Capri Holdings Ltd 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Agreement and Plan of Merger On August 10, 2023, Capri entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Tapestry, Inc., a Maryland corporation (“Tapestry”), and Sunrise Merger Sub, Inc., a British Virgin Islands business company limited by shares and a direct wholly owned subsidiary of Tapestry (“Merger Sub”). The Merger Agreement provides that, among other things and on the terms and subject to the conditions set forth therein, Tapestry will acquire Capri in an all-cash transaction by means of a merger of Merger Sub with and into Capri (the “Merger”), with Capri surviving the Merger as a wholly owned subsidiary of Tapestry. For additional information related to the Merger Agreement, please refer to Capri’s Definitive Proxy Statement on Schedule 14A filed with the U.S. Securities and Exchange Commission (the “SEC”) on September 20, 2023, as well as the supplemental disclosures contained in Capri’s Current Report on Form 8-K filed with the SEC on October 17, 2023. Our Business We are 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. 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 footwear, complemented by accessories, including handbags, small leather goods, scarves and belts, as well as a men’s luxury footwear 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 offers classic and timeless luxury products, as well as innovative products that are unique, instinctively seductive and chic. 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 and 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. 32 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 third quarter of Fiscal 2024, and are likely to continue to impact our business and the premium 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 COVID-19 pandemic has resulted in varying degrees of business disruption for our industry, including us, since it began at the end of Fiscal 2020. Our 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. Government restrictions have since been lifted in the Greater China region. The COVID-19 pandemic did not have a significant impact during the first nine months of Fiscal 2024 and is not expected to have a significant impact for the remainder of the fiscal year. We continue to monitor the latest developments regarding the COVID-19 pandemic and potential impacts on our business, operating results and outlook. Luxury goods trends and demand for 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 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. 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 33 reasonable efforts to source from localities that suit our manufacturing standards and result in more favorable labor driven costs to our products. Implementing and updating information technology systems. During Fiscal 2024, we began implementing a new state of the art e-commerce platform across our brands which is expected to continue through Fiscal 2025. While the new platform is designed to improve the user experience and enhance consumer engagement, the transition created unanticipated challenges which have negatively impacted our results of operations. The continued implementation of this platform may also negatively impact our future results of operations. See Item 1A — “Risk Factors” — “A material delay or disruption in our information technology systems or e-commerce websites or our failure or inability to upgrade our information technology systems precisely and efficiently could have a material adverse effect on our business, results of operations and financial condition” of our Annual Report on Form 10-K for the fiscal year ended April 1, 2023 for additional discussion. 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, 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 Merger related costs, impairment charges, the impact of the war in Ukraine, restructuring and other expense and COVID-19 related expenses. The segment structure is consistent with how our chief operating decision maker plans and allocates resources, manages the 34 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 30, 2023 and December 31, 2022 (in millions): Three Months Ended Nine Months Ended December 30, 2023 December 31, 2022 December 30, 2023 December 31, 2022 Total revenue: Versace $ 227 $ 249 $ 766 $ 832 Jimmy Choo 166 168 481 482 Michael Kors 1,034 1,095 2,700 2,970 Total revenue $ 1,427 $ 1,512 $ 3,947 $ 4,284 Income (loss) from operations: Versace $ (14) $ 24 $ 24 $ 138 Jimmy Choo 4 18 11 45 Michael Kors 219 251 518 721 Total segment income from operations 209 293 553 904 Less: Corporate expenses (68) (56) (210) (171) Impairment of assets (1) (6) (1) (26) (12) Merger related costs (8) — (12) — Restructuring and other expense (5) (5) (3) (11) COVID-19 related expenses — 2 — 6 Impact of war in Ukraine — 3 — 3 Total income from operations $ 122 $ 236 $ 302 $ 719 (1) Impairment of assets during the three and nine months ended December 30, 2023 primarily related to operating lease right-of-use assets at certain Versace and Michael Kors store locations. Impairment of assets during the nine months ended December 31, 2022 primarily related to operating lease right-of-use assets at certain Michael Kors store locations. 35 The following table presents our global network of retail stores and wholesale doors by brand: As of December 30, 2023 December 31, 2022 Number of full price retail stores (including concessions): Versace 170 161 Jimmy Choo 180 186 Michael Kors 493 520 843 867 Number of outlet stores: Versace 63 64 Jimmy Choo 57 56 Michael Kors 307 307 427 427 Total number of retail stores 1,270 1,294 Total number of wholesale doors: Versace 630 788 Jimmy Choo 525 517 Michael Kors 2,819 2,840 3,974 4,145 The following table presents our retail stores by geographic location: As of As of December 30, 2023 December 31, 2022 Versace Jimmy Choo Michael Kors Versace Jimmy Choo Michael Kors Store count by region: The Americas 44 43 308 41 45 328 EMEA 61 69 171 59 72 173 Asia 128 125 321 125 125 326 233 237 800 225 242 827 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 30, 2023 December 31, 2022 December 30, 2023 December 31, 2022 Total revenue $ 1,427 $ 1,512 $ 3,947 $ 4,284 Gross profit as a percent of total revenue 65.0 % 66.5 % 65.2 % 66.7 % Income from operations $ 122 $ 236 $ 302 $ 719 Income from operations as a percent of total revenue 8.5 % 15.6 % 7.7 % 16.8 % 36 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 3 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. 37 Results of Operations Comparison of the three months ended December 30, 2023 with the three months ended December 31, 2022 The following table details the results of our operations for the three months ended December 30, 2023 and December 31, 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 December 30, 2023 December 31, 2022 December 30, 2023 December 31, 2022 Statements of Operations Data: Total revenue $ 1,427 $ 1,512 $ (85) (5.6) % Cost of goods sold 499 507 (8) (1.6) % 35.0 % 33.5 % Gross profit 928 1,005 (77) (7.7) % 65.0 % 66.5 % Selling, general and administrative expenses 749 720 29 4.0 % 52.5 % 47.6 % Depreciation and amortization 46 43 3 7.0 % 3.2 % 2.8 % Impairment of assets 6 1 5 NM 0.4 % 0.1 % Restructuring and other expense 5 5 — — % 0.4 % 0.3 % Total operating expenses 806 769 37 4.8 % 56.5 % 50.9 % Income from operations 122 236 (114) (48.3) % 8.5 % 15.6 % Other income, net — (1) 1 NM — % (0.1) % Interest expense, net 1 12 (11) (91.7) % 0.1 % 0.8 % Foreign currency gain (2) (3) 1 (33.3) % (0.1) % (0.2) % Income before income taxes 123 228 (105) (46.1) % 8.6 % 15.1 % Provision for income taxes 18 3 15 NM 1.3 % 0.2 % Net income 105 225 (120) (53.3) % Less: Net income attributable to noncontrolling interest — — — — % Net income attributable to Capri $ 105 $ 225 $ (120) (53.3) % NM Not meaningful Total Revenue Total revenue decreased $85 million, or 5.6%, to $1.427 billion for the three months ended December 30, 2023, compared to $1.512 billion for the three months ended December 31, 2022, which included net favorable foreign currency effects of approximately $15 million primarily as a result of the weakening of the United States Dollar against the Euro partially offset by the strengthening of the United States dollar compared to the Chinese Renminbi and Japanese Yen for the three months ended December 30, 2023. On a constant currency basis, our total revenue decreased $100 million, or 6.6%. primarily attributable to lower revenues in the Americas for each of our brands. Three Months Ended % Change (in millions) December 30, 2023 December 31, 2022 $ Change As Reported Constant Currency Versace $ 227 $ 249 $ (22) (8.8) % (10.8) % Jimmy Choo 166 168 (2) (1.2) % (3.0) % Michael Kors 1,034 1,095 (61) (5.6) % (6.2) % Total revenue $ 1,427 $ 1,512 $ (85) (5.6) % (6.6) % • Versace revenues decreased $22 million, or 8.8%, to $227 million for the three months ended December 30, 2023, compared to $249 million for the three months ended December 31, 2022, which included favorable foreign 38 currency effects of $5 million. On a constant currency basis, revenue decreased $27 million, or 10.8%, primarily attributable to lower revenues in EMEA and the Americas partially offset by increased revenues in Asia. • Jimmy Choo revenues decreased $2 million, or 1.2%, to $166 million for the three months ended December 30, 2023, compared to $168 million for the three months ended December 31, 2022, which included favorable foreign currency effects of $3 million. On a constant currency basis, revenue decreased $5 million, or 3.0%, primarily attributable to lower revenues in the Americas partially offset by increased revenues in Asia. • Michael Kors revenue decreased $61 million, or 5.6%, to $1.034 billion for the three months ended December 30, 2023, compared to $1.095 billion for the three months ended December 31, 2022, which included favorable foreign currency effects of $7 million. On a constant currency basis, revenue decreased $68 million, or 6.2%, primarily due to lower revenues in the Americas. Gross Profit Gross profit decreased $77 million, or 7.7%, to $928 million for the three months ended December 30, 2023, compared to $1.005 billion for the three months ended December 31, 2022, which included net favorable foreign currency effects of $15 million. Gross profit as a percentage of total revenue was 65.0% and 66.5% for the three months ended December 30, 2023 and December 31, 2022, respectively. The gross profit margin decrease was primarily related to lower full price sell-through for the three months ended December 30, 2023, as compared to the three months ended December 31, 2022. Total Operating Expenses Total operating expenses increased $37 million, or 4.8%, to $806 million for the three months ended December 30, 2023, compared to $769 million for the three months ended December 31, 2022. Our operating expenses included a net unfavorable foreign currency impact of approximately $14 million. Total operating expenses increased to 56.5% as a percentage of total revenue for the three months ended December 30, 2023, compared to 50.9% for the three months ended December 31, 2022. The components that comprise total operating expenses are explained below. Selling, General and Administrative Expenses Selling, general and administrative expenses increased $29 million, or 4.0%, to $749 million for the three months ended December 30, 2023, compared to $720 million for the three months ended December 31, 2022. As a percentage of total revenue, selling, general and administrative expenses increased to 52.5% for the three months ended December 30, 2023, compared to 47.6% for the three months ended December 31, 2022, primarily due to increased retail store costs, marketing investments and unallocated corporate expenses along with deleveraging of expenses on lower revenue for the three months ended December 30, 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 $12 million, or 21.4%, to $68 million for the three months ended December 30, 2023 as compared to $56 million for the three months ended December 31, 2022, primarily due to an increase in professional fees and information technology costs related to the ongoing Capri transformation projects. Depreciation and Amortization Depreciation and amortization increased $3 million, or 7.0%, to $46 million for the three months ended December 30, 2023, compared to $43 million for the three months ended December 31, 2022. Depreciation and amortization increased to 3.2% as a percentage of total revenue for the three months ended December 30, 2023, compared to 2.8% for the three months ended December 31, 2022. The increase in depreciation and amortization expense was primarily attributable to higher depreciation due to information technology assets associated with Capri transformation projects which are now in service. Impairment of Assets For the three months ended December 30, 2023, we recognized asset impairment charges of $6 million primarily related to operating lease right-of-use assets at certain Versace store locations. For the three months ended December 31, 2022, we recognized asset impairment charges of $1 million primarily related to operating lease right-of-use assets at a Jimmy Choo store location. See Note 12 to the accompanying consolidated financial statements for additional information. 39 Restructuring and Other Expense During the three months ended December 30, 2023, we recorded costs of $5 million primarily related to equity awards associated with the acquisition of Versace and severance expenses incurred during the third quarter. The $5 million of expense recorded for the three months ended December 31, 2022 was primarily related to equity awards associated with the acquisition of Versace. See Note 9 to the accompanying consolidated financial statements for additional information. Restructuring and other expense is 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 $114 million, to $122 million for three months ended December 30, 2023, compared to $236 million for the three months ended December 31, 2022. Income from operations as a percentage of total revenue decreased to 8.5% for the three months ended December 30, 2023, compared to 15.6% for the three months ended December 31, 2022. See Segment Information above for a reconciliation of our segment operating income to total operating income. Three Months Ended (in millions) December 30, 2023 December 31, 2022 $ Change % Change Income (loss) from operations: Versace $ (14) $ 24 $ (38) (158.3) % Jimmy Choo 4 18 (14) (77.8) % Michael Kors 219 251 (32) (12.7) % Total segment income from operations $ 209 $ 293 $ (84) (28.7) % Operating Margin: Versace (6.2) % 9.6 % Jimmy Choo 2.4 % 10.7 % Michael Kors 21.2 % 22.9 % • Versace recorded a loss from operations of $14 million for the three months ended December 30, 2023, compared to income of $24 million for the three months ended December 31, 2022. Operating margin decreased from 9.6% for the three months ended December 31, 2022, to an operating loss of 6.2% for the three months ended December 30, 2023, primarily due to increased retail store costs, unfavorable channel mix, deleveraging of operating expenses on lower revenues and lower full price sell-through compared to the prior year. • Jimmy Choo recorded income from operations of $4 million for the three months ended December 30, 2023, compared to $18 million for the three months ended December 31, 2022. Operating margin decreased from 10.7% for the three months ended December 31, 2022 to 2.4% for the three months ended December 30, 2023, primarily due to lower full price sell-through, unfavorable channel mix and increased retail store costs compared to the prior year. • Michael Kors recorded income from operations of $219 million for the three months ended December 30, 2023, compared to $251 million for the three months ended December 31, 2022. Operating margin decreased from 22.9% for the three months ended December 31, 2022, to 21.2% for the three months ended December 30, 2023, primarily due to deleveraging of operating expenses on lower revenues and lower full price sell-through compared to the prior year. 40 Interest Expense, net We recognized $1 million and $12 million of interest expense, net, for the three months ended December 30, 2023 and December 31, 2022, respectively. The $11 million decrease in interest expense, net, is primarily due to $22 million higher interest income from our net investment hedges, partially offset by higher effective interest rates and higher average borrowings on our outstanding debt (see Note 10 and Note 13 to the accompanying consolidated financial statements for additional information). Foreign Currency Gain For the three months ended December 30, 2023 and December 31, 2022, we recognized a net foreign currency gain of $2 million and $3 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 $18 million for the three months ended December 30, 2023, compared to $3 million for the three months ended December 31, 2022. Our effective tax rates were 14.6% and 1.3% for the three months ended December 30, 2023 and December 31, 2022, respectively. In the current year, the increase in our effective tax rate was primarily related to an increase in a foreign uncertain tax position during the current year in Italy. In the prior year, the lower effective tax rate was primarily related to the release of a valuation allowance in the United Kingdom. See Note 16 to the accompanying consolidated financial statements for additional information regarding the effective tax rate for the third quarter of Fiscal 2024. 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 $120 million to $105 million for the three months ended December 30, 2023, compared to $225 million for the three months ended December 31, 2022. 41 Results of Operations Comparison of the nine months ended December 30, 2023 with the nine months ended December 31, 2022 The following table details the results of our operations for the nine months ended December 30, 2023 and December 31, 2022, 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 30, 2023 December 31, 2022 December 30, 2023 December 31, 2022 Statements of Operations Data: Total revenue $ 3,947 $ 4,284 $ (337) (7.9) % Cost of goods sold 1,375 1,427 (52) (3.6) % 34.8 % 33.3 % Gross profit 2,572 2,857 (285) (10.0) % 65.2 % 66.7 % Selling, general and administrative expenses 2,102 1,984 118 5.9 % 53.3 % 46.3 % Depreciation and amortization 139 131 8 6.1 % 3.5 % 3.1 % Impairment of assets 26 12 14 NM 0.7 % 0.3 % Restructuring and other expense 3 11 (8) (72.7) % 0.1 % 0.3 % Total operating expenses 2,270 2,138 132 6.2 % 57.5 % 49.9 % Income from operations 302 719 (417) (58.0) % 7.7 % 16.8 % Other income, net — (2) 2 NM — % — % Interest expense, net 12 13 (1) (7.7) % 0.3 % 0.3 % Foreign currency loss (gain) 16 (10) 26 NM 0.4 % (0.2) % Income before income taxes 274 718 (444) (61.8) % 6.9 % 16.8 % Provision for income taxes 31 66 (35) (53.0) % 0.8 % 1.5 % Net income 243 652 (409) (62.7) % Less: Net income attributable to noncontrolling interest — 2 (2) NM Net income attributable to Capri $ 243 $ 650 $ (407) (62.6) % NM Not meaningful Total Revenue Total revenue decreased $337 million, or 7.9%, to $3.947 billion for the nine months ended December 30, 2023, compared to $4.284 billion for the nine months ended December 31, 2022, which included net favorable foreign currency effects of approximately $31 million, as a result of the weakening of the United States Dollar against the Euro partially offset by the strengthening of the United States dollar compared to the Chinese Renminbi and Japanese Yen for the nine months ended December 30, 2023. On a constant currency basis, our total revenue decreased $368 million, or 8.6%. The decrease is primarily attributable to lower revenues in the Americas for each of our brands. Nine Months Ended % Change (in millions) December 30, 2023 December 31, 2022 $ Change As Reported Constant Currency Versace $ 766 $ 832 $ (66) (7.9) % (9.5) % Jimmy Choo 481 482 (1) (0.2) % (1.2) % Michael Kors 2,700 2,970 (270) (9.1) % (9.5) % Total revenue $ 3,947 $ 4,284 $ (337) (7.9) % (8.6) % • Versace revenues decreased $66 million, or 7.9%, to $766 million for the nine months ended December 30, 2023, compared to $832 million for the nine months ended December 31, 2022, which included favorable foreign currency effects of $13 million. On a constant currency basis, revenue decreased $79 million, or 9.5%, primarily attributable to lower revenues in the Americas. 42 • Jimmy Choo revenues decreased $1 million, or 0.2%, to $481 million for the nine months ended December 30, 2023, compared to $482 million for the nine months ended December 31, 2022, which included favorable foreign currency effects of $5 million. On a constant currency basis, revenue decreased $6 million, or 1.2%, primarily attributable to lower revenues in the Americas, partially offset by increased revenue in EMEA. • Michael Kors revenues decreased $270 million, or 9.1%, to $2.700 billion for the nine months ended December 30, 2023, compared to $2.970 billion for the nine months ended December 31, 2022, which included favorable foreign currency effects of $13 million. On a constant currency basis, revenue decreased $283 million, or 9.5%, primarily due to lower revenues in the Americas. Gross Profit Gross profit decreased $285 million, or 10.0%, to $2.572 billion for the nine months ended December 30, 2023, compared to $2.857 billion for the nine months ended December 31, 2022, which included net favorable foreign currency effects of $35 million. Gross profit as a percentage of total revenue was 65.2% for the nine months ended December 30, 2023, compared to 66.7% for the nine months ended December 31, 2022. The decrease in gross profit margin primarily related to lower full price sell-through, partially offset by lower supply chain costs for the nine months ended December 30, 2023, as compared to the nine months ended December 31, 2022. Total Operating Expenses Total operating expenses increased $132 million, or 6.2%, to $2.270 billion for the nine months ended December 30, 2023, compared to $2.138 billion for the nine months ended December 31, 2022. Our operating expenses included a net unfavorable foreign currency impact of approximately $24 million. Total operating expenses increased to 57.5% as a percentage of total revenue for the nine months ended December 30, 2023, compared to 49.9% for the nine months ended December 31, 2022. The components that comprise total operating expenses are explained below. Selling, General and Administrative Expenses Selling, general and administrative expenses increased $118 million, or 5.9%, to $2.102 billion for the nine months ended December 30, 2023, compared to $1.984 billion for the nine months ended December 31, 2022. As a percentage of total revenue, selling, general and administrative expenses increased to 53.3% for the nine months ended December 30, 2023, compared to 46.3% for the nine months ended December 31, 2022, primarily due to increased retail store costs, marketing investments and unallocated corporate expenses and deleveraging of operating expenses on lower revenue for the nine months ended December 30, 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 $39 million, or 22.8%, to $210 million for the nine months ended December 30, 2023 as compared to $171 million for the nine months ended December 31, 2022, primarily due to an increase in professional fees and information technology costs related to the ongoing Capri transformation projects. Depreciation and Amortization Depreciation and amortization increased $8 million, or 6.1%, to $139 million for the nine months ended December 30, 2023, compared to $131 million for the nine months ended December 31, 2022. Depreciation and amortization increased to 3.5% as a percentage of total revenue for the nine months ended December 30, 2023, compared to 3.1% for the nine months ended December 31, 2022. The increase in depreciation and amortization expense was primarily attributable to higher depreciation due to information technology assets associated with Capri transformation projects which are now in service. Impairment of Assets For the nine months ended December 30, 2023, we recognized asset impairment charges of $26 million primarily related to operating lease right-of-use assets at certain Versace and Michael Kors store locations. For the nine months ended December 31, 2022, we recognized asset impairment charges of $12 million primarily related to operating lease right-of-use assets at certain Michael Kors store locations. See Note 12 to the accompanying consolidated financial statements for additional information. 43 Restructuring and Other Expense During the nine months ended December 30, 2023, we recorded costs of $3 million, primarily related to expenses related to equity awards associated with the acquisition of Versace and severance for certain employees, partially offset by a $10 million gain on the sale of a long-lived corporate asset. During the nine months ended December 31, 2022, we recorded expenses of $11 million, primarily related to equity awards associated with the acquisition of Versace. See Note 9 to the accompanying consolidated financial statements for additional information. Restructuring and other expense is 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 $417 million, to $302 million for the nine months ended December 30, 2023, compared to $719 million for the nine months ended December 31, 2022. Income from operations as a percentage of total revenue decreased to 7.7% for the nine months ended December 30, 2023, compared to 16.8% for the nine months ended December 31, 2022. See Segment Information above for a reconciliation of our segment operating income to total operating income. Nine Months Ended (in millions) December 30, 2023 December 31, 2022 $ Change % Change Income from operations: Versace $ 24 $ 138 $ (114) (82.6) % Jimmy Choo 11 45 (34) (75.6) % Michael Kors 518 721 (203) (28.2) % Total segment income from operations $ 553 $ 904 $ (351) (38.8) % Operating Margin: Versace 3.1 % 16.6 % Jimmy Choo 2.3 % 9.3 % Michael Kors 19.2 % 24.3 % • Versace recorded income from operations of $24 million for the nine months ended December 30, 2023, compared to $138 million for the nine months ended December 31, 2022. Operating margin decreased from 16.6% for the nine months ended December 31, 2022, to 3.1% for the nine months ended December 30, 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, increased retail store costs, deleveraging of operating expenses on lower revenues and lower full price sell-through compared to the prior year. • Jimmy Choo recorded income from operations of $11 million for the nine months ended December 30, 2023, compared to $45 million for the nine months ended December 31, 2022. Operating margin decreased from 9.3% for the nine months ended December 31, 2022, to 2.3% for the nine months ended December 30, 2023, primarily due to increased retail store costs and marketing investments. • Michael Kors recorded income from operations of $518 million for the nine months ended December 30, 2023, compared to $721 million for the nine months ended December 31, 2022. Operating margin decreased from 24.3% for the nine months ended December 31, 2022, to 19.2% for the nine months ended December 30, 2023, primarily due to increased retail store costs, increased marketing investments, deleveraging of operating expenses on lower revenues and lower full price sell-through, partially offset by lower supply chain costs compared to the prior year. Interest Expense, net We recognized $12 million and $13 million of interest expense, net, for the nine months ended December 30, 2023 and December 31, 2022, respectively. The $1 million decrease in interest expense, net, is primarily due to $34 million of higher interest income from our net investment hedges, partially offset by higher effective interest rates and higher average borrowings on our outstanding debt (see Note 10 and Note 13 to the accompanying consolidated financial statements for additional information). 44 Foreign Currency Loss (Gain) For the nine months ended December 30, 2023, we recognized a net foreign currency loss of $16 million, primarily attributable to the remeasurement of intercompany loans with certain of our subsidiaries. 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. Provision for Income Taxes For the nine months ended December 30, 2023, we recognized $31 million of income tax expense compared to $66 million for the nine months ended December 31, 2022. Our effective tax rate was 11.3% and 9.2% for the nine months ended December 30, 2023 and December 31, 2022, respectively. In the current year, the higher effective tax rate was primarily related to a valuation allowance release on United Kingdom deferred tax assets as well as a tax deductible foreign exchange related loss recognized in the prior year. This increase was partially offset by a favorable mix of earnings in lower tax jurisdictions in the current year. See Note 16 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 $407 million to $243 million for the nine months ended December 30, 2023, compared to $650 million for the nine months ended December 31, 2022. 45 Liquidity and Capital Resources Liquidity Our primary sources of liquidity are the cash flows generated from operations, along with borrowings available under our credit facilities (see below discussion regarding “Revolving Credit Facilities”) and available cash and cash equivalents. Our primary use of this liquidity is to fund the ongoing cash requirements, including our working capital needs and capital investments in our business, debt repayments, acquisitions, returns of capital, including share repurchases and other corporate activities. We believe that the cash generated from operations, together with borrowings available under our revolving credit facilities and available cash and cash equivalents, will be sufficient to meet our working capital needs for the next 12 months and beyond, including investments made and expenses incurred in connection with our store growth plans, investments in corporate and distribution facilities, continued systems development, e-commerce and marketing initiatives. We spent $139 million on capital expenditures during the nine months ended December 30, 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 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. From Fiscal 2024 through Fiscal 2026, we expect expenditures of 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 December 30, 2023 April 1, 2023 Balance Sheet Data: Cash and cash equivalents $ 249 $ 249 Working capital $ 103 $ 420 Total assets $ 7,617 $ 7,295 Short-term debt $ 461 $ 5 Long-term debt $ 1,383 $ 1,822 Nine Months Ended December 30, 2023 December 31, 2022 Cash Flows Provided By (Used In): Operating activities $ 265 $ 616 Investing activities $ (139) $ 241 Financing activities $ (116) $ (651) Effect of exchange rate changes $ (11) $ (94) Net (decrease) increase in cash and cash equivalents $ (1) $ 112 Cash Provided by Operating Activities Net cash provided by operating activities was $265 million during the nine months ended December 30, 2023, as compared to net cash provided by operating activities of $616 million for the nine months ended December 31, 2022. The decrease in net cash provided by operating activities were primarily attributable to a decrease in our net income after non-cash adjustments, along with the stabilization of inventory levels and reduction of accounts payables in the current year. Cash (Used in) Provided by Investing Activities Net cash used in investing activities was $139 million during the nine months ended December 30, 2023, as compared to net cash provided by investing activities of $241 million during the nine months ended December 31, 2022. The increase in net 46 cash used in investing activities were primarily attributable to the settlement of net investment hedges of $409 million during the nine months ended December 31, 2022, partially offset by lower capital expenditures of $29 million compared to prior year. Cash Used in Financing Activities Net cash used in financing activities was $116 million during the nine months ended December 30, 2023, as compared to net cash used in financing activities of $651 million during the nine months ended December 31, 2022. The decrease in net cash used in financing activities of $535 million was primarily attributable to a decrease in cash payments to repurchase our ordinary shares of $857 million compared to prior year, offset by lower net debt borrowings of $322 million. 47 Debt Facilities The following table presents a summary of our borrowing capacity and amounts outstanding as of December 30, 2023 and April 1, 2023 (in millions): As of December 30, 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) 874 874 Letter of credit outstanding 2 3 Remaining availability $ 624 $ 623 Versace Term Loan (450 Million Euro) Borrowings outstanding, net of debt issuance costs (3) $ 496 $ 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) $ 11 $ 11 Borrowings outstanding — — Total and remaining availability (75 million Chinese Yuan) $ 11 $ 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) $ 1,844 $ 1,827 Total remaining availability $ 695 $ 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 December 30, 2023 and April 1, 2023, we were in compliance with all covenants related to our agreements then in effect governing our debt. See Note 10 to the accompanying consolidated financial statements for additional information. (2) As of December 30, 2023 and April 1, 2023, all amounts are recorded as long-term debt in our consolidated balance sheets, besides the Senior Notes, due in November 2024, of which are recorded within short-term debt in our consolidated balance sheets as of December 30, 2023. 48 (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 December 30, 2023 and April 1, 2023, all amounts are recorded as long-term debt in our consolidated balance sheets. (4) The balance as of December 30, 2023 consists of $11 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 $3 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, and $2 million of other loans recorded as long-term debt in our consolidated balance sheets. (5) The balance as of December 30, 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 December 30, 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 10 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 nine months ended December 30, 2023 and December 31, 2022 (dollars in millions): Nine Months Ended December 30, 2023 December 31, 2022 Cost of shares repurchased under share repurchase program $ 100 $ 950 Fair value of shares withheld to cover tax obligations for vested restricted share awards 7 14 Total cost of treasury shares repurchased $ 107 $ 964 Shares repurchased under share repurchase program 2,637,102 18,921,459 Shares withheld to cover tax withholding obligations 185,133 300,722 2,822,235 19,222,181 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”) to purchase 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 December 30, 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; however, pursuant to the terms of the Merger Agreement, and subject to certain limited exceptions, we may not repurchase its ordinary shares other than the acceptance of our ordinary shares as payment of the exercise price of our options or for withholding taxes in respect of our equity awards. Accordingly, we did not repurchase any of our ordinary shares since entering into the Merger Agreement pursuant to the Existing Share Repurchase Plan, and we do not expect to repurchase any of our ordinary shares in connection with the Existing Share Repurchase Plan prior to the Merger or earlier termination of the Merger Agreement. 49 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 $28 million at December 30, 2023, including $26 million in letters of credit issued outside of the 2022 Credit Facility. In addition, as of December 30, 2023, bank guarantees of approximately $39 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 3 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. 50