CAPRI HOLDINGS LTD, 10-Q filed on 11/7/2019
Quarterly Report
v3.19.3
Cover Page - shares
6 Months Ended
Sep. 28, 2019
Oct. 31, 2019
Cover page.    
Document Type 10-Q  
Document Quarterly Report true  
Document Transition Report false  
Entity Registrant Name CAPRI HOLDINGS LTD  
Entity File Number 001-35368  
Entity Incorporation, State or Country Code D8  
Entity Address, Address Line One 33 Kingsway  
Entity Address, City or Town London  
Entity Address, Country GB  
Entity Address, Postal Zip Code WC2B 6UF  
Country Region 44  
City Area Code 207  
Local Phone Number 632 8600  
Title of 12(b) Security Ordinary Shares, no par value  
Trading Symbol CPRI  
Security Exchange Name NYSE  
Entity Filer Category Large Accelerated Filer  
Entity Small Business false  
Entity Current Reporting Status Yes  
Entity Emerging Growth Company false  
Entity Common Stock, Shares Outstanding   151,635,485
Amendment Flag false  
Document Period End Date Sep. 28, 2019  
Document Fiscal Year Focus 2020  
Document Fiscal Period Focus Q2  
Entity Central Index Key 0001530721  
Current Fiscal Year End Date --03-28  
Entity Shell Company false  
Entity Interactive Data Current Yes  
v3.19.3
CONSOLIDATED BALANCE SHEETS - USD ($)
$ in Millions
Sep. 28, 2019
Mar. 30, 2019
Current assets    
Cash and cash equivalents $ 179 $ 172
Receivables, net 368 383
Inventories, net 1,073 953
Prepaid expenses and other current assets 275 221
Total current assets 1,895 1,729
Property and equipment, net 589 615
Operating lease right-of-use assets 1,671  
Intangible assets, net 2,171 2,293
Goodwill 1,598 1,659
Deferred tax assets 160 112
Other assets 309 242
Total assets 8,393 6,650
Current liabilities    
Accounts payable 390 371
Accrued payroll and payroll related expenses 97 133
Accrued income taxes 27 34
Current operating lease liabilities 403  
Short-term debt 603 630
Accrued expenses and other current liabilities 283 374
Total current liabilities 1,803 1,542
Long-term portion of operating lease liabilities 1,766  
Deferred rent   132
Deferred tax liabilities 440 438
Long-term debt 1,796 1,936
Other long-term liabilities 176 166
Total liabilities 5,981 4,214
Commitments and contingencies
Redeemable noncontrolling interest 4 4
Shareholders’ equity    
Ordinary shares, no par value; 650,000,000 shares authorized; 216,815,137 shares issued and 151,633,281 outstanding at September 28, 2019; 216,050,939 shares issued and 150,932,306 outstanding at March 30, 2019 0 0
Treasury shares, at cost (65,181,856 shares at September 28, 2019 and 65,118,633 shares at March 30, 2019) (3,225) (3,223)
Additional paid-in capital 1,060 1,011
Accumulated other comprehensive loss (103) (66)
Retained earnings 4,673 4,707
Total shareholders’ equity of Capri 2,405 2,429
Noncontrolling interest 3 3
Total shareholders’ equity 2,408 2,432
Total liabilities and shareholders’ equity $ 8,393 $ 6,650
v3.19.3
CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares
Sep. 28, 2019
Mar. 30, 2019
Statement of Financial Position [Abstract]    
Ordinary shares, par value (in dollars per share) $ 0 $ 0
Ordinary shares, shares authorized (in shares) 650,000,000 650,000,000
Ordinary shares, shares issued (in shares) 216,815,137 216,050,939
Ordinary shares, shares outstanding (in shares) 151,633,281 150,932,306
Treasury shares (in shares) 65,181,856 65,118,633
v3.19.3
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME - USD ($)
$ in Millions
3 Months Ended 6 Months Ended
Sep. 28, 2019
Sep. 29, 2018
Sep. 28, 2019
Sep. 29, 2018
Income Statement [Abstract]        
Total revenue $ 1,442 $ 1,253 $ 2,788 $ 2,456
Cost of goods sold 568 490 1,080 942
Gross profit 874 763 1,708 1,514
Selling, general and administrative expenses 623 494 1,221 959
Depreciation and amortization 65 53 125 109
Impairment of long-lived assets 104 7 201 11
Restructuring and other charges [1] 7 19 22 30
Total operating expenses 799 573 1,569 1,109
Income from operations 75 190 139 405
Other income, net (1) (1) (3) (2)
Interest expense, net 3 6 16 14
Foreign currency loss 4 33 6 36
Income before provision for income taxes 69 152 120 357
(Benefit from) provision for income taxes (4) 15 2 34
Net income 73 137 118 323
Less: Net loss attributable to noncontrolling interest and redeemable noncontrolling interest 0 (1) 0 (1)
Net income attributable to Capri $ 73 $ 138 $ 118 $ 324
Weighted average ordinary shares outstanding:        
Weighted average ordinary shares outstanding, basic (in shares) 151,602,502 149,575,112 151,326,037 149,538,607
Weighted average ordinary shares outstanding, diluted (in shares) 152,576,283 151,705,685 152,455,218 152,052,671
Net income per ordinary share attributable to Capri:        
Net income per ordinary share, basic (in dollars per share) $ 0.48 $ 0.92 $ 0.78 $ 2.17
Net income per ordinary share, diluted (in dollars per share) $ 0.47 $ 0.91 $ 0.77 $ 2.13
Statements of Comprehensive Income:        
Net income $ 73 $ 137 $ 118 $ 323
Foreign currency translation adjustments (13) (25) (38) (128)
Net gain on derivatives 3 3 1 15
Comprehensive income 63 115 81 210
Less: Net loss attributable to noncontrolling interest and redeemable noncontrolling interest 0 (1) 0 (1)
Comprehensive income attributable to Capri $ 63 $ 116 $ 81 $ 211
[1]
Restructuring and other charges includes store closure costs recorded in connection with the Retail Fleet Optimization Plan (as defined in Note 10) and other restructuring initiatives, and costs recorded in connection with the acquisitions of Gianni Versace S.r.l and Jimmy Choo Group Limited.
v3.19.3
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY - USD ($)
$ in Millions
Total
Ordinary Shares
Additional Paid-in Capital
Treasury Shares
Accumulated Other Comprehensive Loss
Retained Earnings
Total Equity of Capri
Non-controlling Interests
Increase (Decrease) in Stockholders' Equity [Roll Forward]                
Adoption of accounting standards $ 12         $ 12 $ 12  
Adjusted beginning balance 2,034 $ 0 $ 831 $ (3,016) $ 51 4,164 2,030 $ 4
Beginning balance (in shares) at Mar. 31, 2018   210,991,000            
Beginning balance, treasury (in shares) at Mar. 31, 2018       (61,293,000)        
Beginning balance at Mar. 31, 2018 2,022 $ 0 831 $ (3,016) 51 4,152 2,018 4
Increase (Decrease) in Stockholders' Equity [Roll Forward]                
Net income (loss) 323         324 324 (1)
Other comprehensive loss (113)       (113)   (113) 0
Total comprehensive income (loss) 210           211 (1)
Vesting of restricted awards, net of forfeitures (in shares)   697,000            
Exercises of employee share options (in shares)   1,521,000            
Exercise of employee share options 20   20       20  
Equity compensation expense 26   26       26  
Purchase of treasury shares (in shares)       (1,766,000)        
Purchase of treasury shares (107)     $ (107)     (107)  
Increase in noncontrolling interest 1             1
Ending balance (in shares) at Sep. 29, 2018   213,209,000            
Ending balance, treasury (in shares) at Sep. 29, 2018       (63,059,000)        
Ending balance at Sep. 29, 2018 2,184 $ 0 877 $ (3,123) (62) 4,488 2,180 4
Beginning balance (in shares) at Jun. 30, 2018   212,210,000            
Beginning balance, treasury (in shares) at Jun. 30, 2018       (63,041,000)        
Beginning balance at Jun. 30, 2018 2,042 $ 0 850 $ (3,122) (40) 4,350 2,038 4
Increase (Decrease) in Stockholders' Equity [Roll Forward]                
Net income (loss) 137         138 138 (1)
Other comprehensive loss (22)       (22)   (22) 0
Total comprehensive income (loss) 115           116 (1)
Vesting of restricted awards, net of forfeitures (in shares)   97,000            
Exercises of employee share options (in shares)   902,000            
Exercise of employee share options 14   14       14  
Equity compensation expense 13   13       13  
Purchase of treasury shares (in shares)       (18,000)        
Purchase of treasury shares (1)     $ (1)     (1)  
Increase in noncontrolling interest 1             1
Ending balance (in shares) at Sep. 29, 2018   213,209,000            
Ending balance, treasury (in shares) at Sep. 29, 2018       (63,059,000)        
Ending balance at Sep. 29, 2018 2,184 $ 0 877 $ (3,123) (62) 4,488 2,180 4
Increase (Decrease) in Stockholders' Equity [Roll Forward]                
Adoption of accounting standards (152)         (152) (152)  
Adjusted beginning balance $ 2,280 $ 0 1,011 $ (3,223) (66) 4,555 2,277 3
Beginning balance (in shares) at Mar. 30, 2019 216,050,939 216,051,000            
Beginning balance, treasury (in shares) at Mar. 30, 2019 (65,118,633)     (65,119,000)        
Beginning balance at Mar. 30, 2019 $ 2,432 $ 0 1,011 $ (3,223) (66) 4,707 2,429 3
Increase (Decrease) in Stockholders' Equity [Roll Forward]                
Net income (loss) 118         118 118 0
Other comprehensive loss (37)       (37)   (37) 0
Total comprehensive income (loss) 81           81 0
Vesting of restricted awards, net of forfeitures (in shares)   764,000            
Equity compensation expense 49   49       49  
Purchase of treasury shares (in shares)       (63,000)        
Purchase of treasury shares $ (2)     $ (2)     (2)  
Ending balance (in shares) at Sep. 28, 2019 216,815,137 216,815,000            
Ending balance, treasury (in shares) at Sep. 28, 2019 (65,181,856)     (65,182,000)        
Ending balance at Sep. 28, 2019 $ 2,408 $ 0 1,060 $ (3,225) (103) 4,673 2,405 3
Beginning balance (in shares) at Jun. 29, 2019   216,742,000            
Beginning balance, treasury (in shares) at Jun. 29, 2019       (65,177,000)        
Beginning balance at Jun. 29, 2019 2,324 $ 0 1,039 $ (3,225) (93) 4,600 2,321 3
Increase (Decrease) in Stockholders' Equity [Roll Forward]                
Net income (loss) 73         73 73 0
Other comprehensive loss (10)       (10)   (10) 0
Total comprehensive income (loss) 63           63 0
Vesting of restricted awards, net of forfeitures (in shares)   73,000            
Equity compensation expense 21   21       21  
Purchase of treasury shares (in shares)       (5,000)        
Purchase of treasury shares $ 0     $ 0        
Ending balance (in shares) at Sep. 28, 2019 216,815,137 216,815,000            
Ending balance, treasury (in shares) at Sep. 28, 2019 (65,181,856)     (65,182,000)        
Ending balance at Sep. 28, 2019 $ 2,408 $ 0 $ 1,060 $ (3,225) $ (103) $ 4,673 $ 2,405 $ 3
v3.19.3
CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)
$ in Millions
6 Months Ended
Sep. 28, 2019
Sep. 29, 2018
Cash flows from operating activities    
Net income $ 118 $ 323
Adjustments to reconcile net income to net cash provided by operating activities:    
Depreciation and amortization 125 109
Equity compensation expense 49 26
Deferred income taxes (8) 13
Impairment of long-lived assets 201 11
Changes to lease related balances, net (26)  
Tax deficit (benefit) on exercise of share options 2 (23)
Amortization of deferred financing costs 3 2
Foreign currency losses 6 5
Other non-cash charges 0 3
Change in assets and liabilities:    
Receivables, net 8 (55)
Inventories, net (141) (126)
Prepaid expenses and other current assets (86) (68)
Accounts payable 32 10
Accrued expenses and other current liabilities (52) 12
Other long-term assets and liabilities 12 22
Net cash provided by operating activities 243 264
Cash flows from investing activities    
Capital expenditures (105) (90)
Purchase of intangible assets 0 (1)
Unrealized loss on hedge related to acquisitions 0 31
Cash paid for business acquisitions, net of cash acquired (1) (2)
Settlement of a net investment hedges 31 0
Net cash used in investing activities (75) (62)
Cash flows from financing activities    
Debt borrowings 1,325 810
Debt repayments (1,480) (925)
Repurchase of treasury shares (2) (107)
Exercise of employee share options 0 20
Net cash used in financing activities (157) (202)
Effect of exchange rate changes on cash and cash equivalents (4) (8)
Net increase (decrease) in cash and cash equivalents 7 (8)
Beginning of period 172 163
End of period 179 155
Supplemental disclosures of cash flow information    
Cash paid for interest 45 16
Cash paid for income taxes 62 98
Supplemental disclosure of non-cash investing and financing activities    
Accrued capital expenditures $ 27 $ 23
v3.19.3
Business and Basis of Presentation
6 Months Ended
Sep. 28, 2019
Accounting Policies [Abstract]  
Business and Basis of Presentation Business and Basis of Presentation
The Company was incorporated in the British Virgin Islands (“BVI”) on December 13, 2002 as Michael Kors Holdings Limited and changed its name to Capri Holdings Limited (“Capri,” and together with its subsidiaries, the “Company”) on December 31, 2018. The Company is a holding company that owns brands that are leading designers, marketers, distributors and retailers of branded women’s and men’s accessories, apparel and footwear bearing the Versace, Jimmy Choo and Michael Kors tradenames and related trademarks and logos. The Company completed the acquisition of Gianni Versace S.r.l. (“Versace”) on December 31, 2018. As a result, the Company now operates in three reportable segments: Versace, Jimmy Choo and Michael Kors. See Note 18 for additional information.
The interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and include the accounts of the Company and its wholly-owned or controlled subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The interim consolidated financial statements as of September 28, 2019 and for the three and six months ended September 28, 2019 and September 29, 2018 are unaudited. In addition, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The interim consolidated financial statements reflect all normal and recurring adjustments, which are, in the opinion of management, necessary for a fair presentation in conformity with U.S. GAAP. The interim consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended March 30, 2019, as filed with the Securities and Exchange Commission on May 29, 2019, in the Company’s Annual Report on Form 10-K. The results of operations for the interim periods should not be considered indicative of results to be expected for the full fiscal year.
The Company utilizes a 52 to 53 week fiscal year ending on the Saturday closest to March 31. As such, the term “Fiscal Year” or “Fiscal” refers to the 52-week or 53-week period, ending on that day. The results for the three and six months ended September 28, 2019 and September 29, 2018, are based on 13-week and 26-week periods, respectively.
v3.19.3
Summary of Significant Accounting Policies
6 Months Ended
Sep. 28, 2019
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to use judgment and make estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The level of uncertainty in estimates and assumptions increases with the length of time until the underlying transactions are completed. The most significant assumptions and estimates involved in preparing the financial statements include allowances for customer deductions, sales returns, sales discounts and doubtful accounts, estimates of gift card breakage, estimates of inventory recovery, the valuation of share-based compensation, valuation of deferred taxes and the valuation of and the estimated useful lives used for amortization and depreciation of intangible assets and property and equipment. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the prior periods’ financial information in order to conform to the current period’s presentation, including the realignment of the Company’s segment reporting structure in the fourth quarter of Fiscal 2019, as further described in Note 18.
Seasonality
The Company experiences certain effects of seasonality with respect to its business. The Company generally experiences greater sales during its third fiscal quarter, primarily driven by holiday season sales, and the lowest sales during its first fiscal quarter.
Inventories, net
Inventories mainly consist of finished goods with the exception of raw materials inventory of $22 million and $25 million, respectively, recorded on the Company’s consolidated balance sheets as of September 28, 2019 and March 30, 2019.
Derivative Financial Instruments
Forward Foreign Currency Exchange Contracts
The Company uses forward currency exchange contracts to manage its exposure to fluctuations in foreign currency for certain transactions. The Company, in its normal course of business, enters into transactions with foreign suppliers and seeks to minimize risks related to these transactions. The Company employs these forward currency contracts to hedge the Company’s cash flows, as they relate to foreign currency transactions. Certain of these contracts are designated as hedges for accounting purposes, while others remain undesignated. All of the Company’s derivative instruments are recorded in the Company’s consolidated balance sheets at fair value on a gross basis, regardless of their hedge designation.
In connection with the September 24, 2018 definitive agreement to acquire all of the outstanding shares of Versace, the Company entered into forward foreign currency exchange contracts in September 2018 with notional amounts totaling €1.680 billion (approximately $2.001 billion) to mitigate its foreign currency exchange risk through the closing date of the acquisition, which were settled on December 21, 2018. These derivative contracts were not designated as accounting hedges. Therefore, changes in fair value were recorded to foreign currency (gain) loss in the Company’s consolidated statements of operations and comprehensive income. The Company’s accounting policy is to classify cash flows from derivative instruments that are accounted for as cash flow hedges in the same category as the cash flows from the items being hedged. Accordingly, the Company classified the unrealized gains and losses relating to these derivative instruments within cash flows from investing activities.
The Company designates certain contracts related to the purchase of inventory that qualify for hedge accounting as cash flow hedges. Formal hedge documentation is prepared for all derivative instruments designated as hedges, including description of the hedged item and the hedging instrument and the risk being hedged. The changes in the fair value for contracts designated as cash flow hedges is recorded in equity as a component of accumulated other comprehensive income (loss) until the hedged item affects earnings. When the inventory related to forecasted inventory purchases that are being hedged is sold to a third party, the gains or losses deferred in accumulated other comprehensive income (loss) are recognized within cost of goods sold. The Company uses regression analysis to assess effectiveness of derivative instruments that are designated as hedges, which compares the change in the fair value of the derivative instrument to the change in the related hedged item. If the hedge is no longer expected to be highly effective in the future, future changes in the fair value are recognized in earnings. For those contracts that are not designated as hedges, changes in the fair value are recorded to foreign currency (gain) loss in the Company’s consolidated statements of operations and comprehensive income. The Company classifies cash flows relating to its forward foreign currency exchange contracts related to purchase of inventory consistently with the classification of the hedged item, within cash flows from operating activities.
The Company is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. In order to mitigate counterparty credit risk, the Company only enters into contracts with carefully selected financial institutions based upon their credit ratings and certain other financial factors, adhering to established limits for credit exposure. The aforementioned forward contracts generally have a term of no more than 12 months. The period of these contracts is directly related to the foreign transaction they are intended to hedge.
Net Investment Hedges
The Company also uses fixed-to-fixed cross currency swap agreements to hedge its net investments in foreign operations against future volatility in the exchange rates between its U.S. Dollars and these foreign currencies. The Company has elected the spot method of designating these contracts under ASU 2017-12 and has designated these contracts as net investment hedges. The net gain or loss on the net investment hedge is reported within foreign currency translation gains and losses (“CTA”), as a component of accumulated other comprehensive income (loss) on the Company’s consolidated balance sheets. Interest accruals and coupon payments are recognized directly in interest expense in the Company’s statement of operations and comprehensive income. Upon discontinuation of a hedge, all previously recognized amounts remain in CTA until the hedged net investment is sold, diluted, or liquidated.
Net Income per Share
The Company’s basic net income per ordinary share is calculated by dividing net income by the weighted average number of ordinary shares outstanding during the period. Diluted net income per ordinary share reflects the potential dilution that would occur if share option grants or any other potentially dilutive instruments, including restricted shares and restricted share units (“RSUs”), were exercised or converted into ordinary shares. These potentially dilutive securities are included in diluted shares to the extent they are dilutive under the treasury stock method for the applicable periods. Performance-based RSUs are included in diluted shares if the related performance conditions are considered satisfied as of the end of the reporting period and to the extent they are dilutive under the treasury stock method.
The components of the calculation of basic net income per ordinary share and diluted net income per ordinary share are as follows (in millions, except share and per share data):
 
Three Months Ended
 
Six Months Ended
 
September 28,
2019
 
September 29,
2018
 
September 28,
2019
 
September 29,
2018
Numerator:
 
 
 
 
 
 
 
Net income attributable to Capri
$
73

 
$
138

 
$
118

 
$
324

Denominator:
 
 
 
 
 
 
 
Basic weighted average shares
151,602,502

 
149,575,112

 
151,326,037

 
149,538,607

Weighted average dilutive share equivalents:
 
 
 
 
 
 
 
Share options and restricted shares/units, and performance restricted share units
973,781

 
2,130,573

 
1,129,181

 
2,514,064

Diluted weighted average shares
152,576,283

 
151,705,685

 
152,455,218

 
152,052,671

 
 
 
 
 
 
 
 
Basic net income per share (1)
$
0.48

 
$
0.92

 
$
0.78

 
$
2.17

Diluted net income per share (1)
$
0.47

 
$
0.91

 
$
0.77

 
$
2.13


 
 
 
 
 
(1) 
Basic and diluted net income per share are calculated using unrounded numbers.
During the three and six months ended September 28, 2019, share equivalents of 5,822,186 shares and 4,098,382 shares, respectively, have been excluded from the above calculations due to their anti-dilutive effect. Share equivalents of 680,869 shares and 664,633 shares, respectively, have been excluded from the above calculations during the three and six months ended September 29, 2018.
See Note 2 in the Company’s Annual Report on Form 10-K for the fiscal year ended March 30, 2019 for a complete disclosure of the Company’s significant accounting policies.
Recently Adopted Accounting Pronouncements
Lease Accounting
On March 31, 2019, the Company adopted ASU 2016-02, “Leases (Topic 842),” which requires lessees to recognize a lease liability and a right-of-use asset on the balance sheet for all leases, except certain short-term leases. In evaluating the impact of ASU 2016-02, the Company considered guidance provided by several additional ASUs issued by the FASB, including ASU 2018-01, “Land Easement Practical Expedient for Transition to Topic 842” in January 2018, ASU 2018-10, “Codification Improvements to Topic 842, Leases” and ASU 2018-11, “Leases (Topic 842): Targeted Improvements,” both issued in July 2018, and ASU 2018-20, “Leases (Topic 842) - Narrow-Scope Improvements for Lessors” issued in December 2018. In connection with its implementation of ASU 2016-02, the Company adopted the package of three practical expedients, allowing it to carry forward its previous lease classification and embedded lease evaluations and not to reassess initial direct costs as of the date of adoption. The Company also adopted, the practical expedient allowing it to combine lease and non-lease components for its real estate leases. Lastly, the Company adopted the practical expedient provided by ASU 2018-11, “Leases (Topic 842): Targeted Improvements,” allowing it to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption without restating the comparative prior year periods.
The Company’s existing lease obligations, which relate to stores, corporate locations, warehouses, and equipment, are subject to the new standard and resulted in recording of lease liabilities and right-of-use assets for operating leases on the Company’s consolidated balance sheet.
The below table details the balance sheet adjustments recorded on March 31, 2019 in connection with the Company’s adoption of ASU 2016-02 (in millions):
 
March 30, 2019
As Reported under ASC 840
 
ASC 842 Adjustments
 
March 31, 2019
As Reported Under ASC 842
Assets
 
 
 
 
 
Prepaid expenses and other current assets
$
221

 
$
(23
)
(1) 
$
198

Operating lease right-of-use assets

 
1,856

(2) 
1,856

Intangible assets, net
2,293

 
(20
)
(3) 
2,273

Deferred tax assets
112

 
38

(4) 
150

Liabilities
 
 
 
 
 
Current portion of operating lease liabilities

 
386

(5) 
386

Accrued expenses and other current liabilities
374

 
(72
)
(6) 
302

Long-term portion of operating lease liabilities

 
1,828

(5) 
1,828

Deferred Rent
132

 
(132
)
(7) 

Deferred tax liabilities
438

 
(7
)
(4) 
431

Shareholders’ Equity
 
 
 
 
 
Retained earnings
4,707

 
(152
)
(4) 
4,555

 
 
 
 
 
(1) 
Represents the reclassification of rent paid in advance to current operating lease liabilities.
(2) 
Represents the recognition of operating lease right-of-use assets, reflecting the reclassifications of deferred rent, sublease liabilities, tenant allowances and favorable and unfavorable lease rights. This balance also reflects the initial impairments of the operating lease right-of-use assets recorded through retained earnings, as described below.
(3) 
Represents the reclassifications favorable and unfavorable purchase accounting adjustments for leases recorded in conjunction with the Company’s acquisitions to operating lease right-of-use assets.
(4) 
Represents the initial impairment recognized through retained earnings for certain underperforming retail store locations for which property and equipments were previously impaired, net of associated deferred taxes.
(5) 
Represents the recognition of current and non-current lease liabilities for fixed payments associated with the Company’s operating leases.
(6) 
Represents the reclassification of $54 million in sublease liabilities, primarily related to Michael Kors retail stores closed under the Retail Fleet Optimization Plan as defined in Note 10, as well as the reclassification of $18 million of deferred rent and tenant allowances to operating lease right-of-use assets.
(7) 
Represents the reclassification of noncurrent deferred rent and tenant improvement allowances to operating lease right-of-use assets.
See Note 4 for additional disclosures related to the Company’s lease accounting policy.
Recently Issued Accounting Pronouncements
We have considered all new accounting pronouncements and, other than the recent pronouncements discussed below, have concluded that there are no new pronouncements that may have a material impact on our results of operations, financial condition or cash flows based on current information.
Intangibles
In August 2018, the FASB issued ASU 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,” which reduces the complexity for the accounting for costs of implementing a cloud computing service arrangement. The standard aligns the accounting for capitalizing implementation costs of hosting arrangements, regardless of whether or not the contract conveys a license to the hosted software. ASU 2018-15 is effective beginning with the Company’s Fiscal 2021, with early adoption permitted, and can either be presented prospectively or retrospectively. The Company is currently evaluating the impact of ASU 2018-15 on its consolidated financial statements, but believes it is generally consistent with its current accounting for cloud computing arrangements and will not have a material impact on its consolidated financial statements.
v3.19.3
Revenue Recognition
6 Months Ended
Sep. 28, 2019
Revenue from Contract with Customer [Abstract]  
Revenue Recognition Revenue Recognition
The Company accounts for contracts with its customers when there is approval and commitment from both parties, the rights of the parties and payment terms have been identified, the contract has commercial substance and collectability of consideration is probable. Revenue is recognized when control of the promised goods or services is transferred to the Company’s customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for goods or services.
The Company sells its products through three primary channels of distribution: retail, wholesale and licensing. Within the retail and wholesale channels, substantially all of the Company’s revenues consist of sales of products that represent a single performance obligation, where control transfers at a point in time to the customer. For licensing arrangements, royalty and advertising revenue is recognized over time based on access provided to the Company’s brands.
Retail
The Company generates sales through directly operated stores and e-commerce throughout the Americas (U.S., Canada and Latin America, excluding Brazil), EMEA (Europe, Middle East, and Africa) and certain parts of Asia.
Gift Cards. The contract liability related to gift cards, net of estimated “breakage,” was $12 million and $13 million as of September 28, 2019 and March 30, 2019, respectively, and is included in accrued expenses and other current liabilities in the Company’s consolidated balance sheet.
Loyalty Program. The contract liability, net of an estimated “breakage,” of $3 million as of both September 28, 2019 and March 30, 2019 is recorded as a reduction to revenue in the consolidated statements of operations and comprehensive income and within accrued expenses and other current liabilities in the Company’s consolidated balance sheet and is expected to be recognized within the next 12 months.
Wholesale
The Company’s products are sold primarily to major department stores, specialty stores and travel retail shops throughout the Americas, EMEA and Asia. The Company also has arrangements where its products are sold to geographic licensees in certain parts of EMEA, Asia, and South America.
Licensing
The Company provides its third-party licensees with the right to access its Versace, Jimmy Choo and Michael Kors trademarks under product and geographic licensing arrangements. Under geographic licensing arrangements, third party licensees receive the right to distribute and sell products bearing the Company’s trademarks in retail and/or wholesale channels within certain geographical areas, including Brazil, the Middle East, Eastern Europe, South Africa, certain parts of Asia and Australia.
The Company recognizes royalty revenue and advertising contributions based on the percentage of sales made by the licensees. Generally the Company’s guaranteed minimum royalty amounts due from licensees relate to contractual periods that do not exceed 12 months, however, some of our guaranteed minimums for Versace are multi-year based. As of September 28, 2019, contractually guaranteed minimum fees from our license agreements expected to be recognized as revenue during future periods were as follows (in millions):
 
 
Contractually Guaranteed Minimum Fees
 
 
Remainder of Fiscal 2020
$
14

 
Fiscal 2021
27

 
Fiscal 2022
27

 
Fiscal 2023
20

 
Fiscal 2024
10

 
Fiscal 2025 and thereafter
34

 
 Total
$
132


Sales Returns
The refund liability recorded as of September 28, 2019 and March 30, 2019 was $35 million in each period and the related asset for the right to recover returned product as of September 28, 2019 and March 30, 2019 was $12 million in each period.
Contract Balances
Total contract liabilities were $17 million and $31 million as of September 28, 2019 and March 30, 2019, respectively. For the three and six months ended September 28, 2019, the Company recognized $3 million and $17 million, respectively, in revenue which related to contract liabilities that existed at March 30, 2019. For the three and six months ended September 29, 2018, the Company recognized $3 million and $11 million, respectively, in revenue which related to contract liabilities that existed at April 1, 2018. There were no contract assets recorded as of September 28, 2019 and March 30, 2019.
There were no changes in historical variable consideration estimates that were materially different from actual results.
Disaggregation of Revenue
The following table presents the Company’s segment revenues disaggregated by geographic location (in millions):
 
Three Months Ended
 
Six Months Ended
 
September 28,
2019
 
September 29,
2018
 
September 28,
2019
 
September 29,
2018
Versace revenue - the Americas
$
48

 
$

 
$
92

 
$

Versace revenue - EMEA
121

 

 
213

 

Versace revenue - Asia
59

 

 
130

 

 Total Versace
228

 

 
435

 

 
 
 
 
 
 
 
 
Jimmy Choo revenue - the Americas
21

 
20

 
51

 
46

Jimmy Choo revenue - EMEA
64

 
56

 
143

 
158

Jimmy Choo revenue - Asia
40

 
40

 
89

 
85

Total Jimmy Choo
125

 
116

 
283

 
289

 
 
 
 
 
 
 
 
Michael Kors revenue - the Americas
733

 
773

 
1,388

 
1,465

Michael Kors revenue - the EMEA
224

 
233

 
413

 
433

Michael Kors revenue - the Asia
132

 
131

 
269

 
269

 Total Michael Kors
1,089

 
1,137

 
2,070

 
2,167

 
 
 
 
 
 
 
 
Total revenue - the Americas
802

 
793

 
1,531

 
1,511

Total revenue - EMEA
409

 
289

 
769

 
591

Total revenue - Asia
231

 
171

 
488

 
354

Total revenue
$
1,442

 
$
1,253

 
$
2,788

 
$
2,456

See Note 3 in the Company’s Annual Report on Form 10-K for the fiscal year ended March 30, 2019 for a complete disclosure of the Company’s revenue recognition.
v3.19.3
Leases
6 Months Ended
Sep. 28, 2019
Leases [Abstract]  
Leases Leases
The Company leases retail stores, office space and warehouse space under operating lease agreements that expire at various dates through September 2043. The Company’s leases generally have terms of up to 10 years, generally require a fixed annual rent and may require the payment of additional rent if store sales exceed a negotiated amount. Although most of the Company’s equipment is owned, the Company has limited equipment leases that expire on various dates through February 2024. The Company acts as sublessor in certain leasing arrangements, primarily related to closed stores under its Retail Fleet Optimization Plan, as defined in Note 10. Fixed sublease payments received are recognized on a straight-line basis over the sublease term. The Company determines the sublease term based on the date it provides possession to the subtenant through the expiration date of the sublease.
The Company recognizes operating lease right-of-use assets and lease liabilities at lease commencement date, based on the present value of fixed lease payments over the expected lease term. The Company uses its incremental borrowing rates to determine the present value of fixed lease payments based on the information available at the lease commencement date, as the rate implicit in the lease is not readily determinable for the Company’s leases. The Company’s incremental borrowing rates are based on the term of the leases, the economic environment of the leases, and reflect the rate it would pay to borrow on a secured basis. Certain leases include one or more renewal options, generally for the same period as the initial term of the lease. The exercise of lease renewal options is generally at the Company’s sole discretion and as such, the Company typically determines that exercise of these renewal options is not reasonably certain. As a result, the Company generally does not include the renewal option period in the expected lease term and the associated lease payments are not included in the measurement of the operating lease right-of-use asset and lease liability. Certain leases also contain termination options with an associated penalty. Generally, the Company is reasonably certain not to exercise these options and as such, they are not included in the determination of the expected lease term. The Company recognizes operating lease expense on a straight-line basis over the lease term.
Leases with an initial lease term of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense for its short-term leases on a straight-line basis over the lease term.
The Company’s leases generally provide for payments of non-lease components, such as common area maintenance, real estate taxes and other costs associated with the leased property. The Company accounts for lease and non-lease components of its real estate leases together as a single lease component and, as such, includes fixed payments of non-lease components in the measurement of the operating lease right-of-use assets and lease liabilities for its real estate leases. Variable lease payments, such as percentage rentals based on location sales, periodic adjustments for inflation, reimbursement of real estate taxes, any variable common area maintenance and any other variable costs associated with the leased property are expensed as incurred as variable lease costs and are not recorded on the balance sheet. The Company’s lease agreements do not contain any material residual value guarantees or material restrictions or covenants.
The following table presents the Company’s supplemental balance sheet information related to leases (in millions):
 
 
Balance Sheet Location
 
September 28,
2019
Assets
 
 
 
 
Operating leases
 
Operating lease right-of-use assets
 
$
1,671

 
 
 
 
 
Liabilities
 
 
 
 
Current:
 
 
 
 
Operating leases
 
Current portion of operating lease liabilities
 
$
403

Non-current:
 
 
 
 
Operating leases
 
Long-term portion of operating lease liabilities
 
$
1,766


The components of net lease costs for the three and six months ended September 28, 2019 were as follows (in millions):
 
 
 
 
September 28, 2019
 
 
Statement of Operations and
Comprehensive Income Location
 
Three Months Ended
 
Six Months Ended
Operating lease cost
 
Selling, general and administrative expenses
 
$
115

 
$
224

Short-term lease cost
 
Selling, general and administrative expenses
 
3

 
13

Variable lease cost
 
Selling, general and administrative expenses
 
39

 
79

Sublease income
 
Selling, general and administrative expenses
 
(2
)
 
(3
)
Total lease cost
 
 
 
$
155

 
$
313

The following table presents the Company’s supplemental cash flow information related to leases (in millions):
 
 
 
 
Six Months Ended
 
 
 
 
September 28, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
 
Operating cash flows used in operating leases
 
$
244

Non-cash transactions:
 
 
Lease assets obtained in exchange for new lease liabilities
 
$
168


The following tables summarizes the weighted average remaining lease term and weighted average discount rate related to the Company’s operating lease right-of-use assets and lease liabilities recorded on the balance sheet as of September 28, 2019:
 
 
 
 
September 28,
2019
Operating leases:
 
 
Weighted average remaining lease term (years)
 
6.5

Weighted average discount rate
 
3.0
%

At September 28, 2019, the future minimum lease payments under the terms of these noncancelable operating lease agreements are as follows (in millions):
 
 
 
 
September 28,
2019
Remainder of Fiscal 2020
 
 
 
$
243

Fiscal 2021
 
 
 
459

Fiscal 2022
 
 
 
404

Fiscal 2023
 
 
 
346

Fiscal 2024
 
 
 
292

Thereafter
 
 
 
668

Total lease payments
 
 
 
2,412

Less: interest
 
 
 
(243
)
Total lease liabilities
 
 
 
$
2,169

At September 28, 2019, the future minimum sublease income under the terms of these noncancelable operating lease agreements are as follows (in millions):
 
 
 
 
September 28,
2019
Remainder of Fiscal 2020
 
 
 
$
3

Fiscal 2021
 
 
 
6

Fiscal 2022
 
 
 
5

Fiscal 2023
 
 
 
5

Fiscal 2024
 
 
 
4

Thereafter
 
 
 
15

Total sublease income
 
 
 
$
38

Additionally, the Company had approximately $15 million of future payment obligations related to executed lease agreements for which the related lease has not yet commenced as of September 28, 2019.
v3.19.3
Acquisitions
6 Months Ended
Sep. 28, 2019
Business Combinations [Abstract]  
Acquisitions Acquisitions
Acquisition of Versace
On December 31, 2018, the Company completed the acquisition of Versace for a total enterprise value of approximately €1.753 billion (or approximately $2.005 billion), giving effect to an investment made by the Versace family at acquisition of 2.4 million shares of CPRI stock. The acquisition was funded through a combination of borrowings under the Company’s 2018 Term Loan Facility, drawings under the Company’s Revolving Credit Facility and cash on hand (see Note 11 for additional information).
Versace’s results of operations have been included in our consolidated financial statements beginning on December 31, 2018. Versace contributed total revenue of $228 million and $435 million, respectively, for the three and six months ended August 31, 2019 and net income from operations of $9 million and $6 million, respectively, after amortization of non-cash purchase accounting adjustments, for the three and six months ended August 31, 2019 (reflecting a one-month reporting lag).
As the Company finalizes the fair value of assets acquired and liabilities assumed, additional purchase price adjustments may be recorded during the measurement period. See Note 4 in the Company’s Annual Report on Form 10-K for the fiscal year ended March 30, 2019 for additional disclosures relating to the Company’s acquisitions.
v3.19.3
Receivables, net
6 Months Ended
Sep. 28, 2019
Receivables [Abstract]  
Receivables, net Receivables, net
Receivables, net, consist of (in millions):
 
September 28,
2019
 
March 30,
2019
Trade receivables (1)
$
428

 
$
459

Receivables due from licensees
26

 
23

 
454

 
482

Less: allowances
(86
)
 
(99
)
 
$
368

 
$
383


 
 
 
 
 
(1) 
As of September 28, 2019 and March 30, 2019, $64 million and $317 million, respectively, of trade receivables were insured.
Receivables are presented net of allowances for discounts, markdowns, operational chargebacks and doubtful accounts. Discounts are based on open invoices where trade discounts have been extended to customers. Markdowns are based on wholesale customers’ sales performance, seasonal negotiations with customers, historical deduction trends and an evaluation of current market conditions. Operational chargebacks are based on deductions taken by customers, net of expected recoveries. Such provisions, and related recoveries, are reflected in revenues.
The Company’s allowance for doubtful accounts is determined through analysis of periodic aging of receivables that are not covered by insurance and assessments of collectability based on an evaluation of historic and anticipated trends, the financial condition of the Company’s customers and the impact of general economic conditions. The past due status of a receivable is based on its contractual terms. Amounts deemed uncollectible are written off against the allowance when it is probable the amounts will not be recovered. Allowance for doubtful accounts was $15 million and $18 million, respectively, as of September 28, 2019 and March 30, 2019. The Company had bad debt expense of $4 million and $1 million, respectively, for the six months ended September 28, 2019 and September 29, 2018. All other periods presented were immaterial.
v3.19.3
Property and Equipment, net
6 Months Ended
Sep. 28, 2019
Property, Plant and Equipment [Abstract]  
Property and Equipment, net Property and Equipment, net
Property and equipment, net, consists of (in millions):
 
September 28,
2019
 
March 30,
2019
Leasehold improvements
$
656

 
$
639

Computer equipment and software
307

 
292

Furniture and fixtures
298

 
292

In-store shops
272

 
270

Equipment
124

 
123

Building
46

 
47

Land
17

 
15

 
1,720

 
1,678

Less: accumulated depreciation and amortization
(1,205
)
 
(1,115
)
 
515

 
563

Construction-in-progress
74

 
52

 
$
589

 
$
615


Depreciation and amortization of property and equipment for the three months ended September 28, 2019 and September 29, 2018 was $52 million and $45 million, respectively, and was $99 million and $92 million, respectively, for the six months ended September 28, 2019 and September 29, 2018. During the three months ended September 28, 2019, the Company recorded property and equipment impairment charges of $10 million, primarily related to Jimmy Choo and Versace store locations. During the six months ended September 28, 2019, the Company recorded property and equipment impairment charges of $23 million, $11 million of which related to determining asset groups for the Company’s premier store locations at an individual store level, $7 million of which related to Michael Kors and $4 million related to Jimmy Choo. In addition, during the six months ended September 28, 2019, the Company recorded property and equipment impairment charges of $12 million, primarily related to Jimmy Choo and Versace store locations (see Note 13 for additional information). During the three and six months ended September 29, 2018, the Company recorded property and equipment impairment charges of $6 million and $9 million, respectively, of which $4 million and $8 million, respectively, were related to underperforming Michael Kors full-price retail store locations, some of which related to the Retail Fleet Optimization Plan, as defined in Note 10.
v3.19.3
Current Assets and Current Liabilities
6 Months Ended
Sep. 28, 2019
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Current Assets and Current Liabilities Current Assets and Current Liabilities
Prepaid expenses and other current assets consist of the following (in millions):
 
September 28,
2019
 
March 30,
2019
Prepaid taxes
$
187

 
$
125

Interest receivable related to net investment hedges
25

 
11

Unrealized gains on forward foreign currency exchange contracts
7

 
5

Prepaid property and equipment
6

 
7

Prepaid rent (1)

 
24

Other
50

 
49

 
$
275

 
$
221



Accrued expenses and other current liabilities consist of the following (in millions):
 
September 28,
2019
 
March 30,
2019
Other taxes payable
$
60

 
$
47

Return liabilities
35

 
35

Accrued capital expenditures
27

 
25

Accrued advertising and marketing
23

 
10

Accrued rent (2)
18

 
34

Gift cards and retail store credits
12

 
13

Professional services
10

 
12

Accrued litigation
10

 
11

Accrued interest
10

 
10

Restructuring liability (1)
7

 
64

Accrued purchases and samples
5

 
29

Other
66

 
84

 
$
283

 
$
374


 
 
 
 
 
(1) 
In connection with the adoption of ASU 2016-02, certain lease related assets and liabilities were reflected within operating lease right-of-use assets and liabilities as of September 28, 2019. See Note 2 and Note 4 for additional information.
(2) 
The accrued rent balance relates to variable lease payments.
v3.19.3
Intangible Assets and Goodwill
6 Months Ended
Sep. 28, 2019
Goodwill and Intangible Assets Disclosure [Abstract]  
Intangible Assets and Goodwill Intangible Assets and Goodwill
The following table details the carrying values of the Company’s intangible assets and goodwill (in millions):
 
September 28,
2019
 
March 30,
2019
Definite-lived intangible assets:
 
 
 
Reacquired Rights
$
400

 
$
400

Trademarks
23

 
23

Key Money (1)
68

 
96

Customer Relationships
398

(2) 
415

Total definite-lived intangible assets
889

 
934

Less: accumulated amortization
(164
)
 
(143
)
Net definite-lived intangible assets
725

 
791

 
 
 
 
Indefinite-lived intangible assets:
 
 
 
Jimmy Choo brand
539

(2) 
572

Versace brand
907

(2) 
930

 
1,446

 
1,502

 
 
 
 
Total intangible assets, excluding goodwill
$
2,171

 
$
2,293

 
 
 
 
Goodwill
$
1,598

(2) 
$
1,659


 
 
 
 
 
(1) 
The March 30, 2019 balance includes certain lease rights that were reclassified to the operating lease right-of-use asset as part of the adoption of ASU 2016-02.
(2) 
The change in the carrying values since March 30, 2019 reflects currency translation.
Amortization expense for the Company’s definite-lived intangible assets for the three months ended September 28, 2019 and September 29, 2018 was $13 million and $8 million, respectively, and was $26 million and $17 million, respectively, for the six months ended September 28, 2019 and September 29, 2018. During the three and six months ended September 28, 2019, the Company recorded impairment charges of $1 million and $6 million, respectively, primarily related to intangible assets associated with its premier Michael Kors store locations (see Note 13 for further information). Impairment charges recorded during the three and six months ended September 29, 2018 were $1 million and $2 million, respectively. There were no goodwill or other indefinite-lived intangible asset impairment charges recorded during any of the periods presented.
v3.19.3
Restructuring and Other Charges
6 Months Ended
Sep. 28, 2019
Restructuring and Related Activities [Abstract]  
Restructuring and Other Charges Restructuring and Other Charges
Retail Fleet Optimization Plan
On May 31, 2017, the Company announced that it plans to close between 100 and 125 of its Michael Kors retail stores in order to improve the profitability of its retail store fleet (“Retail Fleet Optimization Plan”). The Company anticipates finalizing the remainder of the planned store closures under the Retail Fleet Optimization Plan by the end of Fiscal 2020. The Company expects to incur approximately $100 - $125 million of one-time costs associated with these store closures. Collectively, the Company anticipates lower depreciation and amortization expense as a result of the impairment charges recorded once these initiatives are completed.
During the six months ended September 28, 2019, the Company closed 23 of its Michael Kors retail stores under the Retail Fleet Optimization Plan, for a total of 123 stores closed at a cost of $95 million since plan inception. Restructuring charges recorded in connection with the Retail Fleet Optimization Plan during the six months ended September 28, 2019 were $1 million. The below table presents a rollforward of the Company’s remaining restructuring liability related to this plan (in millions):
 
Severance and benefit costs
 
Lease-related and other costs
 
Total
Balance at March 30, 2019
$
2

 
$
53

 
$
55

ASC 842 (Leases) Adjustment (1)

 
(46
)
 
(46
)
Balance at March 31, 2019
2

 
7


9

Additions charged to expense

 
1

 
1

Payments

 
(7
)
 
(7
)
Balance at September 28, 2019
$
2

 
$
1

 
$
3

 
 
 
 
 
(1) 
Consists of the reclassification of sublease liabilities to an offset of the related operating lease right-of-use asset due to the adoption of ASC 842. See Note 2 and Note 4 for further information.

During the three and six months ended September 29, 2018, the Company recorded restructuring charges of $2 million and $6 million, respectively, under the Retail Fleet Optimization Plan, which were comprised of lease-related charges.

Other Restructuring Charges
In addition to the restructuring charges related to the Retail Fleet Optimization Plan, the Company incurred charges of $1 million during the three and six months ended September 28, 2019 related to the Company’s intent to exit certain of its agreements in the EMEA region. During the six months ended September 28, 2019 the Company also incurred charges of $2 million relating to Jimmy Choo lease-related charges. The Company also incurred charges of $1 million relating to Jimmy Choo lease-related charges during the three and six months ended September 29, 2018.
Other Costs
During the three months ended September 28, 2019, the Company recorded costs of $6 million primarily in connection with the acquisition of Versace. During the six months ended September 28, 2019, the Company recorded costs of $18 million, which included $13 million in connection with the acquisition of Versace and $5 million in connection with the Jimmy Choo acquisition.
During the three and six months ended September 29, 2018, the Company recorded costs of $16 million and $23 million, respectively, which included $9 million in each period in connection with the acquisition of Versace, as well as $7 million and $14 million, respectively, in connection with the Jimmy Choo acquisition.
v3.19.3
Debt Obligations
6 Months Ended
Sep. 28, 2019
Debt Disclosure [Abstract]  
Debt Obligations Debt Obligations
The following table presents the Company’s debt obligations (in millions):
 
September 28,
2019
 
March 30,
2019
Term Loan
$
1,435

 
$
1,580

Revolving Credit Facilities
523

 
550

4.000% Senior Notes due 2024
450

 
450

Other
3

 
1

Total debt
2,411

 
2,581

Less: Unamortized debt issuance costs
10

 
13

Less: Unamortized discount on long-term debt
2

 
2

Total carrying value of debt
2,399

 
2,566

Less: Short-term debt
603

 
630

Total long-term debt
$
1,796

 
$
1,936


Senior Unsecured Revolving Credit Facility
The 2018 Credit Facility requires the Company to maintain a leverage ratio as of the end of each fiscal quarter of no greater than 3.75 to 1. Such leverage ratio is calculated as the ratio of the sum of total indebtedness as of the date of the measurement plus six times the consolidated rent expense for the last four consecutive fiscal quarters, to Consolidated EBITDAR (as defined below) for the last four consecutive fiscal quarters. Consolidated EBITDAR is defined as consolidated net income plus income tax expense, net interest expense, depreciation and amortization expense, consolidated rent expense and other non-cash charges, subject to certain additions and deductions. The 2018 Credit Facility also includes covenants that limit additional indebtedness, guarantees, liens, acquisitions and other investments and cash dividends that are customary for financings of this type. As of September 28, 2019, the Company was in compliance with all covenants related to this agreement.
As of September 28, 2019 and March 30, 2019, the Company had borrowings of $513 million and $539 million, respectively, outstanding under the 2018 Revolving Credit Facility, which were recorded within short-term debt in its consolidated balance sheets. In addition, stand-by letters of credit of $16 million were outstanding as of September 28, 2019. At September 28, 2019, the amount available for future borrowings under the 2018 Revolving Credit Facility was $471 million. As of September 28, 2019 and March 30, 2019, the carrying value of borrowings outstanding under the 2018 Term Loan Facility was $1.428 billion and $1.570 billion, respectively, of which $80 million was recorded within short-term debt in each period and $1.348 billion and $1.490 billion, respectively, was recorded within long-term debt in its consolidated balance sheets.
See Note 11 to the Company’s Fiscal 2019 Annual Report on Form 10-K for additional information regarding the Company’s credit facilities and debt obligations.
v3.19.3
Commitments and Contingencies
6 Months Ended
Sep. 28, 2019
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies Commitments and Contingencies
In the ordinary course of business, the Company is party to various legal proceedings and claims. Although the outcome of such items cannot be determined with certainty, the Company’s management does not believe that the outcome of all pending legal proceedings in the aggregate will have a material adverse effect on its cash flow, results of operations or financial position.
Please refer to the Contractual Obligations and Commercial Commitments disclosure within the Liquidity section of the Company’s Annual Report on Form 10-K for the fiscal year ended March 30, 2019 for a detailed disclosure of other commitments and contractual obligations as of March 30, 2019.
v3.19.3
Fair Value Measurements
6 Months Ended
Sep. 28, 2019
Fair Value Disclosures [Abstract]  
Fair Value Measurements Fair Value Measurements
Financial assets and liabilities are measured at fair value using the three-level valuation hierarchy for disclosure of fair value measurements. The determination of the applicable level within the hierarchy of a particular asset or liability depends on the inputs used in the valuation as of the measurement date, notably the extent to which the inputs are market-based (observable) or internally derived (unobservable). Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs are inputs based on a company’s own assumptions about market participant assumptions developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs as follows:
Level 1 – Valuations based on quoted prices in active markets for identical assets or liabilities that a company has the ability to access at the measurement date.
Level 2 – Valuations based on quoted inputs other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly through corroboration with observable market data.
Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

At September 28, 2019 and March 30, 2019, the fair values of the Company’s forward foreign currency exchange contracts and net investment hedges were determined using broker quotations, which were calculations derived from observable market information: the applicable currency rates at the balance sheet date and those forward rates particular to the contract at inception. The Company makes no adjustments to these broker obtained quotes or prices, but assesses the credit risk of the counterparty and would adjust the provided valuations for counterparty credit risk when appropriate. The fair values of the forward contracts are included in prepaid expenses and other current assets, and in accrued expenses and other current liabilities in the consolidated balance sheets, depending on whether they represent assets or liabilities to the Company. The fair values of net investment hedges are included in other assets, as detailed in Note 14.
All contracts are measured and recorded at fair value on a recurring basis and are categorized in Level 2 of the fair value hierarchy, as shown in the following table (in millions):
 
Fair value at September 28, 2019 using:
 
Fair value at March 30, 2019 using:
 
Quoted prices in
active markets for
identical assets
(Level 1)
 
Significant
other observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
Quoted prices in
active markets for
identical assets
(Level 1)
 
Significant
other observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
Derivative assets:
 
 
 
 
 
 
 
 
 
 
 
Forward foreign currency exchange contracts
$

 
$
6

 
$

 
$

 
$
5

 
$

Net investment hedges

 
109

 

 

 
37

 

Other undesignated derivative contracts

 
1

 

 

 

 

Total derivative assets
$

 
$
116

 
$

 
$

 
$
42

 
$

 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
 
 
 
Other undesignated derivative contracts
$

 
$
4

 
$

 
$

 
$
5

 
$

Total derivative liabilities
$

 
$
4

 
$

 
$

 
$
5

 
$


The Company’s long-term debt obligations are recorded in its consolidated balance sheets at carrying values, which may differ from the related fair values. The fair value of the Company’s long-term debt is estimated using external pricing data, including any available quoted market prices and based on other debt instruments with similar characteristics. Borrowings under revolving credit agreements, if outstanding, are recorded at carrying value, which approximates fair value due to the short-term nature of such borrowings. See Note 11 for detailed information relating to carrying values of the Company’s outstanding debt. The following table summarizes the carrying values and estimated fair values of the Company’s short- and long-term debt, based on Level 2 measurements (in millions):
 
September 28, 2019
 
March 30, 2019
 
Carrying
Value
 
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
4.000% Senior Notes
$
445

 
$
459

 
$
445

 
$
438

Term Loan
$
1,428

 
$
1,438

 
$
1,570

 
$
1,574

Revolving Credit Facilities
$
523

 
$
523

 
$
550

 
$
550


The Company’s cash and cash equivalents, accounts receivable and accounts payable, are recorded at carrying value, which approximates fair value.
Non-Financial Assets and Liabilities
The Company’s non-financial assets include goodwill, intangible assets, operating lease right-of-use assets and property and equipment. Such assets are reported at their carrying values and are not subject to recurring fair value measurements. The Company’s goodwill and its indefinite-lived intangible assets (Versace and Jimmy Choo brands) are assessed for impairment at least annually during the fourth quarter of each fiscal year, while its other long-lived assets, including operating lease right-of-use assets, property and equipment and definite-lived intangible assets, are assessed for impairment whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable. The fair values of these assets were determined based on Level 3 measurements using the Company’s best estimates of the amount and timing of future discounted cash flows, based on historical experience, market conditions, current trends and performance expectations.
The Company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that carrying amounts of such assets may not be recoverable. This assessment is performed for each long-lived asset group that represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. The grouping of assets requires a significant amount of judgment. The Company historically grouped certain premier store locations, primarily Michael Kors premier stores, with other Michael Kors stores within the immediate geographic area surrounding the premier store as the Company believed the assets of the store group benefited from the Company’s investments in the premier store. Due to the Company’s recent significant expansion in luxury retail, as well as its continued growth in its global digital business, the Company reassessed its methodology for evaluating impairment of long-lived assets, including the determination of asset groupings. The Company’s luxury retail business generally operates only premier, more luxurious, retail store locations with consistent investments across its individual stores. As a result, during the six months ended September 28, 2019, the Company determined that asset groups at an individual store level represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. As a result of this determination, in the first quarter of Fiscal 2020, the Company identified impairment indicators at certain premier retail store locations and recorded operating lease right-of-use asset and property and equipment impairment charges of $68 million and $11 million, respectively, which are included in the impairment charges detailed in the table below (in millions):
 
Three Months Ended
September 28, 2019
 
Six Months Ended
September 28, 2019
 
Carrying Value Prior to Impairment
 
Fair Value
 
Impairment Charge
 
Carrying Value Prior to Impairment
 
Fair Value
 
Impairment Charge
Operating Lease Right-of-Use Assets
$
174

 
$
81

 
$
93

 
$
306

 
$
134

 
$
172

Property and Equipment
24

 
14

 
10

 
44

 
21

 
23

Key Money
2

 
1

 
1

 
10

 
4

 
6

Total
$
200

 
$
96

 
$
104

 
$
360

 
$
159

 
$
201


 
Three Months Ended
September 29, 2018
 
Six Months Ended
September 29, 2018
 
Carrying Value Prior to Impairment
 
Fair Value
 
Impairment Charge
 
Carrying Value Prior to Impairment
 
Fair Value
 
Impairment Charge
Property and Equipment
$
9

 
$
3

 
$
6

 
$
14

 
$
5

 
$
9

Lease Rights
2

 
1

 
1

 
4

 
2

 
2

Total
$
11

 
$
4

 
$
7

 
$
18

 
$
7

 
$
11


In addition to the impairment charges above, the Company recorded an adjustment to reduce its March 31, 2019 opening balance of retained earnings by $152 million, net of tax, reflecting impairments of operating lease right-of-use assets for certain underperforming real estate locations for which the carrying value of the opening operating lease right-of-use asset exceeded its related fair value. Property and equipment related to these underperforming locations were fully impaired due to the adoption of ASU 2016-02. See Note 2 and Note 4 for additional information.
v3.19.3
Derivative Financial Instruments
6 Months Ended
Sep. 28, 2019
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments Derivative Financial Instruments
Forward Foreign Currency Exchange Contracts
The Company uses forward foreign currency exchange contracts to manage its exposure to fluctuations in foreign currency for certain of its transactions. The Company, in its normal course of business, enters into transactions with foreign suppliers and seeks to minimize risks related to certain forecasted inventory purchases by using forward foreign currency exchange contracts. The Company only enters into derivative instruments with highly credit-rated counterparties. The Company does not enter into derivative contracts for trading or speculative purposes.
In connection with the September 24, 2018 definitive agreement to acquire all of the outstanding shares of Versace, the Company entered into forward foreign currency exchange contracts in September 2018 with notional amounts totaling €1.680 billion (approximately $2.001 billion) to mitigate its foreign currency exchange risk through the closing date of the acquisition, which were settled on December 21, 2018. These derivative contracts were not designated as accounting hedges. Therefore, changes in fair value were recorded to foreign currency (gain) loss in the Company’s consolidated statements of operations and comprehensive income. The Company’s accounting policy is to classify cash flows from derivative instruments that are accounted for as cash flow hedges in the same category as the cash flows from the items being hedged. Accordingly, the Company classified the unrealized gains and losses relating to these derivative instruments within cash flows from investing activities.
Net Investment Hedges
As of September 28, 2019, the Company had multiple fixed-to-fixed cross-currency swap agreements with aggregate notional amounts of $3.190 billion to hedge its net investment in Euro-denominated subsidiaries and $44 million to hedge its net investment in Japanese Yen-denominated subsidiaries against future volatility in the exchange rates between U.S. Dollar and these currencies. Under the terms of these contracts, which have maturity dates between January 2022 and June 2026, the Company will exchange the semi-annual fixed rate payments on U.S. denominated debt for fixed rate payments of 0% to 1.674% in Euros and 0.89% in Japanese Yen. These contracts have been designated as net investment hedges.
When a cross-currency swap is used as a hedging instrument in a net investment hedge assessed under the spot method, the cross-currency basis spread is excluded from the assessment of hedge effectiveness and is recognized as a reduction in interest expense in the Company’s consolidated statements of operations and comprehensive income. Accordingly, the Company recorded a reduction in interest expense of $19 million and $34 million, respectively, during the three and six months ended September 28, 2019 and $3 million and $4 million, respectively, during the three and six months ended September 29, 2018.
The following table details the fair value of the Company’s derivative contracts, which are recorded on a gross basis in the consolidated balance sheets as of September 28, 2019 and March 30, 2019 (in millions):
 
 
 
 
 
Fair Values
 
 
Notional Amounts
 
Assets
 
Liabilities
 
 
September 28,
2019
 
March 30,
2019
 
September 28,
2019
 
March 30,
2019
 
September 28,
2019
 
March 30,
2019
 
Designated forward foreign currency exchange contracts
$
150

 
$
166

 
$
6

(1) 
$
5

(1) 
$

 
$

 
Designated net investment hedge
3,234

 
2,234

 
109

(2) 
37

(2) 

 

 
Total designated hedges
3,384

 
2,400

 
115

 
42

 

 

 
Undesignated derivative contracts (4)
170

 
199

 
1

(1) 

 
4

(3) 
5

(3) 
Total
$
3,554

 
$
2,599

 
$
116

 
$
42

 
$