181 181 Michael Kors 504 520 846 849 Number of outlet stores: Versace 63 60 Jimmy Choo 56 55 Michael Kors 306 301 425 416 Total number of retail stores 1,271 1,265 Total number of wholesale doors: Versace 751 805 Jimmy Choo 517 461 Michael Kors 2,915 2,808 4,183 4,074 The following table presents our retail stores by geographic location: As of As of July 1, 2023 July 2, 2022 Versace Jimmy Choo Michael Kors Versace Jimmy Choo Michael Kors Store count by region: The Americas 42 44 314 39 45 328 EMEA 58 70 174 57 70 175 Asia 124 123 322 112 121 318 224 237 810 208 236 821 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 July 1, 2023 July 2, 2022 Total revenue $ 1,229 $ 1,360 Gross profit as a percent of total revenue 66.1 % 66.3 % Income from operations $ 80 $ 231 Income from operations as a percent of total revenue 6.5 % 17.0 % 32 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 1, 2023. There have been no significant changes in our critical accounting policies and estimates since April 1, 2023. 33 Results of Operations Comparison of the three months ended July 1, 2023 with the three months ended July 2, 2022 The following table details the results of our operations for the three months ended July 1, 2023 and July 2, 2022, 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 July 1, 2023 July 2, 2022 July 1, 2023 July 2, 2022 Statements of Operations Data: Total revenue $ 1,229 $ 1,360 $ (131) (9.6) % Cost of goods sold 417 459 (42) (9.2) % 33.9 % 33.8 % Gross profit 812 901 (89) (9.9) % 66.1 % 66.3 % Selling, general and administrative expenses 689 622 67 10.8 % 56.1 % 45.7 % Depreciation and amortization 45 45 — — % 3.7 % 3.3 % Restructuring and other (income) expense (2) 3 (5) NM (0.2) % 0.2 % Total operating expenses 732 670 62 9.3 % 59.6 % 49.3 % Income from operations 80 231 (151) (65.4) % 6.5 % 17.0 % Other expense, net 1 — 1 NM 0.1 % — % Interest expense (income), net 8 (4) 12 NM 0.7 % (0.3) % Foreign currency loss 21 4 17 NM 1.7 % 0.3 % Income before income taxes 50 231 (181) (78.4) % 4.1 % 17.0 % Provision for income taxes 2 28 (26) (92.9) % 0.2 % 2.1 % Net income 48 203 (155) (76.4) % Less: Net income attributable to noncontrolling interest — 2 (2) NM Net income attributable to Capri $ 48 $ 201 $ (153) (76.1) % NM Not meaningful Total Revenue Total revenue decreased $131 million, or 9.6%, to $1.229 billion for the three months ended July 1, 2023, compared to $1.360 billion for the three months ended July 2, 2022, which included net unfavorable foreign currency effects of approximately $5 million primarily as a result of the strengthening of the United States dollar compared to the Chinese Renminbi and Japanese Yen partially offset by weakening of the United States Dollar against the Euro for the three months ended July 1, 2023. On a constant currency basis, our total revenue decreased $126 million, or 9.3%. primarily attributable to lower revenues in the Americas, partially offset by increased revenues in Greater China for each of our brands. Three Months Ended % Change (in millions) July 1, 2023 July 2, 2022 $ Change As Reported Constant Currency Versace $ 259 $ 275 $ (16) (5.8) % (5.8) % Jimmy Choo 183 172 11 6.4 % 7.0 % Michael Kors 787 913 (126) (13.8) % (13.4) % Total revenue $ 1,229 $ 1,360 $ (131) (9.6) % (9.3) % • Versace revenues decreased $16 million, or 5.8%, to $259 million for the three months ended July 1, 2023, compared to $275 million for the three months ended July 2, 2022 primarily attributable to lower revenues in the Americas, partially offset by increased revenues in EMEA and Greater China. The foreign currency effect on revenue was minimal for the three months ended July 1, 2023. • Jimmy Choo revenues increased $11 million, or 6.4%, to $183 million for the three months ended July 1, 2023, compared to $172 million for the three months ended July 2, 2022, which included unfavorable foreign currency 34 effects of $1 million. On a constant currency basis, revenue increased $12 million, or 7.0%, primarily attributable to increased revenue in EMEA and Greater China, partially offset by lower revenues in the Americas. • Michael Kors revenue decreased $126 million, or 13.8%, to $787 million for the three months ended July 1, 2023, compared to $913 million for the three months ended July 2, 2022, which included unfavorable foreign currency effects of $4 million. On a constant currency basis, revenue decreased $122 million, or 13.4%, primarily due to lower revenues in the Americas and EMEA, partially offset by increased revenues in Greater China. Gross Profit Gross profit decreased $89 million, or 9.9%, to $812 million for the three months ended July 1, 2023, compared to $901 million for the three months ended July 2, 2022. Gross profit as a percentage of total revenue was 66.1% and 66.3% for the three months ended July 1, 2023 and July 2, 2022, respectively. Our gross profit margin decreased primarily related to a return to more normalized promotional levels supported by an improved inventory position versus the prior year offset by lower supply chain costs for the three months ended July 1, 2023, as compared to the three months ended July 2, 2022. Total Operating Expenses Total operating expenses increased $62 million, or 9.3%, to $732 million for the three months ended July 1, 2023, compared to $670 million for the three months ended July 2, 2022. Our operating expenses included a net favorable foreign currency impact of approximately $3 million. Total operating expenses increased to 59.6% as a percentage of total revenue for the three months ended July 1, 2023, compared to 49.3% for the three months ended July 2, 2022. The components that comprise total operating expenses are explained below. Selling, General and Administrative Expenses Selling, general and administrative expenses increased $67 million, or 10.8%, to $689 million for the three months ended July 1, 2023, compared to $622 million for the three months ended July 2, 2022. As a percentage of total revenue, selling, general and administrative expenses increased to 56.1% for the three months ended July 1, 2023, compared to 45.7% for the three months ended July 2, 2022, primarily due to increased marketing and unallocated corporate expenses and deleveraging of operating expenses on lower revenue for the three months ended July 1, 2023. Unallocated corporate expenses, which are included within selling, general and administrative expenses discussed above, but are not directly attributable to a reportable segment, increased $11 million, or 18.3%, to $71 million for the three months ended July 1, 2023 as compared to $60 million for the three months ended July 2, 2022, primarily due to an increase in professional fees and information technology costs related to the ongoing Capri transformation projects and ERP system implementation. Restructuring and Other (Income) Expense We recognized restructuring and other (income) expense of $(2) million and $3 million for the three months ended July 1, 2023 and July 2, 2022, respectively. The income for the three months ended July 1, 2023 is primarily related to a gain on the sale of a long-lived corporate asset, partially offset by acquisition related Versace equity awards and severance expenses. The expense for the three months ended July 2, 2022 was 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 (income) expense is not evaluated as part of our reportable segments’ results (See Segment Information above for additional information). 35 Income from Operations As a result of the foregoing, income from operations decreased $151 million, to $80 million for three months ended July 1, 2023, compared to $231 million for the three months ended July 2, 2022. Income from operations as a percentage of total revenue decreased to 6.5% for the three months ended July 1, 2023, compared to 17.0% for the three months ended July 2, 2022. See Segment Information above for a reconciliation of our segment operating income to total operating income. Three Months Ended (in millions) July 1, 2023 July 2, 2022 $ Change % Change Income from operations: Versace $ 3 $ 52 $ (49) (94.2) % Jimmy Choo 16 19 (3) (15.8) % Michael Kors 130 222 (92) (41.4) % Total segment income from operations $ 149 $ 293 $ (144) (49.1) % Operating Margin: Versace 1.2 % 18.9 % Jimmy Choo 8.7 % 11.0 % Michael Kors 16.5 % 24.3 % • Versace recorded income from operations of $3 million for the three months ended July 1, 2023, compared to $52 million for the three months ended July 2, 2022. Operating margin decreased from 18.9% for the three months ended July 2, 2022, to 1.2% for the three months ended July 1, 2023, primarily due to increased marketing investments, particularly related to the timing of the fall fashion show which occurred in the first quarter of this fiscal year, and deleveraging of operating expenses on lower revenues. • Jimmy Choo recorded income from operations of $16 million for the three months ended July 1, 2023, compared to $19 million for the three months ended July 2, 2022. Operating margin decreased from 11.0% for the three months ended July 2, 2022 to 8.7% for the three months ended July 1, 2023, primarily due to higher employee costs and increased marketing investments. • Michael Kors recorded income from operations of $130 million for the three months ended July 1, 2023, compared to $222 million for the three months ended July 2, 2022. Operating margin decreased from 24.3% for the three months ended July 2, 2022, to 16.5% for the three months ended July 1, 2023, primarily due to increased marketing investments and deleveraging of operating expenses on lower revenues. Interest Expense (Income), net For the three months ended July 1, 2023, we recognized $8 million of interest expense compared to $4 million of interest income for the three months ended July 2, 2022. The $12 million increase in interest expense (income), net, is primarily due to higher effective interest rates and higher average borrowings on our outstanding debt, 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 Loss For the three months ended July 1, 2023 and July 2, 2022, we recognized a net foreign currency loss of $21 million and $4 million, respectively, primarily attributable to the remeasurement of intercompany loans with certain of our subsidiaries. Provision for Income Taxes The provision for income taxes was $2 million for the three months ended July 1, 2023, compared to $28 million for the three months ended July 2, 2022. Our effective tax rates were 4.0% and 12.1% for the three months ended July 1, 2023 and July 2, 2022, respectively. In the current year, the decrease in our effective tax rate was primarily related to the release of a valuation allowance and a decrease in uncertain tax positions due to the settlement of an outstanding audit. See Note 15 to the accompanying consolidated financial statements for additional information regarding the effective tax rate for the first quarter of Fiscal 2024. 36 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 $153 million to $48 million for the three months ended July 1, 2023, compared to $201 million for the three months ended July 2, 2022. 37 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 $50 million on capital expenditures during the three months ended July 1, 2023. The Capri transformation program represents a multi-year, multi-project initiative extending through Fiscal 2026 intended to improve the operating effectiveness and efficiency of our organization by creating best in class shared platforms across our brands and by expanding our digital capabilities. These initiatives cover multiple aspects of our operations including supply chain, marketing, omni-channel customer experience, e-commerce, data analytics and IT infrastructure. Through Fiscal 2026, we expect expenditures up to $220 million related to these efforts. The Company is also in progress with a multi-year ERP implementation which includes accounting, finance and wholesale and retail inventory solutions in order to create standardized finance IT applications across our organization. This ERP implementation will continue through Fiscal 2026 and we expect expenditures up to $170 million related to these initiatives. The following table sets forth key indicators of our liquidity and capital resources (in millions): As of July 1, 2023 April 1, 2023 Balance Sheet Data: Cash and cash equivalents $ 238 $ 249 Working capital $ 472 $ 420 Total assets $ 7,409 $ 7,295 Short-term debt $ 13 $ 5 Long-term debt $ 1,924 $ 1,822 Three Months Ended July 1, 2023 July 2, 2022 Cash Flows Provided By (Used In): Operating activities $ 40 $ 137 Investing activities $ (50) $ 30 Financing activities $ (3) $ (50) Effect of exchange rate changes $ (3) $ (65) Net (decrease) increase in cash and cash equivalents $ (16) $ 52 Cash Provided by Operating Activities Net cash provided by operating activities decreased $97 million to $40 million during the three months ended July 1, 2023, as compared to $137 million for the three months ended July 2, 2022, as a result of a decrease in our net income after non-cash adjustments and decreases in working capital requirements due to the stabilization of inventory levels compared to prior year. Cash (Used in) Provided by Investing Activities Net cash used in investing activities was $50 million during the three months ended July 1, 2023, as compared to net cash provided by investing activities of $30 million during the three months ended July 2, 2022. The increase in net cash used 38 in investing activities were primarily attributable to the settlement of net investment hedges of $66 million during the three months ended July 2, 2022 partially offset by higher capital expenditures of $14 million compared to prior year. Cash Used in Financing Activities Net cash used in financing activities was $3 million during the three months ended July 1, 2023, as compared to $50 million during the three months ended July 2, 2022. The decrease of cash used in financing activities of $47 million was primarily attributable to a decrease in net debt borrowings of $158 million, partially offset by a $206 million decrease in cash payments to repurchase our ordinary shares compared to prior year. 39 Debt Facilities The following table presents a summary of our borrowing capacity and amounts outstanding as of July 1, 2023 and April 1, 2023 (in millions): As of July 1, 2023 April 1, 2023 Senior Unsecured Revolving Credit Facility: Revolving Credit Facility (excluding up to a $500 million accordion feature) (1) Total availability $ 1,500 $ 1,500 Borrowings outstanding (2) 973 874 Letter of credit outstanding 3 3 Remaining availability $ 524 $ 623 Versace Term Loan (450 Million Euro) Borrowings outstanding, net of debt issuance costs (3) $ 490 $ 487 Senior Notes due 2024 Borrowings outstanding, net of debt issuance costs and discount amortization (2) $ 449 $ 449 Other Borrowings (4) $ 25 $ 17 Hong Kong Uncommitted Credit Facility: Total availability (70 million Hong Kong Dollars) (5) $ 9 $ 9 Borrowings outstanding — — Remaining availability (70 million Hong Kong Dollars) $ 9 $ 9 China Uncommitted Credit Facility: Total availability (75 million Chinese Yuan) (5) $ 10 $ 11 Borrowings outstanding — — Total and remaining availability (75 million Chinese Yuan) $ 10 $ 11 Japan Credit Facility: Total availability (1.0 billion Japanese Yen) $ 7 $ 8 Borrowings outstanding — — Remaining availability (1.0 billion Japanese Yen) $ 7 $ 8 Versace Uncommitted Credit Facilities: Total availability (40 million Euro) (5) $ 44 $ 43 Borrowings outstanding — — Remaining availability (40 million Euro) $ 44 $ 43 Total borrowings outstanding (1) $ 1,937 $ 1,827 Total remaining availability $ 594 $ 694 (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 July 1, 2023 and April 1, 2023, 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 July 1, 2023 and April 1, 2023, all amounts are recorded as long-term debt in our consolidated balance sheets. (3) 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. As of July 1, 2023 and April 1, 2023, all amounts are recorded as long-term debt in our consolidated balance sheets. 40 (4) The balance as of July 1, 2023 consists of $12 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 1, 2023 consists of $4 million related to our supplier finance 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 recorded within short-term debt and long-term debt, respectively, in our consolidated balance sheets. (5) The balance as of July 1, 2023 and April 1, 2023 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 July 1, 2023, 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 2023 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 treasury share repurchases during the three months ended July 1, 2023 and July 2, 2022 (dollars in millions): Three Months Ended July 1, 2023 July 2, 2022 Cost of shares repurchased under share repurchase program $ 100 $ 300 Fair value of shares withheld to cover tax obligations for vested restricted share awards 6 12 Total cost of treasury shares repurchased $ 106 $ 312 Shares repurchased under share repurchase program 2,636,564 6,120,174 Shares withheld to cover tax withholding obligations 164,377 265,311 2,800,941 6,385,485 On June 1, 2022, the Company announced its Board of Directors authorized a new share repurchase program (the “Fiscal 2023 Plan”) 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. On November 9, 2022, the Company announced its Board of Directors approved a new share repurchase program (the “Existing Share Repurchase Plan”) of up to $1.0 billion of our 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. As of July 1, 2023, the remaining availability under the Existing Share Repurchase Plan was $300 million. 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. 41 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 2023 Form 10-K for a detailed disclosure of our other contractual obligations and commitments as of April 1, 2023. 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 $33 million at July 1, 2023, including $30 million in letters of credit issued outside of the 2022 Credit Facility. In addition, as of July 1, 2023, bank guarantees of approximately $38 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. 42