2 0 47 2 _ S P 1 8 _ P P_ A N N U A L R E P O R T_ 1 0 K _W R A P_V 6 T R I M S I Z E : 1 7 " W X 1 0 . 8 7 " H
C O V E R :
P M S 4 6 7
PA P E R S T O C K : O P U S S A P P I / M AT T E (C O AT E D) / 8 0 L B C O V E R
S P I N E W I DT H I N C L U D E D A N D A C C O U N T S F O R . 2 5 " O F T H E W I DT H
P R I N T E R M AY A D J U S T M E C H A N C A L TO F I T P R O D U C T I O N N E E D S
2 0 47 2 _ S P 1 8 _ P P_ A N N U A L R E P O R T_ 1 0 K _W R A P_V 6 FA L L
T R I M S I Z E : 1 7 " W X 1 0 . 8 7 " H
I N S I D E C O V E R : P R I N T S 4 C O L O R
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2018
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-35368
Michael Kors Holdings Limited
(Exact Name of Registrant as Specified in Its Charter)
British Virgin Islands
(State or other jurisdiction of incorporation or organization)
N/A
(I.R.S. Employer Identification No.)
33 Kingsway
London, United Kingdom
WC2B 6UF
(Address of Principal Executive Offices)
Registrant’s telephone number, including area code: 44 207 632 8600
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of Each Class
Ordinary Shares, no par value
Name of Each Exchange on which Registered
New York Stock Exchange
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Yes
Yes
No
No
Yes
No
Yes
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Non-accelerated filer
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Accelerated filer
Smaller reporting company
(Do not check if smaller reporting company)
Yes
No
The aggregate market value of the registrant’s voting and non-voting ordinary shares held by non-affiliates of the registrant was $6,957,593,123 as of
September 30, 2017, the last business day of the registrant’s most recently completed second fiscal quarter based on the closing price of the common
stock on the New York Stock Exchange.
As of May 23, 2018, Michael Kors Holdings Limited had 149,891,999 ordinary shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this report, to the extent not set forth herein, is incorporated by reference from the Registrant’s definitive Proxy
Statement, which will be filed in June 2018, for the 2018 Annual Meeting of the Shareholders.
Page
4
13
25
26
26
26
27
28
30
55
56
56
56
57
58
58
58
58
58
59
Business
Item 1
Item 1A Risk Factors
Item 1B Unresolved Staff Comments
Item 2
Item 3
Item 4
Properties
Legal Proceedings
Mine Safety Disclosures
TABLE OF CONTENTS
PART I
PART II
Item 5
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 6
Item 7
Item 7A Quantitative and Qualitative Disclosures About Market Risk
Item 8
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9
Item 9A Controls and Procedures
Item 9B Other Information
PART III
Item 10 Directors, Executive Officers and Corporate Governance
Item 11
Item 12
Item 13
Item 14
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions and Director Independence
Principal Accountant Fees and Services
Item 15
Exhibits and Financial Statement Schedules
PART IV
2
NOTE REGARDING FORWARD-LOOKING STATEMENTS
The statements in this Annual Report on Form 10-K, including documents incorporated herein by reference, that refer to
plans and expectations for future periods are forward-looking statements. These forward-looking statements are based on
management’s current expectations. Words such as “expects,” “anticipates,” “plans,” “believes,” “estimates,” “may,” “will,”,
“should” and variations of such words and similar expressions are intended to identify such forward-looking statements. You
should not place undue reliance on such statements. These forward-looking statements are subject to a number of risks and
uncertainties, many of which are beyond the Company’s control, which could cause the Company’s actual results to differ materially
from those indicated in these forward-looking statements. These factors are more fully discussed in the Company’s risk factors,
as they may be amended from time to time, which are set forth in the Company’s filings with the Securities and Exchange
Commission (the “SEC”), including in this Annual Report, particularly under “Item 1A. Risk Factors” and in “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations.” The Company undertakes no obligation to update or
revise any forward-looking statements to reflect subsequent events or circumstances, except as required by applicable laws or
regulations.
Electronic Access to Company Reports
Our investor website can be accessed at www.michaelkors.com under “Investor Relations.” Our Annual Reports on Form 10-
K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K filed with or furnished to the SEC pursuant to Section 13(a)
or Section 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our investor website under
the caption “SEC Filings” promptly after we electronically file such materials with, or furnish such materials to, the SEC. No
information contained on our website is intended to be included as part of, or incorporated by reference into, this Annual Report
on Form 10-K. Information relating to corporate governance at our Company, including our Corporate Governance Guidelines,
our Code of Business Conduct and Ethics for all directors, officers, and employees, and information concerning our directors,
Committees of the Board, including Committee charters, and transactions in Company securities by directors and executive officers,
is available at our investor website under the captions “Corporate Governance” and “SEC Filings.” Paper copies of these filings
and corporate governance documents are available to shareholders free of charge by written request to Investor Relations, Michael
Kors Holdings Limited, 33 Kingsway, London, United Kingdom, WC2B 6UF. Documents filed with the SEC are also available
on the SEC’s website at www.sec.gov.
3
PART I
Unless the context requires otherwise, references in this Annual Report on Form 10-K to “MKHL”, “we”, “us”, “our”,
“the Company”, “our Company” and “our business” refer to Michael Kors Holdings Limited and its consolidated subsidiaries,
unless the context requires otherwise. References to our stores, retail stores and retail segment include all of our full-price retail
stores (including concessions), our e-commerce websites and outlet stores, and the term “Fiscal,” with respect to any year, refers
to the 52-week period ending on the Saturday closest to March 31 of such year, except for “Fiscal 2016,” which refers to the 53-
week period ending April 2, 2016. Some differences in the numbers in the tables and text throughout this annual report may exist
due to rounding. All comparable store sales are presented on a 52-week basis.
Item 1. Business
Our Company
We are a global fashion luxury group of industry-leading fashion luxury brands led by a world-class management team and
renowned designers. The Michael Kors (“MK”) brand was launched over 35 years ago by Mr. Michael Kors, whose vision has
taken the MK brand from its beginnings as an American luxury sportswear house to a global accessories, footwear and apparel
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. On November 1, 2017, we completed
the acquisition of Jimmy Choo Group Limited (formerly known as Jimmy Choo PLC ) and its subsidiaries (collectively, “Jimmy
Choo”). The combination of Michael Kors and Jimmy Choo brought together two iconic brands that are industry leaders in style
and trend and created a global fashion luxury group with a diversified geographic and product portfolio, which we believe will
strengthen the Company’s future revenue growth opportunities.
Prior to third quarter of Fiscal 2018, we operated our Michael Kors business in three segments: Retail, Wholesale and
Licensing. With the acquisition of Jimmy Choo, the Company began to operate in four reportable segments, which are as follows:
• MK Retail — accounted for approximately 57.5% of our total revenue in Fiscal 2018 and includes sales of Michael Kors
products from 379 retail stores in the Americas (including concessions) and 450 international retail stores (including
concessions) throughout Europe and certain parts of Asia, as well as from Michael Kors e-commerce sites in the United
States (“U.S.”), Canada, certain parts of Europe, China, Japan and South Korea as of March 31, 2018.
• MK Wholesale — accounted for approximately 34.7% of our total revenue in Fiscal 2018 and includes wholesale sales
of Michael Kors products through 1,403 department store doors and 875 specialty store doors in the Americas and through
1,048 specialty store doors and 218 department store doors internationally as of March 31, 2018. MK Wholesale also
includes revenues from sales of products to Michael Kors geographic licensees.
• MK Licensing — accounted for approximately 3.1% of our total revenue in Fiscal 2018 and includes royalties and
advertising contributions earned on licensed products and use of Michael Kors trademarks, and rights granted to third
parties for the right to operate retail stores and/or sell Michael Kors products in certain geographic regions.
•
Jimmy Choo — accounted for approximately 4.7% of our total revenue in Fiscal 2018 (from November 1, 2017 through
March 31, 2018) and includes worldwide sales of Jimmy Choo products through 182 retail stores (including concessions)
and through Jimmy Choo e-commerce sites in the U.S., certain parts of Europe and Japan, through 629 wholesale doors,
as well as through product and geographic licensing arrangements, as of March 31, 2018.
For additional financial information regarding our segments, see Segment Information note in the accompanying
consolidated financial statements.
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 in many of our Michael Kors retail stores, our Michael Kors e-commerce sites, as well as in the finest
luxury department stores in the world, including Bergdorf Goodman, Saks Fifth Avenue, Neiman Marcus and Harrods, among
others. In 2004, we saw an opportunity to capitalize on the brand strength of the Michael Kors collection and address the significant
demand opportunity in accessible luxury goods, and we introduced MICHAEL Michael Kors, which has a strong focus on
accessories, in addition to offering footwear and apparel. MICHAEL Michael Kors is carried in all of our Michael Kors lifestyle
stores, as well as leading department stores throughout the world, including Bloomingdale’s, Macy’s, Harvey Nichols, Galeries
Lafayette, Printemps, Lotte, Hyundai, Isetan and Lane Crawford, among others. More recently, we have begun to grow our Michael
Kors men’s business in recognition of the significant opportunity afforded by our 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.
4
Since its inception in 1996, Jimmy Choo has offered a distinctive, glamorous and fashion-forward product range, enabling
it to develop into a leading global luxury accessories brand, whose core product offering of women’s luxury shoes is complemented
by accessories, including handbags, small leather goods, scarves and belts, as well as a growing men’s luxury shoes and accessory
business. In addition, certain categories, such as fragrances, sunglasses and eyewear are produced under licensing agreements.
Industry
We operate in the global luxury goods industry. The personal luxury goods market has recently experienced increased
growth, driven by stronger local and tourist purchases, overcoming some of the challenges the industry has faced in the past several
years. Accessories has continued to remain the biggest personal luxury goods category, with footwear, jewelry and handbags being
the fastest growing product categories. While the wholesale channel has shown slower growth primarily driven by the
underperformance of department stores, the retail channel has continued to experience increased growth, largely driven by the
rapid growth of the e-commerce channel, as well as increased off-price and travel retail sales, which has continued to have a
negative impact on monobrand retail store sales. As the overall environment has become increasingly omni-channel, increased
customer engagement and tailoring merchandise to customer shopping and communication preferences have become the key
ingredients to winning market share. We believe that our innovative product offerings and customer engagement initiatives make
us well positioned to capitalize on the continued growth of the luxury accessories and footwear product categories, as they are
among our primary product categories of focus, as well as to grow our sales in other product categories.
Geographic Information
We generate revenue globally through our four reporting segments, as described above. We sell our Michael Kors and Jimmy
Choo products through retail and wholesale channels of distribution in three principal geographic markets: the Americas (U.S.,
Canada and Latin America), EMEA (Europe, Middle East and Africa) and Asia. We also have wholesale arrangements pursuant
to which we sell products to our geographic licensees. In addition, we have licensing agreements through which we license to third
parties the use of our Michael Kors and Jimmy Choo brand names and trademarks, certain production rights, and sales and/or
distribution rights with respect to our brands.
The following table details our revenue by segment and geographic location (in millions):
MK Retail revenue - the Americas
MK Retail revenue - Europe
MK Retail revenue - Asia
Total MK Retail
MK Wholesale revenue - the Americas
MK Wholesale revenue - EMEA
MK Wholesale revenue - Asia
Total MK Wholesale
MK Licensing revenue - the Americas
MK Licensing revenue - EMEA
Total MK Licensing
Total Michael Kors
Jimmy Choo revenue - the Americas
Jimmy Choo revenue - EMEA
Jimmy Choo revenue - Asia
Total Jimmy Choo
Total revenue - the Americas
Total revenue - EMEA
Total revenue - Asia
Total revenue
Fiscal Years Ended
March 31,
2018
April 1,
2017
April 2,
2016
$
1,678.4
564.4
469.0
2,711.8
1,234.0
343.9
61.4
1,639.3
83.5
61.4
144.9
4,496.0
37.3
123.0
62.3
222.6
$
1,713.7
507.7
350.7
2,572.1
1,340.9
376.5
58.4
1,775.8
86.1
59.7
145.8
4,493.7
—
—
—
—
3,033.2
1,092.7
592.7
4,718.6
$
3,140.7
943.9
409.1
4,493.7
$
1,779.0
509.6
106.3
2,394.9
1,628.6
406.4
108.9
2,143.9
99.0
74.3
173.3
4,712.1
—
—
—
—
3,506.6
990.3
215.2
4,712.1
$
$
5
Competitive Strengths
We believe that the following strengths differentiate us from our competitors:
Global Fashion Luxury Group Led by a World-Class Management Team and Renowned Designers. We are a global
fashion luxury group of industry-leading fashion luxury brands led by a world-class management team and renowned designers.
With the acquisition of Jimmy Choo on November 1, 2017, we brought together two iconic brands that are industry leaders in
style and trend.
The Michael Kors brand was launched over 35 years ago by Mr. Michael Kors, a world-renowned designer, who personally
leads our experienced design team for the Michael Kors brand. Mr. Kors and his team are responsible for conceptualizing and
directing the design of all of our products, and their design leadership is a unique advantage that we possess. Mr. Kors has received
a number of awards, which recognize the contribution Mr. Kors and his team have made to the fashion industry and our Company.
We believe that the Michael Kors brand name has become synonymous with luxurious fashion that is timeless and elegant, expressed
through sophisticated accessories and ready-to-wear collections. Each of our collections exemplifies the jet-set lifestyle and features
high quality designs, materials and craftsmanship. Some of the most widely recognized global trendsetters—including celebrities
such as Cate Blanchett, Viola Davis, Ashley Graham, Kate Hudson, Scarlett Johansson, Angelina Jolie, Nicole Kidman, Jennifer
Lawrence, Blake Lively, Jennifer Lopez, Gwyneth Paltrow, Taylor Swift, and the Duchess of Cambridge wear our Michael Kors
collections.
Jimmy Choo’s design team is led by Sandra Choi (niece of Mr. Jimmy Choo, O.B.E.), who has been the Creative Director
for the Jimmy Choo brand since its inception in 1996. Jimmy Choo’s design team has a proven track record of developing Ms.
Choi’s conceptual visions into sought-after luxury products each year through a structured process encompassing line plans, designs,
prototypes, edits and pre-launch samples. Jimmy Choo products are unique, instinctively seductive and chic. The Jimmy Choo
brand offers classic and timeless luxury products, as well as innovative products that are intended to set and lead fashion trends.
Jimmy Choo’s products have a strong red carpet presence and are often worn by global celebrities, including Jessica Biel, Reese
Witherspoon, Laura Dern, Michelle Pfeiffer, Mandy Moore, Emma Roberts, Sandra Bullock, Emily Blunt, Rachel Weisz, and
Natalie Dormer.
Our design teams are supported by our senior management team with extensive experience across a broad range of disciplines
in the retail industry, including design, sales, marketing, public relations, merchandising, real estate, supply chain and finance.
With an average of 22 years of experience in the retail industry, including at a number of public companies, and an average of ten
years with the Company, our senior management team has strong creative and operational experience and a successful track record.
Leveraging our Success in the Accessories Product Category. The strength of our Michael Kors luxury collection and
our accessible luxury MICHAEL Michael Kors line, have allowed us to expand our brand awareness and position Michael Kors
as one of the leading global luxury brands in the accessories product categories. Capitalizing on the success of our accessories
product category, we are continuing to grow and diversify our Michael Kors brand through other product categories, such as men’s
apparel and accessories, dresses and wearable technology. In addition, we believe that we can leverage this success to further
develop and grow the accessories product line of the recently acquired Jimmy Choo business.
Proven Multi-Format Michael Kors Retail Business with Future Growth Opportunity. In Fiscal 2018, our MK Retail
segment reported revenue of $2.712 billion, which represented a 5.4% increase from revenue of $2.572 billion in Fiscal 2017.
Within our MK Retail segment we have four primary retail store formats: collection stores, lifestyle stores (including concessions),
outlet stores and e-commerce sites. Our collection stores are located in some of the world’s most prestigious shopping areas, such
as Madison Avenue in New York and Rodeo Drive in California, and are generally 2,900 square feet in size. Our lifestyle stores
are located in some of the world’s most frequented metropolitan shopping locations and leading regional shopping centers, and
are generally 2,800 square feet in size. We also extend our reach to additional consumer groups through our outlet stores, which
are generally 4,100 square feet in size. We also have e-commerce sites in the U.S., Canada, certain parts of Europe, China, Japan
and South Korea.
Strong Relationships with Premier Michael Kors Wholesale Customers. We partner with leading wholesale customers
for the Michael Kors brand, such as Bergdorf Goodman, Saks Fifth Avenue, Neiman Marcus, Harrods, Bloomingdale’s and Macy’s
in North America, as well as Harvey Nichols, Printemps, Selfridges and Galeries Lafayette in Europe. These relationships enable
us to access large numbers of our key consumers in a targeted manner. Our Michael Kors “shop-in-shops” have specially trained
staff, as well as customized fixtures, wall casings, decorative items, and flooring, and provide department store consumers with a
more personalized shopping experience than traditional retail department store configurations. Michael Kors has also engaged
with its wholesale customers on various initiatives and has continued to enter into innovative supply chain partnerships with its
wholesale customers designed to increase the speed at which Michael Kors products reach the ultimate consumer. During Fiscal
6
2018, we have continued to strategically decrease promotional activity, which resulted in a reduction in shipments of Michael Kors
products within our wholesale channel. While we believe that this is necessary to appropriately position the Michael Kors brand
long-term, revenue for our MK Wholesale segment decreased by 7.7% from $1.776 billion in Fiscal 2017 to $1.639 billion in
Fiscal 2018.
Innovative Product Offerings from our Michael Kors Licensed Operations. The strength of our global Michael Kors
brand has been instrumental in helping us build our licensing business. We collaborate with a select number of product licensees
who produce and sell what we believe are products requiring specialized expertise that are enhanced by our Michael Kors brand
strength, including Fossil Partners, LP. (“Fossil”) for watches and jewelry, The Estée Lauder Companies Inc. (“Estée Lauder”) for
fragrances and beauty and Luxottica Group (“Luxottica”) for eyewear, among others. Total revenue for licensed products decreased
slightly from $145.8 million in Fiscal 2017 to $144.9 million in Fiscal 2018, primarily due to lower geographic licensing revenue
due to our acquisition of the previously licensed business in the Greater China region, and lower licensing revenues related to
fashion watches, jewelry and fragrance sales, largely offset by higher licensing royalties related to Michael Kors ACCESS
smartwatches and eyewear. We have continued to introduce new and innovative product offerings in collaboration with our licensees,
including additional fragrance and smartwatch offerings. During Fiscal 2019, we plan to introduce a new fine jewelry product line
in collaboration with Fossil.
Acquisition and Integration of Jimmy Choo, a Powerful Iconic Brand with Deep Roots in Fashion. For the period
from acquisiton on November 1, 2017 through March 31, 2018, Jimmy Choo contributed incremental sales of $222.6 million.
Jimmy Choo operated 182 stores as of March 31, 2018, with approximately 63% of stores represented by the brand’s new global
retail store format, which has been progressively rolled out around the world during the past several years. Jimmy Choo’s retail
stores average approximately 1,280 square feet, including 10 flagship locations averaging 2,600 square feet. In addition, Jimmy
Choo operates e-commerce sites in the U.S., certain parts of Europe and Japan and is in the process of rolling out its omni-channel
capabilities in the U.S. and Europe. In November 2017, Jimmy Choo assumed direct control of its operations in South Korea from
its former geographic license partner upon expiration of the related license agreement. Jimmy Choo partners with luxury wholesale
customers, including luxury department stores in the U.S. and specialty and multi-brand stores worldwide. Jimmy Choo’s wholesale
customers include Nordstrom, Neiman Marcus, Bergdorf Goodman, Bloomingdales and Saks Fifth Avenue, where we have
personalized space in a number of stores and specially trained personnel. In addition, Jimmy Choo generates wholesale revenue
through sales of its products to its geographic licensing partners. Jimmy Choo’s growth potential is demonstrated through the
success of its product licensed categories, where it has strong partnerships with Interparfums SA for fragrance and Safilo SpA for
Sunglasses and Eyewear.
Business Strategy
Our goal is to continue to create shareholder value by increasing our revenue and profits and strengthening our global brands.
We plan to achieve our business strategy by focusing on the following five strategic initiatives:
Trendsetting and Innovative Product Offerings. We will continue to introduce trendsetting and innovative products, as
well as expand our offerings across product categories to strengthen our position as a fashion leader and generate business growth
through:
•
•
•
•
•
•
layered strategically-priced product offerings within our iconic Michael Kors accessory product lines, introduction of
new product groups and elevated product offerings with unique design, style and craftsmanship;
leveraging the current athletic fashion trend in accessories and footwear product categories;
continued Michael Kors women’s apparel growth through increased dress, outerwear and tops assortment;
expanded licensed product offerings in our Michael Kors smartwatch category and men’s watches, new fragrances,
and through the launch of the new Michael Kors fine jewelry collection;
increased product offerings within our menswear and footwear businesses with focused marketing and inclusion of
these product categories in our global advertising campaigns; and
enhancement of Jimmy Choo’s accessories and men’s product categories, while continuing to maintain the brand’s
authoritative presence in footwear.
Increased Brand Engagement. We intend to continue increasing our brand engagement and customer loyalty in a number
of ways, including by:
•
leveraging Mr. Kors’ global prestige and popularity through a variety of press activities and personal appearances and
leveraging Jimmy Choo’s globally iconic brand through celebrity placement, editorial and digital coverage, as well as
social media and product advertising;
•
continuing to evolve our premier retail stores in preeminent, high-visibility locations around the world;
7
•
•
•
•
•
•
delivering a focused message and a clear brand point of view across all marketing channels and ensuring consistency
of our product messaging through global marketing campaigns and maintaining and refining our strong advertising
position and editorial coverage in global fashion publications;
continuing to grow our customer database in order to create a more personalized shopping experience catered to our
customers’ shopping preferences;
evolving our digital strategy to align with the media consumption habits of our target markets to ensure that we are
promoting the right message to the right person at the right time and leveraging our social media presence to drive
targeted, personalized reach;
growing our Michael Kors VIP customer loyalty program, which was launched during the fourth quarter of Fiscal 2018;
holding semi-annual runway shows for the Michael Kors brand that reinforce Mr. Kors’ designer status and high-fashion
image, creating excitement around the Michael Kors brand and generating global multimedia press coverage; and
representing our Jimmy Choo brand at high-profile celebrity events and generating global press coverage.
Optimizing Customer Experience. We plan to continue to focus on customer relationship initiatives as part of our omni-
channel strategy to provide a seamless customer experience across the different channels and geographies by:
•
•
•
optimizing and further expanding our global e-commerce presence, in addition to launching 14 new Michael Kors e-
commerce sites in Europe and Asia during Fiscal 2018;
continuing to enhance customer experience globally through omni-channel order fulfillment, including by filling online
orders through our retail stores and through our click-and-collect service offerings;
continued investment in new leading edge mobile technologies across our retail store and e-commerce network with
endless aisle capabilities, allowing our customers to order a wider range of products and have them shipped to their
homes, enhanced styling and wardrobe-building tools and customer-preferred communication capabilities; and
•
continued investments in our retail stores globally, including store renovations targeted to enhance customer experience.
Investing in Technology. We intend to continue making investments in technology to support our business by:
•
continuing to make investments in in-store technology and evolve our digital experience in response to the shift in
consumer preferences toward mobile devices with a focus on addressing new levels of customer service expectations;
• making investments in systems necessary to support our information technology infrastructure, including our financial
systems;
•
•
investing in customer relationship management systems and processes to personalize our marketing efforts; and
utilizing our proprietary platforms to drop ship orders to our wholesale customers;
Expanding Our Global Presence. We will continue to increase our global penetration in Asia and Europe and leverage
our existing operations in international locations to increase global brand awareness and market share by:
•
•
•
•
growing our recently acquired Jimmy Choo business through new store openings worldwide, with a focus on Asia, and
through taking direct control of certain businesses operated by geographic licensees, as well as continuing to grow our
travel retail business;
providing a consistent, sophisticated jet-set lifestyle experience to our Michael Kors customers around the world;
investing in new retail stores, primarily in Asia and further expanding our international e-commerce presence; and
elevating the Michael Kors store experience and optimizing the Michael Kors store fleet through the closing of 100-125
stores to improve store profitability (the “Retail Fleet Optimization Plan”), as well as continuing to grow the Michael
Kors mens’ business, apparel and footwear product categories around the world.
8
Collections and Products
Our total revenue by major product category is as follows (in millions):
March 31,
2018
3,057.0
$
% of
Total
64.8% $
Fiscal Years Ended
% of
April 1,
Total
2017
68.1% $
3,061.4
April 2,
2016
3,179.7
656.9
604.6
249.7
150.4
13.9%
12.8%
5.3%
3.2%
462.0
543.2
281.3
145.8
10.3%
12.1%
6.3%
3.2%
491.0
543.7
324.4
173.3
$
4,718.6
$
4,493.7
$
4,712.1
% of
Total
67.5%
10.4%
11.5%
6.9%
3.7%
Accessories
Footwear
Apparel
Licensed product
Licensing revenue
Total revenue
Michael Kors
Michael Kors has three primary collections that offer accessories, footwear and apparel: Michael Kors Collection, MICHAEL
Michael Kors and Michael Kors Mens, all of which are offered through our MK Retail and MK Wholesale segments. We also
offer licensed products through our MK Retail segment.
Michael Kors Collection
The Michael Kors Collection is a sophisticated designer collection for women based on a philosophy of essential luxury
and pragmatic glamour. The collection includes ready-to-wear and accessories, including handbags and small leather goods, and
footwear, many of which are made from fine quality leathers. Generally, our women’s handbags and small leather goods retail
from $300 to $6,000, our footwear retails from $300 to $1,500 and our ready-to-wear retails from $400 to $7,500.
MICHAEL Michael Kors
MICHAEL Michael Kors has a strong focus on women’s accessories, primarily handbags and small leather goods, as well
as footwear and apparel for women, and is carried in all of our lifestyle stores as well as leading department stores throughout the
world. MICHAEL Michael Kors offers handbags designed to meet the fashion and functional requirements of our broad and diverse
consumer base; small leather goods such as clutches, wallets, wristlets and cosmetic cases; footwear; and apparel, including dresses,
tops, jeans, pants, skirts, shorts and outerwear. Generally, our handbags retail from $200 to $600, our small leather goods retail
from $45 to $250, our footwear retails from $50 to $300 and our apparel retails from $75 to $600.
Michael Kors Mens
Michael Kors Mens is an innovative collection of men’s ready-to-wear, accessories, and footwear with a modern American
style. Our menswear apparel retails from $50 to $1,000, our men’s accessories generally retail from $40 to $800 and our men’s
footwear retails from $200 to $400.
Michael Kors Licensed Products
Watches. Fossil has been our exclusive Michael Kors watch licensee since 2004. Watches are sold in our retail stores, our
e-commerce sites and by Fossil to wholesale customers in addition to select watch retailers. Generally, our fashion watches retail
from $150 to $595.
Wearable Technology. In addition to the fashion watch and jewelry product categories, Fossil is our exclusive licensee for
Michael Kors ACCESS smartwatches, which were first introduced in Fiscal 2017 and retail from $350 to $500.
Jewelry. Fossil has been our exclusive Michael Kors fashion jewelry licensee since 2010. Our jewelry product line is
complementary to our watches and accessories lines and is comprised of bracelets, necklaces, rings and earrings. Our jewelry is
sold in our retail stores, our e-commerce sites and by Fossil to wholesale customers in addition to other specialty stores. Generally,
our jewelry retails from $55 to $500. During Fiscal 2019, Michael Kors plans to transition its fashion jewelry product category to
a new line of fine jewelry.
9
Eyewear. Since 2015, Luxottica has been Michael Kors exclusive eyewear licensee for developing distinctive eyewear
inspired by our collections. Our eyewear products are focused on status eyewear with sunglasses serving as a key category. Eyewear
is sold in our retail stores, on our e-commerce sites and by Luxottica to wholesale customers in addition to select sunglass retailers
and prescription eyewear providers. Generally, our eyewear retails from $100 to $210.
Fragrance and Beauty. Estée Lauder has been Michael Kors exclusive women’s and men’s fragrance licensee since 2003.
Fragrances are sold in our retail stores, on our e-commerce sites and by Estée Lauder to wholesale customers in addition to select
fragrance retailers. Our fragrance and related products generally retail from $30 to $125.
Jimmy Choo
Jimmy Choo offers a distinctive, glamorous and fashion-forward product range, enabling it to develop into a leading global
luxury accessories brand, whose core product offerings are women’s luxury shoes, complemented by accessories, including
handbags, smaller leather goods, scarves and belts, as well as a growing men’s luxury shoes and accessories business. Approximately
78% of the Jimmy Choo’s revenue is comprised of luxury shoes. Generally, Jimmy Choo women’s luxury shoes retail from $425
to $4,600, accessories retail from $600 to $4,800 and men’s shoes retail from $170 to $2,500.
Certain product categories such as Jimmy Choo fragrances, sunglasses and eyewear are produced under product licensing
agreements. Interparfums SA is the exclusive licensee for Jimmy Choo fragrances and Safilo SpA is the exclusive licensee for
Jimmy Choo sunglasses and eyewear. Generally, Jimmy Choo eyewear retails from $295 to $645 and Jimmy Choo fragrances
retail from $55 to $115.
Advertising and Marketing
Our marketing strategy is to deliver a brand and product message that is consistent with each of our global brands across
all customer touch points on their path from brand consideration through purchase. Our global image is created and executed
internally by our creative marketing, visual merchandising and public relations teams, which helps ensure the consistency of our
brands messaging.
In Fiscal 2018, we recognized approximately $167.1 million in advertising and marketing expenses globally. We engage in
a wide range of integrated marketing programs, across various marketing channels including but not limited to email marketing,
print advertising, outdoor advertising, digital marketing, social media, direct print mailings, public relations outreach, visual
merchandising and partnership marketing, in an effort to engage our existing and potential customer base and ultimately stimulate
sales in a consumer-preferred shopping venue. In addition, our Michael Kors spring and fall ready-to-wear collections, along with
our latest accessories, are showcased at New York Fashion Week. The Michael Kors semi-annual runway shows and Jimmy Choo
celebrity placements generate extensive media coverage. Jimmy Choo is also the leading brand in editorial coverage for women’s
luxury shoes globally.
Our growing e-commerce businesses provide us with an opportunity to increase the size of our customer database and to
communicate with our consumers to increase online and physical store sales, as well as build brand awareness for Michael Kors
and Jimmy Choo. We are continuously improving the functionalities and features on our e-commerce sites to create innovative
ways to keep our brands at the forefront of consumers’ minds by offering a broad selection of products, including accessories,
apparel, and footwear. Since e-commerce growth is critical to our overall growth strategy, we continued to expand our global e-
commerce presence by launching new Michael Kors e-commerce sites in 14 additional countries in Europe and South Korea during
Fiscal 2018, increasing our total e-commerce site presence to 25 Michael Kors e-commerce sites as of March 31, 2018. In addition,
Jimmy Choo operates e-commerce sites in the U.S., certain parts of Europe and Japan as of March 31, 2018.
Manufacturing and Sourcing
We contract for the purchase of finished goods principally with independent third-party manufacturing contractors, whereby
the manufacturing contractor is generally responsible for the entire manufacturing process, including the purchase of piece goods
and trim.
We allocate product manufacturing for the Michael Kors brand among third-party agents based on their capabilities, the
availability of production capacity, pricing and delivery. Michael Kors also has relationships with various agents who source our
finished goods with numerous manufacturing contractors on our behalf. Although our relationships with our manufacturing
contractors or agents are generally terminable at any time, we believe we have mutually satisfactory relationships with these third
parties. This multi-supplier strategy provides specialist skills, scalability, flexibility and speed to market, as well as diversifies
risk. In Fiscal 2018 and Fiscal 2017, one third-party agent sourced approximately 23.9% and 21.8% of our Michael Kors finished
10
goods purchases, respectively, based on unit volume. In Fiscal 2018, Michael Kors’ largest manufacturing contractor, who primarily
produces its products in China and who Michael Kors has worked with for over 10 years, accounted for the production of 19.9%
of its finished products, based on unit volume. In Fiscal 2018, by dollar volume, approximately 94.7% of our Michael Kors products
were produced in Asia and Europe. See “Import Restrictions and Other Government Regulations” and Item 1A. —“Risk Factors”
— “We primarily use foreign manufacturing contractors and independent third-party agents to source our finished goods, which
poses legal, regulatory, political and economic risks to our business operations.”
Manufacturing contractors and agents for our Michael Kors brand operate under the close supervision of our Michael Kors
global manufacturing divisions and buying agents headquartered in North America, Europe and Asia. All products are produced
according to our specifications. Production staff monitors manufacturing at supplier facilities in order to correct problems prior
to shipment of the final product. Quality assurance is focused on as early as possible in the production process, allowing merchandise
to be received at the distribution facilities and shipped to customers with minimal interruption.
Jimmy Choo products are also manufactured by third-party manufacturing contractors. Approximately 92% of Jimmy Choo
products are produced by specialists in the Florence and Veneto regions of Italy and the remaining 8% are produced in Spain. For
the period covering November 1, 2017 through March 31, 2018, one manufacturer accounted for approximately 16.0% of Jimmy
Choo’s finished goods purchases, based on unit volume. Jimmy Choo has a product development facility in Florence and enjoys
longstanding and close partnerships with its supplier base. Jimmy Choo has a 33% ownership interest in one factory, which is
dedicated to Jimmy Choo production. Jimmy Choo typically only purchases finished goods and does not purchase raw materials,
except for development purposes.
Distribution
Our primary Michael Kors distribution facility in the U.S. is the 1,284,420 square foot leased facility in Whittier, California,
which we operate directly and services our Michael Kors retail stores, Michael Kors e-commerce site, and our Michael Kors
wholesale operations in the U.S. We also engage in omni-channel order fulfillment by filling online orders through our Michael
Kors retail stores and through our click-and-collect service offerings. Our primary Michael Kors distribution facility in Europe is
our Company-owned and operated 1,108,680 square foot distribution facility in Holland, which supports our European operations
for the Michael Kors brand, including our European e-commerce sites. We also have a regional Michael Kors distribution center
in Canada, which is leased, as well as regional Michael Kors distribution centers in China, Hong Kong, Japan, South Korea and
Taiwan, which are operated by third-parties.
Jimmy Choo uses a shared central warehouse facility in Contone, Switzerland, which acts as a global hub for all Jimmy
Choo operations. From there, products are shipped to regional warehouses in the United Kingdom, U.S., China, Hong Kong, South
Korea, Japan and United Arab Emirates, largely supporting the Jimmy Choo retail and e-commerce businesses. Shipments to
wholesale customers globally are made from Switzerland and the U.S., with some further local fulfillment. All of the distribution
facilities utilized by Jimmy Choo are operated by third parties and are shared with other businesses. This flexible method reinforces
the speed and efficiency of the supply chain and allows the business to deliver Jimmy Choo product and collections to market
rapidly and in line with the industry’s fashion calendar.
Intellectual Property
We own the Michael Kors, MICHAEL Michael Kors and Jimmy Choo trademarks, as well as other material trademark rights
related to the production, marketing and distribution of our products, both in the United States and in other countries in which our
products are principally sold. We also have trademark applications pending for a variety of related marks and logos. We expect
that our material trademarks will remain in full force and effect for as long as we continue to use and renew them.
Pursuant to an agreement entered into by Mr. Kors in connection with the acquisition by our former principal shareholder
of a majority interest in the Company in 2003, Mr. Kors (i) represented that all intellectual property rights used in connection with
the Company’s business at such time were owned exclusively by the Company, (ii) assigned to the Company (to the extent not
already assigned to and owned by the Company) exclusive worldwide rights in perpetuity to the “Michael Kors” name and trademark
and all derivations thereof, as well as to Mr. Kors’ signature and likeness, and all goodwill associated therewith, (iii) agreed not
to take any action against the Company inconsistent with such ownership by the Company (including, without limitation, by
asserting any privacy, publicity or moral rights) and (iv) agreed not to use, whether or not he is employed by the Company, any
of such intellectual property in connection with any commercial enterprise (provided that he may use the name Michael Kors as
his legal name only, and not as service mark or trade name, to identify himself personally and to engage in charitable activities
and other activities that do not compete with any businesses of the Company). Similarly, in 2001, Mr. Jimmy Choo O.B.E. assigned
all right, title and interest in and to the Jimmy Choo name and related copyrights and design rights (and related registrations and
applications) to Jimmy Choo. Mr. Jimmy Choo O.B.E. has no involvement in the Jimmy Choo business.
11
We aggressively police our trademarks and pursue infringers both domestically and internationally. We also pursue
counterfeiters in the United States, Europe, the Middle East, the Far East and elsewhere in the world in both online and offline
channels through leads generated internally, as well as through our network of customs authorities, law enforcement, legal
representatives and brand specialists around the world.
Employees
At the end of Fiscal 2018, 2017 and 2016, we had approximately 14,846, 13,702 and 12,689 total employees, respectively.
As of March 31, 2018, we had approximately 8,166 full-time employees and approximately 6,680 part-time employees.
Approximately 12,197 of our employees were engaged in retail selling and administrative positions and our remaining employees
were engaged in other aspects of our business as of March 31, 2018. None of the employees involved with the Michael Kors brand
are currently covered by collective bargaining agreements. Jimmy Choo has collective bargaining agreements that cover its
employees in France, Italy and Spain. We consider our relations with both our union and non-union employees to be good.
Competition
We face intense competition in the product lines and markets in which we operate from both, existing and new competitors.
Our products compete with other branded products within their product category. In varying degrees, depending on the product
category involved, we compete on the basis of style, price, customer service, quality, brand prestige and recognition, among other
bases. In our wholesale business, we compete with numerous manufacturers, importers and distributors of accessories, footwear
and apparel for the limited space available for product display. Moreover, the general availability of manufacturing contractors
allows new entrants easy access to the markets in which we compete, which may increase the number of our competitors and
adversely affect our competitive position and our business. We believe, however, that we have significant competitive advantages
because of the recognition of our brands and the acceptance of our brands by consumers. See Item 1A. “Risk Factors” — “The
markets in which we operate are highly competitive, both within North America and internationally, and increased competition
based on a number of factors could cause our profitability to decline.”
Seasonality
We experience certain effects of seasonality with respect to our business. Our MK Retail segment generally experiences
greater sales during our third fiscal quarter as a result of holiday season sales. Our MK Wholesale segment generally experiences
the lowest sales during our first fiscal quarter. Our Jimmy Choo segment generally experiences greater sales during our third fiscal
quarter, primarily driven by the product launch calendar and holiday season sales. In the aggregate, our first fiscal quarter typically
experiences less sales volume relative to the other three quarters and our third fiscal quarter generally has higher sales volume
relative to the other three quarters.
Import Restrictions and Other Governmental Regulations
Virtually all of our Michael Kors merchandise imported into the U.S., Canada, Europe and Asia is subject to duties. For
Jimmy Choo, duties are paid on importation to certain countries, including the U.S., China, Japan and South Korea. No duties are
payable in the European Union (the “EU”), as all Jimmy Choo product is manufactured therein.
Most of the countries to which we ship could impose safeguard quotas to protect their local industries from import surges
that threaten to create market disruption. The U.S. and other countries may also unilaterally impose additional duties in response
to a particular product being imported at unfairly traded prices that, in such increased quantities, cause or threaten injury to the
relevant domestic industry (generally known as “anti-dumping” actions). If dumping is suspected in the U.S., the U.S. government
may self-initiate a dumping case on behalf of a particular industry. Furthermore, additional duties, generally known as countervailing
duties, can also be imposed by the United States government to offset subsidies provided by a foreign government to foreign
manufacturers if the importation of such subsidized merchandise injures or threatens to injure a United States industry. We are
also subject to other international trade agreements and regulations, such as the North American Free Trade Agreement (“NAFTA”).
See Item 1A. “Risk Factors” — “We primarily use foreign manufacturing contractors and independent third-party agents to source
our finished goods, which poses legal, regulatory, political and economic risks to our business operations.”
Accessories, footwear and apparel sold by us are also subject to regulation in the U.S. and other countries by governmental
agencies, including, in the U.S., the Federal Trade Commission and the Consumer Products Safety Commission. These regulations
relate principally to product labeling, licensing requirements, flammability testing and product safety. We are also subject to
environmental laws, rules and regulations. Similarly, accessories, footwear and apparel sold by us are also subject to import
regulations in the U.S. and other countries concerning the use of wildlife products for commercial and non-commercial trade,
including the U.S. Fish and Wildlife Service (“F&W”). We do not estimate any significant capital expenditures for environmental
12
control matters in the near future. Our licensed products and licensing partners are also subject to regulation. Our agreements
require our licensing partners to operate in compliance with all applicable laws and regulations, and we are not aware of any
violations that could reasonably be expected to have a material adverse effect on our business or operating results.
We are also required to comply with the disclosure requirements under the U.S. Securities Exchange Act of 1934, as amended,
relating to the use of conflict minerals in our products. As a result, we have incurred, and expect to continue to incur, additional
costs to comply with this rule.
Although we have not suffered any material restriction from doing business in desirable markets in the past, we cannot
assure that significant impediments will not arise in the future as we expand product offerings and introduce additional trademarks
to new markets.
Item 1A. Risk Factors
You should carefully read this entire report, including, without limitation, the following risk factors and the section of this
annual report entitled “Note Regarding Forward-Looking Statements.” Any of the following factors could materially adversely
affect our business, results of operations and financial condition. Additional risks and uncertainties not currently known to us or
that we currently view as immaterial may also materially adversely affect our business, results of operations and financial condition.
Acquisitions may not be successfully integrated and may not achieve intended benefits.
We face additional risks associated with our strategy to grow our business through acquisitions of other brands and geographic
licensees, such as our acquisition of Jimmy Choo in November 2017. We may not be able to successfully integrate any licensee
or any other business that we may acquire into our own business, or achieve any expected cost savings or synergies from such
integration or we may determine to limit the integration of our brands. The potential difficulties that we may face that could cause
the results of the acquisition of such previously licensed business, Jimmy Choo, or any other business that we may acquire to not
be in line with our expectations include, among others:
•
•
•
•
•
•
•
•
•
•
•
•
failure to implement our business plan for the combined business or to achieve anticipated revenue or profitability targets;
delays or difficulties in completing the integration of acquired companies or assets;
higher than expected costs, lower than expected cost savings and/or a need to allocate resources to manage unexpected
operating difficulties;
unanticipated issues in integrating logistics, information and other systems;
unanticipated changes in applicable laws and regulations;
retaining key customers, suppliers and employees;
operating risks inherent in the acquired business and our business;
diversion of the attention and resources of management;
retaining and obtaining required regulatory approvals, licenses and permits;
unanticipated changes in the combined business due to potential divestitures or other requirements imposed by antitrust
regulators;
assumption of liabilities not identified in due diligence or other unanticipated issues, expenses and liabilities; and
the impact on our internal controls and compliance with the requirements under the Sarbanes-Oxley Act of 2002.
Our acquisition of Jimmy Choo or any other entity that we may acquire may not perform as well as initially expected, which
could have a material adverse effect on our results of operations and financial condition. In addition, we are required to test
goodwill, brand and any other intangible assets acquired as a result of acquisitions for impairment. If such testing indicates that
the carrying value of goodwill, brand or other intangible assets exceeds the related fair value, we would be required to record an
impairment charge for the difference, which could have a material adverse effect on our results of operations and financial condition.
Additionally, Jimmy Choo outsources its information technology, accounting and other back office activities to a third-
party service provider pursuant to an agreement effective October 2, 2017. We may incur additional expenses with the new third-
party service provider. In addition, we may experience delays or difficulties in completing the transition to the new third-party
service provider, which could cause material operational disruption and result in a material adverse effect on our business, results
of operations and financial condition.
13
The long-term growth of our business depends on the successful execution of our strategic initiatives.
As part of our long-term strategy, we intend to grow our market share and revenue through the following initiatives:
•
•
•
•
•
trendsetting and innovative product offerings;
increased brand engagement;
optimizing customer experience;
investing in technology; and
expanding our global presence.
As previously announced, we also intend to optimize the Michael Kors retail store fleet, including through the closure of
between 100 and 125 of our underperforming Michael Kors full-price retail stores over the next two years, in order to generate
cost savings and focus on our most highly productive locations. As of March 31, 2018, we closed 47 of our Michael Kors full-
price retail stores under our Retail Fleet Optimization Plan. We cannot guarantee that we will be able to successfully execute on
this initiative or achieve the anticipated cost savings, efficiencies, or other benefits related to the Retail Fleet Optimization Plan.
In addition, we intend to support the growth of Jimmy Choo’s sales through retail store openings and further developing
Jimmy Choo’s online presence, leveraging Jimmy Choo’s strong presence in Asia and expanding into the luxury accessories
market. We cannot guarantee that we will be able to successfully execute on these strategic initiatives.
If we are unable to execute on our strategic initiatives, our business, results of operations and financial condition could be
materially adversely affected.
The markets in which we operate are highly competitive, both within North America and internationally, and increased
competition based on a number of factors could cause our profitability to decline.
We face intense competition for our Michael Kors brand from other domestic and foreign accessories, footwear and apparel
producers and retailers, including the following brands, among others: Coach, Burberry, Guess, Ralph Lauren, Hermès, Louis
Vuitton, Gucci, Marc Jacobs, Chloé, Tory Burch, Prada, Kate Spade, Tommy Hilfiger and Calvin Klein. Likewise, we face
competition for our Jimmy Choo brand from the following brands: Christian Louboutin, Manolo Blahnik, Giuseppe Zanotti,
Salvatore Ferragamo, Tod’s, Roger Vivier, Christian Dior, Prada, Yves Saint Laurent, Louis Vuitton and Chanel. In addition, we
face competition through third party distribution channels, such as e-commerce, department stores and specialty stores. Competition
is based on a number of factors, including, without limitation, the following:
•
•
•
•
•
•
•
•
•
•
•
•
anticipating and responding to changing consumer demands in a timely manner;
establishing and maintaining favorable brand-name recognition;
determining and maintaining product quality;
maintaining key employees;
maintaining and growing market share;
developing quality and differentiated products that appeal to consumers;
establishing and maintaining acceptable relationships with retail customers;
pricing products appropriately;
providing appropriate service and support to retailers;
optimizing retail and supply chain capabilities;
determining size and location of retail and department store selling space; and
protecting intellectual property.
In addition, some of our competitors may be significantly larger and more diversified than us and may have significantly
greater financial, technological, manufacturing, sales, marketing and distribution resources than we do. Their greater capabilities
in these areas may enable them to better withstand periodic downturns in the accessories, footwear and apparel industries, compete
more effectively on the basis of price and production and more quickly develop new products. The general availability of
manufacturing contractors and agents also allows new entrants easy access to the markets in which we compete, which may
increase the number of our competitors and adversely affect our competitive position and our business. Any increased competition,
or our failure to adequately address any of these competitive factors, could result in reduced revenues, which could adversely
affect our business, results of operations and financial condition.
14
Competition, along with other factors such as consolidation, changes in consumer spending patterns and a highly promotional
environment, could also result in significant pricing pressure. These factors may cause us to reduce our sales prices to our wholesale
customers and retail consumers, which could cause our gross margins to decline if we are unable to appropriately manage inventory
levels and/or otherwise offset price reductions with comparable reductions in our operating costs. If our sales prices decline and
we fail to sufficiently reduce our product costs or operating expenses, our profitability may decline, which could have a material
adverse effect on our business, results of operations and financial condition.
Our retail stores are heavily dependent on the ability and desire of consumers to travel and shop and a decline in consumer
traffic could have a negative effect on our comparable store sales and/or average sales per square foot and store profitability
resulting in impairment charges, which could have a material adverse effect on our business, results of operations and financial
condition.
Reduced travel resulting from economic conditions, fuel shortages, increased fuel prices, travel restrictions, travel concerns
and other circumstances, including adverse weather conditions, disease epidemics and other health-related concerns, war, terrorist
attacks or the perceived threat of war or terrorist attacks could have a material adverse effect on us, particularly if such events
impact our customers' desire to travel to our retail stores. In addition, other factors that could impact the success of our retail stores
include: (i) the location of the mall or the location of a particular store within the mall; (ii) the other tenants occupying space at
the mall; (iii) vacancies within the mall; (iv) increased competition in areas where the malls are located; (v) the amount of advertising
and promotional dollars spent on attracting consumers to the malls; and (vi) a shift toward online shopping. A decline in consumer
traffic could have a negative effect on our comparable store sales and/or average sales per square foot and store profitability. If
our retail stores underperform due to declining consumer traffic or otherwise and our expected future cash flows of the related
underlying retail store asset do not exceed such asset’s carrying value, we may incur store impairment charges. A decline in future
comparable store sales or average sales per square foot decline or failure to meet market expectations or the incurrence of impairment
charges relating to our retail store fleet could have a material adverse effect on our business, results of operations and financial
condition.
In addition, the aggregate results of operations of our stores have fluctuated in the past and can be expected to continue to
fluctuate in the future. A variety of factors affect both comparable store sales and average sales per square foot, including, among
others, fashion trends, competition, current economic conditions, pricing, inflation, the timing of the release of new merchandise
and promotional events, changes in our merchandise mix, the success of marketing programs and weather conditions. If we
misjudge the market for our products, we may incur excess inventory for some of our products and miss opportunities for other
products. These factors may cause our comparable store sales results and average sales per square foot in the future to be materially
lower than in recent periods and our expectations, which could have a material adverse effect on our business, results of operations
and financial condition.
We may not be able to respond to changing fashion and retail trends in a timely manner, which could have a material adverse
effect on our brands, business, results of operations and financial condition, including from excess inventory if we misjudge
the demand for our products.
The accessories, footwear and apparel industries have historically been subject to rapidly changing fashion trends and
consumer preferences. We believe that our success is largely dependent on the images of our brands and ability to anticipate and
respond promptly to changing consumer demands and fashion trends in the design, styling, production, merchandising and pricing
of products. If we do not correctly gauge consumer needs and fashion trends and respond appropriately, consumers may not
purchase our products and our brand names and the images of our brands may be impaired. Even if we react appropriately to
changes in fashion trends and consumer preferences, consumers may consider our brands to be outdated or associate our brands
with styles that are no longer popular or trend-setting. Any of these outcomes could have a material adverse effect on our brands,
our business, results of operations and financial condition. If we fail to anticipate, identify and respond effectively to changing
consumer demands and fashion trends, we may be faced with significant excess inventories for some products and missed
opportunities for other products. If that occurs, we may be forced to rely on markdowns or promotional sales to dispose of excess
and slow-moving inventory, which may negatively impact our gross margin and profitability.
The success of our business also depends on our ability to continue to develop and maintain a reliable digital experience
for our customers. We strive to give our customers a jet-set shopping experience both in stores and through digital technologies,
such as computers, mobile phones, tablets, and other devices. We also use social media to interact with our customers and enhance
their shopping experience. Our inability to develop and continuously improve our digital footprint could negatively affect our
ability to compete with other brands, which could adversely impact our business, results of operations and financial condition.
15
The accessories, footwear and apparel industries are heavily influenced by general macroeconomic cycles that affect consumer
spending and a prolonged period of depressed consumer spending could have a material adverse effect on our business, results
of operations and financial condition.
The accessories, footwear and apparel industries have historically been subject to cyclical variations, recessions in the
general economy and uncertainties regarding future economic prospects that can affect consumer spending habits. Purchases of
discretionary luxury items, such as our products, tend to decline during recessionary periods when disposable income is lower.
The success of our operations depends on a number of factors impacting discretionary consumer spending, including general
economic conditions, consumer confidence, wages and unemployment, housing prices, consumer debt, interest rates, fuel and
energy costs, taxation and political conditions. A worsening of the economy may negatively affect consumer and wholesale
purchases of our products and could have a material adverse effect on our business, results of operations and financial condition.
Our business is subject to risks associated with importing products, and the imposition of additional duties and any changes
to international trade agreements could have a material adverse effect on our business, results of operations and financial
condition.
There are risks inherent to importing our products. Virtually all of our Michael Kors merchandise is manufactured in Asia
or Europe, and is subject to duties when imported into the United States, Canada, Europe and Asia, as applicable. Jimmy Choo
products are manufactured in Europe and are subject to duties when imported to countries outside of the EU, such as the U.S.,
China, Japan and South Korea. Most of the countries to which we ship could impose safeguard quotas to protect their local industries
from import surges that threaten to create market disruption. The United States and other countries may also unilaterally impose
additional duties in response to a particular product being imported at unfairly traded prices that cause or threaten injury to the
relevant domestic industry (generally known as “anti-dumping” actions). If dumping is suspected in the United States, the United
States government may self-initiate a dumping case on behalf of a particular industry. Furthermore, additional duties, generally
known as countervailing duties, can also be imposed by the United States government or the governments of other countries to
offset subsidies provided by a foreign government to foreign manufacturers if the importation of such subsidized merchandise
injures or threatens to injure a United States industry or the industry of such other country, as applicable. If the United States
imposes import duties or other protective import measures, other countries could retaliate in ways that could harm the international
distribution of our products.
We are also dependent on international trade agreements and regulations, such as NAFTA. If the United States were to
withdraw from or materially modify NAFTA or certain other international trade agreements, our business could be adversely
affected.
The accessories, footwear and apparel sold by us are also subject to import regulations in the United States and other
countries concerning the use of wildlife products for commercial and non-commercial trade, including the F&W. F&W requires
that we obtain a license to import animal and fauna that are subject to regulation by F&W and can revoke (or refuse to renew) this
license, seize and possibly destroy our shipments and/or fine the Company for F&W violations.
The imposition of taxes, duties and quotas, the initiation of an anti-dumping action or a countervailing duty action, the
withdrawal from or material modification to trade agreements and/or the repercussions of F&W violations could have a material
adverse effect on our business, results of operations and financial condition.
We are dependent on a limited number of distribution facilities. If one or more of our distribution facilities experiences
operational difficulties or becomes inoperable, it could have a material adverse effect on our business, results of operations
and financial condition.
We operate a limited number of distribution facilities. Our ability to meet the needs of our wholesale customers and our
own retail stores and e-commerce sites depends on the proper operation of these distribution facilities. If any of these distribution
facilities were to shut down or otherwise become inoperable or inaccessible for any reason, we could suffer a substantial loss of
inventory and/or disruptions of deliveries to our retail and wholesale customers. In addition, we could incur significantly higher
costs and longer lead times associated with the distribution of our products during the time it takes to reopen or replace the damaged
facility. Any of the foregoing factors could result in decreased sales and have a material adverse effect on our business, results of
operations and financial condition.
In addition, we have been moving into new and larger facilities as needed and have been concurrently implementing new
warehouse management systems to further support our efforts to operate with increased efficiency and flexibility. There are risks
inherent in operating in new distribution environments and implementing new warehouse management systems, including
operational difficulties that may arise with such transitions. We may experience shipping delays should there be any disruptions
in our new warehouse management systems or warehouses themselves.
16
Privacy breaches and other cyber security risks related to our business could negatively affect our reputation, credibility and
business.
We are dependent on information technology systems and networks for a significant portion of our direct-to-consumer
sales, including our e-commerce sites and retail business credit card transaction authorization and processing. We are responsible
for storing data relating to our customers and employees and also rely on third party vendors for the storage, processing and
transmission of personal and Company information. Consumers, lawmakers and consumer advocates alike are increasingly
concerned over the security of personal information transmitted over the Internet, consumer identity theft and privacy and the
retail industry, in particular, has been the target of many recent cyber-attacks. In addition to taking the necessary precautions
ourselves, we require that third-party service providers implement reasonable security measures to protect our employees’ and
customers’ identity and privacy. We do not, however, control these third-party service providers and cannot guarantee that no
electronic or physical computer break-ins or security breaches will occur in the future. Our systems and technology are vulnerable
from time-to-time to damage, disruption or interruption from, among other things, physical damage, natural disasters, inadequate
system capacity, system issues, security breaches, “hackers,” email blocking lists, computer viruses, power outages and other
failures or disruptions outside of our control. A significant breach of customer, employee or Company data could damage our
reputation, our relationship with customers and our brands, and could result in lost sales, sizable fines, significant breach-notification
costs and lawsuits, as well as adversely affect our results of operations. We may also incur additional costs in the future related to
the implementation of additional security measures to protect against new or enhanced data security and privacy threats, or to
comply with state, federal and international laws that may be enacted to address those threats.
A material disruption in our information technology systems could have a material adverse effect on our business, results of
operations and financial condition.
We rely extensively on our information technology (“IT”) systems to track inventory, manage our supply chain, record and
process transactions, manage customer communications, summarize results and manage our business. The failure of our IT systems
to operate properly or effectively, problems with transitioning to upgraded or replacement systems, or difficulty in/failure to
implement new systems, could adversely affect our business. In addition, we have e-commerce websites in the United States,
Canada, certain European countries, China, Japan and South Korea, and plans to continue to expand our global e-commerce
distribution. Our IT systems and websites may be subject to damage and/or interruption from power outages, computer, network
and telecommunications failures, computer viruses, “hackers”, security breaches, usage errors by our employees and bad acts by
our customers and website visitors. If our IT systems or websites are damaged or cease to function properly, we may have to make
a significant investment to fix or replace them, and we may suffer loss of critical data (including our customer data) and interruptions
or delays in our operations in the interim. Any significant disruption in our IT systems or websites could harm our reputation and
credibility, and could have a material adverse effect on our business, results of operations and financial condition.
The departure of our founder, members of our executive management and other key employees could have a material adverse
effect on our business.
We depend on the services and management experience of our founder and executive officers, who have substantial
experience and expertise in our business. In particular, Mr. Kors, our Honorary Chairman and Chief Creative Officer, has provided
design and executive leadership to the Company since its inception. He is instrumental to our marketing and publicity strategy
and is closely identified with both the brand that bears his name and our Company in general. Our ability to maintain our brand
image and leverage the goodwill associated with Mr. Kors’ name may be damaged if we were to lose his services. Mr. Kors has
the right to terminate his employment with us without cause. In addition, the leadership of John D. Idol, our Chairman and Chief
Executive Officer, has been a critical element of our success. We also depend on other key employees involved in our licensing,
design and advertising operations. Competition for qualified personnel in the apparel industry is intense, and competitors may use
aggressive tactics to recruit our executive officers and key employees. Although we have entered into employment agreements
with Mr. Kors and certain of our other executive officers, including Mr. Idol, we may not be able to retain the services of such
individuals in the future. In addition, Michael Kors attaches great importance to the skills and experience of Jimmy Choo’s existing
management team, including Ms.Sandra Choi, and thus the risk of dependence on key members of management may be further
exacerbated by the acquisition. The loss of services of one or more of these individuals or any negative public perception with
respect to, or relating to, the loss of one or more of these individuals could have a material adverse effect on our business, results
of operations and financial condition.
17
Fluctuations in our tax obligations and changes in tax laws, treaties and regulations may have a material adverse impact on
our future effective tax rates and results of operations.
Our subsidiaries are subject to taxation in the U.S. and various foreign jurisdictions, with the applicable tax rates varying
by jurisdiction. As a result, our overall effective tax rate is affected by the proportion of earnings from the various tax jurisdictions.
We record tax expense based on our estimates of taxable income and required reserves for uncertain tax positions in multiple tax
jurisdictions. At any time, there are multiple tax years that are subject to examinations by various taxing authorities. The ultimate
resolution of these audits and negotiations with taxing authorities may result in a settlement amount that differs from our original
estimate. Any proposed or future changes in tax laws, treaties and regulations or interpretations where we operate could have a
material adverse effect on our effective tax rates, results of operations and financial condition.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts
and Jobs Act (the “Tax Act”). The Tax Act includes significant changes to the U.S. corporate income tax system including, among
other things, lowering the U.S. statutory federal tax rate to 21% and implementing a territorial tax system. The Tax Act also adds
many new provisions, including changes to bonus depreciation, limits on the deductions for executive compensation and interest
expense, a tax on global intangible low-taxed income (“GILTI”), the base erosion anti-abuse tax (“BEAT”) and a deduction for
foreign derived intangible income (“FDII”). The final transition impacts of the Tax Act may differ from our initial estimates,
possibly materially, due to, among other things, changes in interpretations of the Tax Act, any legislative action to address questions
that arise because of the Tax Act, or any changes in accounting standards for income taxes or related interpretations in response
to the Tax Act. In addition, once we finalize certain tax positions when we file our 2017 U.S. tax return, we will be able to conclude
whether any further adjustments are required to our deferred tax balances in the U.S., as well as to the total liability associated
with the one-time mandatory tax.
On March 26, 2015, the United Kingdom (“U.K.”) enacted new Diverted Profits Tax legislation (the “DPT”), which was
effective on April 1, 2015. Under the DPT, profits of certain multinational enterprises (such as the Company) deemed to have been
artificially diverted from the U.K. will be taxed at a rate of 25%. While the Company believes that all of its affiliated entities and
the transactions among them have the required economic substance, there is no assurance that this legislation will not have a
material effect on its results of operations and financial condition.
We and our subsidiaries are also engaged in a number of intercompany transactions. Although we believe that these
transactions reflect arm’s-length terms and that proper transfer pricing documentation is in place, the transfer prices and conditions
may be scrutinized by local tax authorities, which could result in additional tax liabilities. On October 5, 2015, the Organization
for Economic Co-operation and Development (OECD), an international association of thirty four countries, including the U.S.
and U.K., released the final reports from its Base Erosion and Profit Shifting (BEPS) Action Plans. The BEPS recommendations
covered a number of issues, including country-by-country reporting, permanent establishment rules, transfer pricing rules and tax
treaties. Future tax reform resulting from this development may result in changes to long-standing tax principles, which could
adversely affect our effective tax rate or result in higher cash tax liabilities.
We face risks associated with operating in international markets and our strategy to continue to expand internationally.
We operate on a global basis, with approximately 40.3% of our total revenue from operations outside of the U.S. during
Fiscal 2018. As a result, we are subject to the risks of doing business internationally, including political and economic instability
in foreign countries, laws, regulations and policies of foreign governments, potential negative consequences from changes in
taxation policies, political or civil unrest, acts of terrorism, military actions or other conditions. Economic instability and unsettled
regional and global conflicts may negatively affect consumer spending by foreign tourists and local consumers in the various
regions where we operate, which could adversely affect our revenues and results of operations. We also sell our products at varying
retail price points based on geographic location that yield different gross profit margins and we achieve different operating profit
margins, depending on geographic region, due to a variety of factors including product mix, store size, occupancy costs, labor
costs and retail pricing. Changes in any one or more of these factors could result in lower revenues, increased costs, and negatively
impact our business, results of operations and financial condition.
There are some countries where we do not yet have significant operating experience, and in most of these countries we face
established competitors with significantly more operating experience in those locations. Many countries have different operational
characteristics, including, but not limited to, employment and labor, transportation, logistics, real estate (including lease terms)
and local reporting or legal requirements. Furthermore, consumer demand and behavior, as well as tastes and purchasing trends
may differ in these countries and, as a result, sales of our product may not be successful, or the margins on those sales may not
be in line with those we currently anticipate. In addition, in many of these countries there is significant competition to attract and
retain experienced and talented employees. If our international expansion plans are unsuccessful, it could have a material adverse
effect on our business, results of operations and financial condition.
18
In addition, on June 23, 2016, voters in the U.K. approved an advisory referendum to withdraw from the EU (“Brexit”). The
Brexit vote and the perceptions as to the impact of the withdrawal of the U.K. from the EU may adversely affect business activity,
political stability and economic conditions in the U.K., the EU and elsewhere. On March 29, 2017, the U.K. triggered Article 50
of the Lisbon Treaty formally starting negotiations with the EU The U.K. has two years to complete these negotiations. Negotiations
on withdrawal and post-exit arrangements likely will be complex and protracted, and there can be no assurance regarding the
terms, timing or consummation of any such arrangements. The withdrawal could adversely affect the tax, currency, operational,
legal and regulatory regimes to which our businesses in the region are subject. The withdrawal could also disrupt the free movement
of goods, services and people between the U.K. and the EU and significantly disrupt trade between the U.K. and the EU and other
parties. There can be no assurance that any or all of these events will not have a material adverse effect on our business, results
of operations and financial condition.
A substantial portion of our revenue is derived from a small number of large wholesale customers, and the loss of any of these
wholesale customers could substantially reduce our total revenue.
A small number of our wholesale customers account for a significant portion of our sales. Revenue from our five largest
wholesale customers represented 19.2% of our total revenue for Fiscal 2018 and 21.0% of our total revenue for Fiscal 2017.
Michael Kors’ largest wholesale customer, Macy’s, accounted for 7.8% of our total revenue for Fiscal 2018 and 8.9% of our total
revenue for Fiscal 2017. We do not have written agreements with any of our wholesale customers and purchases generally occur
on an order-by-order basis. A decision by any of our major wholesale customers, whether motivated by marketing strategy,
competitive conditions, financial difficulties or otherwise, to decrease significantly the amount of merchandise purchased from
us or our licensing partners, or to change their manner of doing business with us or our licensing partners, could substantially
reduce our revenue and have a material adverse effect on our profitability. During the past several years, the retail industry has
experienced a great deal of consolidation and other ownership changes and we expect such changes will continue. In addition,
store closings by our wholesale customers decrease the number of stores carrying our products, while the remaining stores may
purchase a smaller amount of our products and/or may reduce the retail floor space designated for our brands. In the future, retailers
may further consolidate, undergo bankruptcy, restructurings or reorganizations, realign their affiliations or reposition their stores’
target markets. Any of these types of actions could decrease the number of stores that carry our products or increase the ownership
concentration within the retail industry. These changes could decrease our opportunities in the market, increase our reliance on a
smaller number of large wholesale customers and decrease our negotiating strength with our wholesale customers. These factors
could have a material adverse effect on our business, results of operations and financial condition.
Our business is exposed to foreign currency exchange rate fluctuations.
Our results of operations for our international subsidiaries are exposed to foreign exchange rate fluctuations as the financial
results of the applicable subsidiaries are translated from the local currency into U.S. dollars during financial statement consolidation.
If the U.S. dollar strengthens against foreign currencies, the translation of these foreign currency denominated transactions could
impact our consolidated results of operations. In addition, we have intercompany notes amongst certain of our non-U.S. subsidiaries,
which may be denominated in a currency other than the local currency of a particular reporting entity. As a result of using a currency
other than the functional currency of the related subsidiary, results of these operations may be adversely affected during times of
significant fluctuation between the functional currency of that subsidiary and the denomination currency of the note. We
continuously monitor our foreign currency exposure and hedge a portion of our foreign subsidiaries’ foreign currency-denominated
inventory purchases to minimize the impact of changes in foreign currency exchange rates. However, we cannot fully anticipate
all of our foreign currency exposures and cannot ensure that these hedges will fully offset the impact of foreign currency exchange
rate fluctuations.
As a result of operating retail stores and concessions in various countries outside of the U.S., we are also exposed to market
risk from fluctuations in foreign currency exchange rates, particularly the Euro, the British Pound, the Chinese Renminbi, the
Japanese Yen, the Korean Won and the Canadian Dollar, among others. A substantial weakening of foreign currencies against the
U.S. Dollar could require us to raise our retail prices or reduce our profit margins in various locations outside of the U.S. In
addition, our sales and profitability could be negatively impacted if consumers in those markets were unwilling to purchase our
products at increased prices.
We are subject to risks associated with leasing retail space under long-term, non-cancelable leases and are required to make
substantial lease payments under our operating leases. If we close a leased retail space, we remain obligated under the applicable
lease. We also may be unable to renew leases at the end of their terms.
We do not own any of our store facilities; instead, we lease all of our stores under operating leases. Our leases generally
have terms of up to 10 years, generally require a fixed annual rent and most require the payment of additional rent if store sales
exceed a negotiated amount. Certain of our European stores also require initial investments in the form of key money to secure
prime locations, which may be paid to landlords or existing lessees. Generally, our leases are “net” leases, which require us to pay
19
all of the costs of insurance, taxes, maintenance and utilities. We generally cannot cancel these leases at our option. Payments
under these operating leases account for a significant portion of our operating costs. For example, as of March 31, 2018, we were
party to operating leases associated with our stores as well as other corporate facilities requiring future minimum lease payments
aggregating to $1.375 billion through Fiscal 2023 and approximately $531.4 million thereafter through Fiscal 2044, which included
$267.6 million of future non-cancelable aggregate operating lease payments for Jimmy Choo. We previously announced that we
intend to optimize the Michael Kors retail store fleet, including, through the closure of between 100 and 125 of Michael Kors full-
price underperforming retail stores. In connection with our Retail Fleet Optimization Plan, we may remain obligated under the
applicable lease for, among other things, payment of the base rent for the balance of the lease term. In some instances, we may be
unable to close an underperforming retail store due to continuous operation provisions in our leases. In addition, as each of our
leases expire, we may be unable to negotiate renewals, either on commercially acceptable terms or at all, which could cause us to
close retail stores in desirable locations. Our substantial operating lease obligations, including with respect to closed retail spaces,
could have a material adverse effect on our business, results of operations and financial condition.
Our current and future licensing arrangements may not be successful and may make us susceptible to the actions of third
parties over whom we have limited control.
We have entered into a select number of product licensing agreements with companies that produce and sell, under our
trademarks, products requiring specialized expertise. We have also entered into a number of select licensing agreements pursuant
to which we have granted third parties certain rights to distribute and sell our products in certain geographical areas, such as the
Middle East, Eastern Europe, Brazil, certain parts of Asia and Australia. In addition, we have a joint venture that covers the
distribution and sale of Michael Kors branded products and the operation of retail stores in Latin America (excluding Brazil) and
the Caribbean and Jimmy Choo has joint ventures in the Middle East and Russia. In the future, we may enter into additional
licensing arrangements. Although we take steps to carefully select our licensing partners, such arrangements may not be successful.
Our licensing partners may fail to fulfill their obligations under their license agreements or have interests that differ from or conflict
with our own, such as the timing of new store openings, the pricing of our products and the offering of competitive products. In
addition, the risks applicable to the business of our licensing partners may be different than the risks applicable to our business,
including risks associated with each such partner’s ability to:
•
•
•
•
•
•
obtain capital;
exercise operational and financial control over its business;
manage its labor relations;
maintain relationships with suppliers;
manage its credit and bankruptcy risks; and
maintain customer relationships.
Any of the foregoing risks, or the inability of any of our licensing partners to successfully market our products or otherwise
conduct its business, may result in loss of revenue and competitive harm to our operations in regions or product categories where
we have entered into such licensing arrangements.
We rely on our licensing partners to preserve the value of our brands. Although we attempt to protect our brands through,
among other things, approval rights over store location and design, product design, production quality, packaging, merchandising,
distribution, advertising and promotion of our stores and products, we may not be able to control the use by our licensing partners
of our brand. The misuse of our brand by a licensing partner could have a material adverse effect on our business, results of
operations and financial condition.
Increases in the cost of raw materials could increase our production costs and cause our operating results and financial
condition to suffer.
The costs of raw materials used in our products are affected by, among other things, weather, consumer demand, speculation
on the commodities market, the relative valuations and fluctuations of the currencies of producer versus consumer countries and
other factors that are generally unpredictable and beyond our control. We are not always successful in our efforts to protect our
business from the volatility of the market price of raw materials and our business can be materially affected by dramatic movements
in prices of raw materials. The ultimate effect of this change on our earnings cannot be quantified, as the effect of movements in
raw materials prices on industry selling prices are uncertain, but any significant increase in these prices could have a material
adverse effect on our business, results of operations and financial condition.
20
We primarily use foreign manufacturing contractors and independent third-party agents to source our finished goods, which
poses legal, regulatory, political and economic risks to our business operations.
Our products are primarily produced by, and purchased or procured from, independent manufacturing contractors located
mainly in Asia and Europe. A manufacturing contractor’s failure to ship products to us in a timely manner or to meet the required
quality standards could cause us to miss the delivery date requirements of our customers for those items. The failure to make
timely deliveries may cause customers to cancel orders, refuse to accept deliveries or demand reduced prices, any of which could
have a material adverse effect on us. In addition, any of the following factors could negatively affect our ability to produce or
deliver our products and, as a result, could have a material adverse effect on our business, results of operations and financial
condition:
•
•
•
•
•
•
•
•
•
•
•
•
political or labor instability, labor shortages (stemming from labor disputes or otherwise), or increases in costs of
labor or production in countries where manufacturing contractors and suppliers are located;
significant delays or disruptions in delivery of our products due to labor disputes or strikes at the location of the
source of our goods and/or at ports of entry;
political or military conflict involving the United States or the EU, which could cause a delay in the transportation
of our products and raw materials and increase transportation costs;
heightened terrorism security concerns, which could subject imported or exported goods to additional, more frequent
or more thorough inspections, leading to delays in deliveries or impoundment of goods for extended periods of time
or could result in increased scrutiny by customs officials for counterfeit goods, leading to lost sales, increased costs
for our anti-counterfeiting measures and damage to the reputation of our brands;
a significant decrease in availability or an increase in the cost of raw materials;
disease epidemics and health-related concerns, which could result in closed factories, reduced workforces, scarcity
of raw materials and scrutiny or embargoing of goods produced in infected areas;
the migration and development of manufacturing contractors, which could affect where our products are or are
planned to be produced;
imposition of regulations, quotas and safeguards relating to imports and our ability to adjust in a timely manner to
changes in trade regulations, which, among other things, could limit our ability to produce products in cost-effective
countries that have the labor and expertise needed;
increases in the costs of fuel, travel and transportation;
imposition of duties, taxes and other charges on imports;
significant fluctuation of the value of the U.S. Dollar against foreign currencies; and
restrictions on transfers of funds out of countries where our foreign licensees are located.
We do not have written agreements with any of our third-party manufacturing contractors. As a result, any single
manufacturing contractor could unilaterally terminate its relationship with us at any time. In Fiscal 2018, Michael Kors’ largest
manufacturing contractor, who primarily produces its products in China and who Michael Kors has worked with for over ten years,
accounted for the production of 19.9% of its finished products, based on unit volume. For the period covering November 1, 2017
through March 31, 2018 one manufacturer accounted for approximately 16.0% of Jimmy Choo’s finished goods purchases, based
on unit volume. Our inability to promptly replace manufacturing contractors that terminate their relationships with us or cease to
provide high quality products in a timely and cost-efficient manner could have a material adverse effect on our business, results
of operations and financial condition, and impact the cost and availability of our goods.
In addition, Michael Kors uses third-party agents to source its finished goods with numerous manufacturing contractors on
its behalf. Any single agent could unilaterally terminate its relationship with Michael Kors at any time. In Fiscal 2018, Michael
Kors’ largest third-party agent, whose primary place of business is Hong Kong and who Michael Kors has worked with for over
10 years, sourced approximately 23.9% of its purchases of finished goods, based on unit volume. Our inability to promptly replace
agents that terminate their relationships with us or cease to provide high quality service in a timely and cost-efficient manner could
have a material adverse effect on our business, results of operations and financial condition.
If we fail to comply with labor laws or collective bargaining agreements, or if our manufacturing contractors fail to use
acceptable, ethical business practices, our business and reputation could suffer.
We are subject to labor laws governing relationships with employees, including minimum wage requirements, overtime,
working conditions and citizenship requirements. Jimmy Choo is also subject to collective bargaining agreements with respect to
employees in certain European countries. Compliance with these laws and regulations, as well as collective bargaining agreements
may lead to increased costs and operational complexity and may increase our exposure to governmental investigations or litigation.
21
We require our manufacturing contractors to operate in compliance with applicable laws, rules and regulations regarding
working conditions, employment practices and environmental compliance. Additionally, we impose upon our business partners
operating guidelines that require additional obligations in those three areas in order to promote ethical business practices, and our
staff and third parties we retain for such purposes periodically visit and monitor the operations of our manufacturing contractors
to determine compliance. However, we do not control our manufacturing contractors or their labor and other business practices.
If one of our manufacturing contractors violates applicable labor or other laws, rules or regulations or implements labor or other
business practices that are generally regarded as unethical in the United States, the shipment of finished products to us could be
interrupted, orders could be cancelled, relationships could be terminated and our reputation could be damaged. Any of these events
could have a material adverse effect on our business, results of operations and financial condition.
We may be unable to protect our trademarks and other intellectual property rights, and others may allege that we infringe upon
their intellectual property rights.
Our trademarks, including MICHAEL KORS and MICHAEL MICHAEL KORS, JIMMY CHOO, logos and other
intellectual property rights are important to our success and our competitive position. We are susceptible to others imitating our
products and infringing on our intellectual property rights in the Americas, Europe, the Middle East, the Far East and elsewhere
in the world in both online and offline channels. Both the Michael Kors and Jimmy Choo brands enjoy significant worldwide
consumer recognition and the generally higher pricing of our products creates additional incentive for counterfeiters to infringe
on our brands. We work with customs authorities, law enforcement, legal representatives and brand specialists globally in an effort
to prevent the sale of counterfeit products, but we cannot guarantee the extent to which our efforts to prevent counterfeiting of
our brands and other intellectual property infringement will be successful. Such counterfeiting and other infringement could dilute
the Michael Kors or Jimmy Choo brand and harm our reputation and business.
Our trademark applications may fail to result in registered trademarks or provide the scope of coverage sought, and others
may seek to invalidate our trademarks or block sales of our products as a violation of their trademarks and intellectual property
rights. In addition, others may assert rights in, or ownership of, trademarks and other intellectual property rights of ours or in
trademarks that are similar to ours or trademarks that we license and/or market, and we may not be able to successfully resolve
these types of conflicts to our satisfaction. In some cases, trademark owners may have prior rights to our trademarks or similar
trademarks. Furthermore, certain foreign countries may not protect trademarks and other intellectual property rights to the same
extent as do the laws of the United States or the EU.
From time to time, in the ordinary course of our business, we become involved in opposition and cancellation proceedings
with respect to trademarks similar to some of our brands. Any litigation or dispute involving the scope or enforceability of our
intellectual property rights or any allegation that we infringe upon the intellectual property rights of others could be costly and
time-consuming and could result, if determined adversely to us, in harm to our competitive position.
Our share price may periodically fluctuate based on the accuracy of our earnings guidance or other forward-looking statements
regarding our financial performance.
Our business and long-range planning process is designed to maximize our long-term growth and profitability and not to
achieve an earnings target in any particular fiscal quarter. We believe that this longer-term focus is in the best interests of the
Company and our shareholders. At the same time, however, we recognize that it is helpful to provide investors with guidance as
to our forecast of total revenue, earnings per share, comparable store sales and other financial metrics or projections. While we
generally expect to provide updates to our financial guidance when we report our results each fiscal quarter, we do not have any
responsibility to update any of our forward-looking statements at such times or otherwise. In addition, any longer-term guidance
that we provide is based on goals that we believe, at the time guidance is given, are reasonably attainable for growth and performance
over a number of years. However, such long-range targets are more difficult to predict than our current quarter and fiscal year
expectations. If, or when, we announce actual results that differ from those that have been predicted by us, outside investment
analysts, or others, our share price could be adversely affected. Investors who rely on these predictions when making investment
decisions with respect to our securities do so at their own risk. We take no responsibility for any losses suffered as a result of such
changes in our share price.
We periodically return value to shareholders through our share repurchase program. Investors may have an expectation that
we will repurchase all shares available under our share repurchase program. The market price of our securities could be adversely
affected if our share repurchase activity differs from investors’ expectations or if our share repurchase program were to terminate.
22
Restrictive covenants in our indebtedness agreements may restrict our ability to pursue our business strategies.
On August 22, 2017, we entered into a second amended and restated senior unsecured credit facility (as amended, the “2017
Credit Facility”) with, among others, JPMorgan Chase Bank, N.A., as administrative agent. The Company and its U.S., Canadian,
Dutch and Swiss subsidiaries are the borrowers under the 2017 Credit Facility. The borrowers and certain material subsidiaries
of the Company provide unsecured guarantees of the 2017 Credit Facility. The agreement that governs our 2017 Credit Facility
contains a number of restrictive covenants that impose operating and financial restrictions on us, and the Indenture governing our
senior notes contain certain restrictions, which collectively may limit our ability to engage in acts that may be in our long-term
best interest, including restrictions on our ability to:
•
•
•
•
•
•
•
incur additional indebtedness and guarantee indebtedness;
pay dividends or make other distributions or repurchase or redeem capital stock;
make loans and investments, including acquisitions;
sell assets;
incur liens;
enter into transactions with affiliates; and
consolidate, merge or sell all or substantially all of our assets.
In addition, the restrictive covenants in the credit agreement governing our New Credit Facilities require us to maintain a
ratio of the sum of total indebtedness plus 6.0 times consolidated rent expense for the last four fiscal quarters to Consolidated
EBITDAR of no greater than 3.5 to 1.0. Our ability to meet this financial ratio can be affected by events beyond our control and
we may be unable to meet it.
A breach of the covenants or restrictions under the documents that govern our indebtedness could result in an event of
default under the applicable indebtedness. Such a default may allow the creditors to accelerate the related debt and may result in
the acceleration of any other debt to which a cross-acceleration or cross-default provision applies. In addition, an event of default
under the credit agreement governing our 2017 Credit Facility would permit the lenders under our 2017 Credit Facility to terminate
all commitments to extend further credit under that facility. In the event our lenders or noteholders accelerate the repayment of
our borrowings, we and our subsidiaries may not have sufficient assets to repay that indebtedness. As a result of there restrictions,
we may be:
•
•
•
limited in how we conduct our business;
unable to raise additional debt or equity financing to operate during general economic or business downturns; or
unable to compete effectively or to take advantage of new business opportunities.
These restrictions may affect our ability to grow in accordance with our strategy. In addition, our financial results, our
substantial indebtedness and our credit ratings could adversely affect the availability and terms of our financing.
We have incurred a substantial amount of indebtedness, which could restrict our ability to engage in additional transactions
or incur additional indebtedness.
During Fiscal 2018, we financed our acquisition of Jimmy Choo with $1.0 billion term loans (which have been partially
repaid), $450.0 million of senior notes and cash on hand. As of March 31, 2018, our consolidated indebtedness was approximately
$874.4 million, net of debt issuance costs and discount amortization. Our total borrowings as of March 31, 2018 included $200.0
million outstanding under our 2017 Revolving Credit Facility, senior notes of $450.0 million and term loans of $229.8 million.
As of March 31, 2018, we have the capacity to borrow up to $804.7 million of additional indebtedness under our undrawn revolving
credit facilities, which may be used to finance our working capital needs, capital expenditures, permitted investments, share
repurchases, dividends and other general corporate purposes. This substantial level of indebtedness could have important
consequences to our business including making it more difficult to satisfy our debt obligations, increasing our vulnerability to
general adverse economic and industry conditions, limiting our flexibility in planning for, or reacting to, changes in our business
and the industry in which we operate and restricting us from pursuing certain business opportunities. In addition, the terms of our
credit facility contain affirmative and negative covenants, including a leverage ratio, and the instruments governing our indebtedness
limit our ability to incur debt, grant liens, engage in mergers and dispose of assets. These consequences and limitations could
reduce the benefits we expect to achieve from the acquisition of Jimmy Choo or impede our ability to engage in future business
opportunities or strategic acquisitions.
23
Our ability to make payments on and to refinance our debt obligations and to fund planned capital expenditures depends
on our ability to generate cash from our operations. This, to a certain extent, is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our control. We cannot guarantee that our business will generate sufficient
cash flow from our operations or that future borrowings will be available to us in an amount sufficient to enable us to make
payments of our debt, fund other liquidity needs and make planned capital expenditures. In addition, our ability to access the credit
and capital markets in the future as a source of funding, and the borrowing costs associated with such financing, is dependent upon
market conditions and our credit rating and outlook.
Failure to maintain adequate financial and management processes and controls could lead to errors in our financial reporting,
which could harm our business and cause a decline in the price of our ordinary shares.
As a public company we are required to document and test our internal controls over financial reporting pursuant to
Section 404 of the Sarbanes-Oxley Act. If our management is unable to certify the effectiveness of our internal controls or if our
independent registered public accounting firm cannot render an opinion on the effectiveness of our internal control over financial
reporting, or if material weaknesses in our internal controls are identified, we could be subject to regulatory scrutiny and a loss
of public confidence, which could have an adverse effect on our business and cause a decline in the price of our ordinary shares.
The integration of Jimmy Choo into our internal control over financial reporting will require significant time and resources
from our management and other personnel and will increase our compliance costs. If we fail to successfully integrate these
operations, our internal control over financial reporting may not be effective. In addition, if Jimmy Choo’s internal control over
financial reporting is found to be ineffective, the integrity of Jimmy Choo’s past financial statements could be adversely impacted.
Provisions in our organizational documents may delay or prevent our acquisition by a third party.
Our Memorandum and Articles of Association (together, as amended from time to time, our “Memorandum and Articles”)
contain several provisions that may make it more difficult or expensive for a third party to acquire control of us without the approval
of our board of directors. These provisions also may delay, prevent or deter a merger, acquisition, tender offer, proxy contest or
other transaction that might otherwise result in our shareholders receiving a premium over the market price for their ordinary
shares. These provisions include, among others:
•
•
•
•
•
our board of directors’ ability to amend the Memorandum and Articles to create and issue, from time to time, one or
more classes of preference shares and, with respect to each such class, to fix the terms thereof by resolution;
provisions relating to the multiple classes and three-year terms of directors, the manner of election of directors,
removal of directors and the appointment of directors upon an increase in the number of directors or vacancy on our
board of directors;
restrictions on the ability of shareholders to call meetings and bring proposals before meetings;
elimination of the ability of shareholders to act by written consent; and
the requirement of the affirmative vote of 75% of the shares entitled to vote to amend certain provisions of our
Memorandum and Articles.
These provisions of our Memorandum and Articles could discourage potential takeover attempts and reduce the price that
investors might be willing to pay for our ordinary shares in the future, which could reduce the market price of our ordinary shares.
Rights of shareholders under British Virgin Islands law differ from those under United States law, and, accordingly, our
shareholders may have fewer protections.
Our corporate affairs are governed by our Memorandum and Articles, the BVI Business Companies Act, 2004 (as amended,
the “BVI Act”) and the common law of the British Virgin Islands. The rights of shareholders to take legal action against our
directors, actions by minority shareholders and the fiduciary responsibilities of our directors under British Virgin Islands law are
to a large extent governed by the common law of the British Virgin Islands and by the BVI Act. The common law of the British
Virgin Islands is derived in part from comparatively limited judicial precedent in the British Virgin Islands as well as from English
common law, which has persuasive, but not binding, authority on a court in the British Virgin Islands. The rights of our shareholders
and the fiduciary responsibilities of our directors under British Virgin Islands law are not as clearly established as they would be
under statutes or judicial precedents in some jurisdictions in the United States. In particular, the British Virgin Islands has a less
developed body of securities laws as compared to the United States, and some states (such as Delaware) have more fully developed
and judicially interpreted bodies of corporate law. As a result of the foregoing, holders of our ordinary shares may have more
difficulty in protecting their interests through actions against our management, directors or major shareholders than they would
as shareholders of a U.S. company.
24
The laws of the British Virgin Islands provide limited protection for minority shareholders, so minority shareholders will have
limited or no recourse if they are dissatisfied with the conduct of our affairs.
Under the laws of the British Virgin Islands, there is limited statutory law for the protection of minority shareholders other
than the provisions of the BVI Act dealing with shareholder remedies. The principal protection under statutory law is that
shareholders may bring an action to enforce the constituent documents of a British Virgin Islands company and are entitled to
have the affairs of the company conducted in accordance with the BVI Act and the memorandum and articles of association of
the company. As such, if those who control the company have persistently disregarded the requirements of the BVI Act or the
provisions of the company’s memorandum and articles of association, then the courts will likely grant relief. Generally, the areas
in which the courts will intervene are the following: (i) an act complained of which is outside the scope of the authorized business
or is illegal or not capable of ratification by the majority; (ii) acts that constitute fraud on the minority where the wrongdoers
control the company; (iii) acts that infringe on the personal rights of the shareholders, such as the right to vote; and (iv) acts where
the company has not complied with provisions requiring approval of a special or extraordinary majority of shareholders, which
are more limited than the rights afforded to minority shareholders under the laws of many states in the United States.
It may be difficult to enforce judgments against us or our executive officers and directors in jurisdictions outside the United
States.
Under our Memorandum and Articles, we may indemnify and hold our directors harmless against all claims and suits
brought against them, subject to limited exceptions. Furthermore, to the extent allowed by law, the rights and obligations among
or between us, any of our current or former directors, officers and employees and any current or former shareholder will be governed
exclusively by the laws of the British Virgin Islands and subject to the jurisdiction of the British Virgin Islands courts, unless those
rights or obligations do not relate to or arise out of their capacities as such. Although there is doubt as to whether United States
courts would enforce these provisions in an action brought in the United States under United States securities laws, these provisions
could make judgments obtained outside of the British Virgin Islands more difficult to enforce against our assets in the British
Virgin Islands or jurisdictions that would apply British Virgin Islands law.
British Virgin Islands companies may not be able to initiate shareholder derivative actions, thereby depriving shareholders of
one avenue to protect their interests.
British Virgin Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the
United States. The circumstances in which any such action may be brought, and the procedures and defenses that may be available
in respect of any such action, may result in the rights of shareholders of a British Virgin Islands company being more limited than
those of shareholders of a company organized in the United States. Accordingly, shareholders may have fewer alternatives available
to them if they believe that corporate wrongdoing has occurred. The British Virgin Islands courts are also unlikely to recognize
or enforce judgments of courts in the United States based on certain liability provisions of United States securities law or to impose
liabilities, in original actions brought in the British Virgin Islands, based on certain liability provisions of the United States securities
laws that are penal in nature. There is no statutory recognition in the British Virgin Islands of judgments obtained in the United
States, although the courts of the British Virgin Islands will generally recognize and enforce the non-penal judgment of a foreign
court of competent jurisdiction without retrial on the merits. This means that even if shareholders were to sue us successfully, they
may not be able to recover anything to make up for the losses suffered.
Item 1B. Unresolved Staff Comments
None.
25
Item 2.
Properties
The following table sets forth the location, use and size of our significant distribution and corporate facilities as of March 31,
2018, all of which are leased with the exception of our distribution center in Holland, which is owned. The leases expire at various
times through Fiscal 2044, subject to renewal options.
Location
Whittier, CA
Venlo, Holland
Montreal, Quebec
New York, NY
East Rutherford, NJ
Manno, Switzerland
London, England
Secaucus, NJ
London, England
New York, NY
Shanghai, China
Tokyo, Japan
Michael Kors U.S. Distribution Center
Use
Approximate Square
Footage
1,284,420
Michael Kors European Distribution Center
Michael Kors Canadian Corporate Office and Distribution Centers (1)
Michael Kors U.S. Corporate Offices and Corporate Headquarters
Michael Kors U.S. Corporate Offices and Corporate Headquarters
1,108,680
334,450
262,450
53,480
Michael Kors European Corporate Offices
Jimmy Choo EMEA Regional Corporate Offices
Michael Kors U.S. Distribution Center
Michael Kors Regional Corporate Offices
Jimmy Choo U.S. Regional Corporate Offices
Michael Kors Regional Corporate Offices
Michael Kors Regional Corporate Offices
25,830
23,950
22,760
21,650
17,580
16,150
15,330
(1)
In December 2017, we leased a new facility in Montreal, Quebec, which is approximately 150,440 square feet, which will support
our Michael Kors and Jimmy Choo operations in Canada. We are currently in the process transitioning out of our current 168,650
square foot facility, which is exclusive to Michael Kors.
As of March 31, 2018, we also occupied 1,011 leased retail stores worldwide (including concessions). We consider our
properties to be in good condition and believe that our facilities are adequate for our operations and provide sufficient capacity to
meet our anticipated requirements.
Other than the land and building for our European distribution center in Venlo, Holland, fixed assets related to our stores
(e.g. leasehold improvements, fixtures, etc.) and computer equipment, we did not own any material property as of March 31, 2018.
Item 3. Legal Proceedings
We are involved in various routine legal proceedings incident to the ordinary course of our business. We believe that the
outcome of all pending legal proceedings in the aggregate will not have a material adverse effect on our business, results of
operations and financial condition.
Item 4. Mine Safety Disclosures
None.
26
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
PART II
Securities
Market Information
Our ordinary shares trade on the NYSE under the symbol “KORS”. At March 31, 2018, there were 149,698,407 ordinary
shares outstanding, and the closing sale price of our ordinary shares was $62.08. Also as of that date, we had approximately 220
ordinary shareholders of record. The table below sets forth the high and low closing sale prices of our ordinary shares for the
periods indicated:
Fiscal 2018 Quarter Ended:
July 1, 2017
September 30, 2017
December 30, 2017
March 31, 2018
Fiscal 2017 Quarter Ended:
July 2, 2016
October 1, 2016
December 31, 2016
April 1, 2017
Share Performance Graph
High
Low
38.65
48.55
64.03
68.14
56.35
52.90
51.76
43.56
$
$
$
$
$
$
$
$
33.05
33.25
47.00
59.80
40.70
46.79
42.75
36.02
$
$
$
$
$
$
$
$
The line graph below compares the cumulative total shareholder return on our ordinary shares with the Standard & Poor’s
500 Index (GSPC), the S&P Retailing Index (RLX), and a peer group index of companies that we believe are closest to ours for
the five-year period from March 29, 2013 through March 29, 2018, the last business day of the our fiscal year. The peer group
index consists of the following companies: Tapestry, Inc., Guess?, Inc., PVH Corp., L Brands, Inc., Ralph Lauren Corporation,
Tiffany & Co. and VF Corporation. The graph below assumes that an investment of $100 made at the closing of trading on March
29, 2013, in (i) our ordinary shares, (ii) the shares comprising the GSPC, (iii) the shares comprising the RLX and (iv) the shares
comprising our peer group index. All values assume reinvestment of the full amount of all dividends, if any, into additional shares
of the same class of equity securities at the frequency with which dividends are paid on such securities during the applicable time
period.
27
Issuer Purchases of Equity Securities
On May 25, 2017, our Board of Directors authorized a $1.0 billion share repurchase program. We also have in place a
“withhold to cover” repurchase program, which allows us to withhold ordinary shares from certain executive officers and directors
to satisfy minimum tax withholding obligations relating to the vesting of their restricted share awards.
The following table provides information regarding our ordinary share repurchases during the three months ended March 31,
2018:
Total Number
of Shares
Purchased
— $
$
3,157,459
Average
Price Paid
per Share
—
63.34
— $
—
3,157,459
Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs
Maximum Number (or
Approximated Dollar Value)
of Shares (or Units) That
May Yet Be Purchased
Under the Plans or Programs
(in millions)
— $
$
3,157,459
— $
3,157,459
842.2
642.2
642.2
December 31 – January 27
January 28 – February 24
February 25 – March 31
Item 6.
Selected Financial Data
The following table sets forth selected historical consolidated financial and other data for Michael Kors Holdings Limited
and its consolidated subsidiaries for the periods presented. The statements of operations data for Fiscal 2018, Fiscal 2017 and
Fiscal 2016 and the balance sheet data as of the end of Fiscal 2018 and Fiscal 2017 have been derived from our audited consolidated
financial statements included elsewhere in this report. The statements of operations data for Fiscal 2015 and Fiscal 2014 and the
balance sheet data as of the end of Fiscal 2016, Fiscal 2015 and Fiscal 2014 have been derived from our prior audited consolidated
financial statements, which are not included in this report.
The selected historical consolidated financial data below should be read in conjunction with “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes included
elsewhere in this annual report.
28
Fiscal Years Ended
March 31,
2018
April 1,
2017
April 2,
2016 (1)
March 28,
2015
March 29,
2014
(data presented in millions, except for shares and per share data)
Statement of Operations Data:
Total revenue
Cost of goods sold
Gross profit
Selling, general and administrative expenses
Depreciation and amortization
Impairment of long-lived assets
Restructuring and other charges (2)
Total operating expenses
Income from operations
Other income
Interest expense, net
Foreign currency (gain) loss
Income before provision for income taxes
Provision for income taxes
Net income
Less: Net income (loss) attributable to noncontrolling
interests
$
$
4,718.6
1,859.3
2,859.3
1,766.8
208.6
32.7
102.1
2,110.2
749.1
(1.7)
22.3
(13.3)
741.8
149.7
592.1
0.2
$
4,493.7
1,832.3
2,661.4
1,541.2
219.8
199.2
11.3
1,971.5
689.9
(5.4)
4.1
2.6
688.6
137.1
551.5
$
4,712.1
1,914.9
2,797.2
1,428.0
183.2
10.9
—
1,622.1
1,175.1
(3.7)
1.7
4.8
1,172.3
334.6
837.7
$
4,371.5
1,723.8
2,647.7
1,251.5
138.4
0.8
—
1,390.7
1,257.0
(1.6)
0.2
2.6
1,255.8
374.8
881.0
(1.0)
(1.4)
—
Net income attributable to MKHL
$
591.9
$
552.5
$
839.1
$
881.0
$
3,310.8
1,294.7
2,016.1
926.9
79.7
1.3
—
1,007.9
1,008.2
—
0.4
0.1
1,007.7
346.2
661.5
—
661.5
Weighted average ordinary shares outstanding:
Basic
Diluted
Net income per ordinary share(3):
152,283,586
155,102,885
165,986,733
168,123,813
186,293,295
189,054,289
202,680,572
205,865,769
202,582,945
205,638,107
Basic
Diluted
$
$
3.89
3.82
$
$
3.33
3.29
$
$
4.50
4.44
$
$
4.35
4.28
$
$
3.27
3.22
(1)
(2)
(3)
Fiscal year ended April 2, 2016 contained 53 weeks, whereas all other fiscal years presented are based on 52-week periods.
Restructuring and other charges includes store closure costs recorded in connection with the Retail Fleet Optimization Plan, as well as
transaction and transition costs recorded in connection with the acquisitions of Jimmy Choo and Michael Kors (HK) Limited and
Subsidiaries (see Note 3 and Note 9 to the accompanying audited consolidated financial statements).
Basic net income per ordinary share is computed by dividing net income available to ordinary shareholders of MKHL by basic weighted
average ordinary shares outstanding. Diluted net income per ordinary share is computed by dividing net income attributable to ordinary
shareholders of MKHL by diluted weighted average ordinary shares outstanding.
March 31,
2018
Fiscal Years Ended
April 2,
2016
(data presented in millions, except for share and store data)
March 28,
2015
April 1,
2017
March 29,
2014
Operating Data:
Comparable retail store sales (decline) growth (1)
Retail stores, including concessions, end of period
(2.2)%
1,011
(8.3)%
827
(4.2)%
668
10.3%
526
26.2%
405
Balance Sheet Data:
Working capital
Total assets
Short-term debt
Long-term debt
Shareholders’ equity of MKHL
Number of ordinary shares issued
301.8
$
4,059.0
$
200.0
$
674.4
$
2,017.7
$
210,991,091
1,663.4
2,684.6
1,234.3
2,566.8
598.9
2,409.6
133.1
$
$
$
$
1,592.6
$
209,332,493
$
$
$
$
— $
$
$
2.3
— $
2,241.0
$
1,995.7
$
206,486,699
208,084,175
1,438.3
$
2,211.2
$
—
— $
—
— $
1,806.1
$
204,291,345
(1)
Fiscal year ended April 2, 2016 contained 53 weeks, whereas all other fiscal years presented are based on 52-week periods. All comparable
store sales are presented on a 52-week basis.
29
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in
conjunction with the consolidated financial statements and notes thereto included as part of this Annual Report on Form 10-K.
This discussion contains forward-looking statements that are based upon current expectations. We sometimes identify forward-
looking statements with such words as “may,” “expect,” “anticipate,” “estimate,” “seek,” “intend,” “believe” or similar words
concerning future events. The forward-looking statements contained herein include, without limitation, statements concerning our
ability to execute on our future growth strategies, our ability to achieve intended benefits from acquisitions, future revenue sources
and concentration, gross profit margins, selling and marketing expenses, capital expenditures, general and administrative expenses,
capital resources, new stores, Retail Fleet Optimization Plan and anticipated cost savings, additional financings or borrowings
and additional losses and are subject to risks and uncertainties including, but not limited to, those discussed in this report that
could cause actual results to differ materially from the results contemplated by these forward-looking statements. We also urge
you to carefully review the risk factors set forth in “Item 1A. – Risk Factors.”
Overview
Our Business
We are a global fashion luxury group of industry-leading fashion luxury brands led by a world-class management team and
renowned designers. The Michael Kors brand was launched over 35 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 apparel 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. On November 1, 2017, we completed the acquisition
of Jimmy Choo and its subsidiaries (collectively, “Jimmy Choo”). The combination of Michael Kors and Jimmy Choo brought
together two iconic brands that are industry leaders in style and trend and created a global fashion luxury group with a diversified
geographic and product portfolio, strengthening the Company’s future revenue growth opportunities.
Michael Kors is a highly recognized luxury fashion brand in the Americas and Europe with accelerating brand awareness
in other international markets. The Michael Kors (“MK”) brand 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 many of our 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 apparel, and addresses the significant demand opportunity in accessible luxury goods. More
recently, we have begun to grow 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.
Since its inception, Jimmy Choo has offered a distinctive, glamorous and fashion-forward product range, enabling it to
develop into a leading global luxury accessories brand, whose core product offering is women’s luxury shoes, complemented by
accessories, including handbags, small leather goods, scarves and belts, as well as a growing men’s luxury shoe business. In
addition, certain products such as fragrances, sunglasses and eyewear are produced under product licensing agreements. Jimmy
Choo’s design team is led by Sandra Choi, who has been the Creative Director for the brand since its inception in 1996. Jimmy
Choo products are unique, instinctively seductive and chic. The brand offers classic and timeless luxury products, as well as
innovative products that are intended to set and lead fashion trends. The Jimmy Choo brand is represented through its global store
network, its e-commerce sites, as well as through the most prestigious department and specialty stores worldwide.
Prior to the third quarter of Fiscal 2018, we had three reportable segments for our Michael Kors brand: Retail, Wholesale
and Licensing. With the acquisition of Jimmy Choo, the Company began to operate in four reportable segments, which are as
follows:
• MK Retail — includes sales of Michael Kors products from 379 retail stores in the Americas (including concessions)
and 450 international retail stores (including concessions) in Europe and certain parts of Asia, as well as from Michael
Kors e-commerce sites in the U.S., Canada, certain parts of Europe, China, Japan and South Korea as of March 31, 2018.
• MK Wholesale — includes wholesale sales of Michael Kors products through 1,403 department store doors and 875
specialty store doors in the Americas and through 1,048 specialty store doors and 218 department store doors
internationally as of March 31, 2018. MK Wholesale also includes revenues from sales of products to Michael Kors
geographic licensees.
30
• MK Licensing — includes royalties and advertising contributions earned on licensed products and use of the Company’s
trademarks, and rights granted to third parties for the right to operate retail stores and/or sell the Company’s products in
certain geographic regions.
•
Jimmy Choo — includes worldwide sales of Jimmy Choo products through 182 retail stores (including concessions) and
Jimmy Choo e-commerce sites in the U.S., certain parts of Europe and Japan, through 629 wholesale doors, as well as
through product and geographic licensing arrangements, as of March 31, 2018.
Certain Factors Affecting Financial Condition and Results of Operations
Establishing brand identity and enhancing global presence. We intend to grow our international presence through the
formation of a global fashion luxury group, bringing together industry-leading fashion luxury brands. As mentioned above, on
November 1, 2017, we completed our acquisition of Jimmy Choo for a total transaction value of $1.447 billion (see Note 3 to the
accompanying consolidated financial statements for additional information). Jimmy Choo has a rich history as a leading global
luxury house, renowned for its glamorous and fashion-forward footwear, and is an excellent complement to the Michael Kors
brand. We believe this combination further strengthens our future growth opportunities, while also increasing both product and
geographic diversification. However, there are risks associated with a new acquisition and the anticipated benefits of the acquisition
on our financial results may not be in line with our expectations.
We intend to continue to increase our international presence and global brand recognition by growing our existing
international operations through acquisitions, the formation of various joint ventures with international partners, and continuing
with our international licensing arrangements. We feel this is an efficient method for continued penetration into the global luxury
goods market, especially for markets where we have yet to establish a substantial presence. In addition, our growth strategy includes
assuming direct control of certain licensed international operations to better manage our growth opportunities in the related regions.
On May 31, 2016, we acquired the previously licensed business in the Greater China region (“MKHKL”), which has operations
in China, Hong Kong, Macau and Taiwan.
See Note 3 to the accompanying consolidated financial statements for additional information regarding our recent
acquisitions.
Channel Shift and Demand for Our Accessories and Related Merchandise. Our performance is affected by trends in the
luxury goods industry, as well as shifts in demographics and changes in lifestyle preferences. Although the overall consumer
spending for personal luxury products has recently increased, consumer shopping preferences have continued to shift from physical
stores to on-line shopping. We currently expect that this trend will continue in the foreseeable future. During Fiscal 2018, we have
continued to strategically decrease promotional activity, which resulted in a reduction in shipments of Michael Kors products
within our wholesale channel, which we believe is necessary to appropriately position the Michael Kors brand long-term. In
addition, we have been strategically reducing promotional activity within our full-price retail stores. We continue to adjust our
operating strategy to the changing business environment and on May 31, 2017, we announced that we plan to close between 100
and 125 of our Michael Kors full-price retail stores over the next two years in order to improve the profitability of our Michael
Kors retail store fleet under our Retail Fleet Optimization Plan. Over this time period, we expect to incur approximately $100 -
$125 million of one-time costs associated with these store closures. During Fiscal 2018, we closed 47 of our Michael Kors full-
price retail stores under the Retail Fleet Optimization Plan, which resulted in restructuring charges of $52.6 million recorded within
restructuring and other charges in our consolidated statements of operations and comprehensive income. We currently anticipate
finalizing the remainder of the planned store closures under the Retail Fleet Optimization Plan over the next two fiscal years.
Collectively, we anticipate ongoing annual savings of approximately $60 million as a result of the store closures and lower
depreciation and amortization associated with the impairment charges recorded during Fiscal 2017 and Fiscal 2018.
Foreign currency fluctuation. Our consolidated operations are impacted by the relationships between our reporting currency,
the U.S. dollar, and those of our non-U.S. subsidiaries whose functional/local currency is other than the U.S. dollar. Our Fiscal
2018 results have been positively impacted by the strengthening of the Euro and the Canadian Dollar relative to the U.S. Dollar
of 7% and 2%, respectively, partially offset by the declines in value of the Japanese Yen of 3%, as compared to the same prior
year period. We continue to expect significant volatility in the global foreign currency exchange rates, which may have a negative
impact on the reported results of certain of our non-U.S. subsidiaries in the future, when translated to U.S. Dollars.
Disruptions in shipping and distribution. Our operations are subject to the impact of shipping disruptions as a result of
changes or damage to our distribution infrastructure, as well as due to external factors. Any future disruptions in our shipping and
distribution network could have a negative impact on our results of operations.
31
Costs of Manufacturing. 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. These fluctuations may have a material impact on our revenues, results of operations and cash flows
to the extent they occur. We use commercially reasonable efforts to mitigate these effects by sourcing our products as efficiently
as possible. In addition, manufacturing labor costs are also subject to degrees of volatility based on local and global economic
conditions. We use commercially reasonable efforts to source from localities that suit our manufacturing standards and result in
more favorable labor driven costs to our products.
U.S. Tax Reform. On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred
to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act includes significant changes to the U.S. corporate income tax system
including, among other things, lowering U.S. statutory federal tax rate and implementing a territorial tax system. As we have a
March 31 fiscal year-end, the lower tax rate will be phased in, resulting in a U.S. statutory federal tax rate of approximately 32%
for Fiscal 2018 and a 21% U.S. statutory federal tax rate for fiscal years thereafter. The Tax Act also adds many new provisions,
including changes to bonus depreciation, limits on the deductions for executive compensation and interest expense, a tax on global
intangible low-taxed income (“GILTI”), the base erosion anti-abuse tax (“BEAT”) and a deduction for foreign derived intangible
income (“FDII”). We are still evaluating the impact of these provisions of the Tax Act, which do not apply until 2019, and thus,
have not adjusted any net deferred tax assets of our foreign subsidiaries for the new tax.
As part of the transition to the new territorial tax system, the Tax Act imposes a tax on the mandatory deemed repatriation
of earnings of our foreign subsidiaries. In addition, the reduction of the U.S. statutory federal tax rate will cause us to re-measure
our U.S. deferred tax assets and liabilities. In accordance with Accounting Standards Codification (“ASC”) 740, we recorded the
effects of the tax law change during Fiscal 2018, which resulted in a provisional charge of $21.2 million, comprised of an estimated
deemed repatriation tax charge of $3.0 million and an estimated deferred tax charge of $18.2 million due to the re-measurement
of our net U.S. deferred tax assets. Conversely, we realized a $6.1 million net benefit for Fiscal 2018 due to the corporate tax rate
reductions. While the Tax Act has negatively impacted our results of operations for Fiscal 2018 by approximately 200 basis points,
the lower corporate rate is expected to result in an ongoing reduction in our effective tax rate. The benefit to our effective tax rate
for Fiscal 2019 is expected to be approximately 300 to 400 basis points, which we plan to reinvest in our business.
In December 2017, the SEC issued Staff Accounting Bulletin (“SAB”) 118 to provide guidance for companies that would
allow for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related
tax impacts. The final transition impacts of the Tax Act may differ from the above estimate, possibly materially due to, among
other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax
Act, or any changes in accounting standards for income taxes or related interpretations in response to the Tax Act. Our estimates
are provisional and subject to adjustment in Fiscal 2019 under the measurement period allowed by the SEC. The Company expects
to finalize its accounting related to the impacts of the Tax Act on the one-time transition tax liability, deferred taxes, valuation
allowances, state tax considerations, and any remaining basis differences in our foreign subsidiaries during Fiscal 2019. As we
complete our analysis of the Tax Act, collect and prepare necessary data and interpret any additional guidance issued by the United
States Department of the Treasury, the Internal Revenue Service and other standard-setting bodies, we may make adjustments
during Fiscal 2019 to the provisional amounts recorded in Fiscal 2018.
Critical Accounting Policies
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
upon on our informed judgments, assessments of probability and best estimates. Estimates, by their nature, are subjective and are
based on analysis of available information, including current and historical factors and the experience and judgment of management.
We evaluate our assumptions and estimates on an ongoing basis. While our significant accounting policies are detailed in Note 2
to the accompanying financial statements, our critical accounting policies are discussed below and include revenue recognition
(including deferred revenue associated with our loyalty program), inventories, impairment of long-lived assets, goodwill, share-
based compensation, derivatives and income taxes.
32
Revenue Recognition
Revenue is recognized when there is persuasive evidence of an arrangement, delivery has occurred, the price has been fixed
and determinable and collectability is reasonably assured. We recognize retail store revenue upon sale of our products to retail
consumers, net of estimated returns. Revenue from sales through our e-commerce sites is recognized at the time of delivery to the
customer, reduced by an estimate of returns. Wholesale revenue is recognized net of estimates for sales returns, discounts,
markdowns and allowances, after merchandise is shipped and title and risk of loss are transferred to our wholesale customers. To
arrive at net sales for retail, gross sales are reduced by actual customer returns, as well as by a provision for estimated future
customer returns, which is based on management’s review of historical and current customer returns. The amounts reserved for
retail sales returns were $12.1 million, $7.3 million and $4.7 million at March 31, 2018, April 1, 2017 and April 2, 2016,
respectively. To arrive at net sales for wholesale, gross sales are reduced by provisions for estimated future returns based on current
expectations, as well as trade discounts, markdowns, allowances, operational chargebacks, and certain cooperative selling expenses.
Total sales reserves for wholesale were $108.6 million, $96.7 million and $110.9 million at March 31, 2018, April 1, 2017 and
April 2, 2016, respectively. These estimates are based on such factors as historical trends, actual and forecasted performance, and
market conditions, which are reviewed by management on a quarterly basis. Our historical estimates of these costs were not
materially different from actual results.
Royalty revenue generated from product licenses, which includes contributions for advertising, is based on reported sales
of licensed products bearing our tradenames at rates specified in the license agreements. These agreements are also subject to
contractual minimum levels. Royalty revenue generated by geographic licensing agreements is recognized as it is earned under
the licensing agreements based on reported sales of licensees applicable to specified periods, as outlined in the agreements. These
agreements allow for the use of our tradenames to sell our branded products in specific geographic regions.
During Fiscal 2018, we launched our Michael Kors customer loyalty program in the U.S., which allows customers to earn
points on qualifying purchases toward monetary and non-monetary rewards that may be redeemed for purchases at our U.S. retail
stores and e-commerce site. We defer a portion of the initial sales transaction based on the estimated relative fair value of the
benefits using statistical formulas including the projected timing of future redemptions and historical activity. These amounts
include estimated “breakage” for points that are not expected to be redeemed. The deferred revenue, net of an estimated “breakage,”
is recorded as a reduction to revenue in the consolidated statements of income and comprehensive income. Our breakage and other
assumptions used to determine the estimated fair value of benefits are estimates, which could vary significantly from actual benefits
that will be redeemed in the future.
Inventories
Our inventory costs include amounts paid to independent manufacturers, plus duties and freight to bring the goods to the
Company’s warehouses, which are located in the United States, United Kingdom, Holland, Canada, China, Hong Kong, Japan,
South Korea, Switzerland, Taiwan and United Arab Emirates. We continuously evaluate the composition of our inventory and
make adjustments when the cost of inventory is not expected to be fully recoverable. The net realizable value of our inventory is
estimated based on historical experience, current and forecasted demand and market conditions. In addition, reserves for inventory
losses are estimated based on historical experience and inventory counts. Our inventory reserves are estimates, which could vary
significantly from actual results if future economic conditions, customer demand or competition differ from expectations. Our
historical estimates of these adjustments have not differed materially from actual results.
Long-lived Assets
We evaluate all long-lived assets, including fixed assets and definite-lived intangible assets, for impairment whenever events
or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable. For the purposes of
impairment testing, we group our long-lived assets according to their lowest level of use, such as aggregating and capitalizing all
construction costs related to a retail store into leasehold improvements and those related to our wholesale business into shop-in-
shops. Our leasehold improvements are typically amortized over the life of the store lease, including highly probable renewals,
and our shop-in-shops are amortized over a useful life of three or four years. Our impairment testing is based on our best estimate
of the future operating cash flows. If the sum of our estimated undiscounted future cash flows associated with the asset is less than
the asset’s carrying value, we recognize an impairment charge, which is measured as the amount by which the carrying value
exceeds the fair value of the asset. These estimates of future cash flows require significant management judgment and certain
assumptions about future volume, sales and expense growth rates, devaluation and inflation. As such, these estimates may differ
from actual cash flows and future impairments may result if actual cash flows are lower than our expectations. During Fiscal 2018,
Fiscal 2017 and Fiscal 2016, we recorded impairment charges of $32.7 million, $199.2 million and $10.9 million, respectively,
primarily related to fixed assets and lease rights for underperforming Michael Kors retail stores. Please refer to Note 6, Note 7
and Note 12 to the accompanying consolidated audited financial statements for additional information.
33
Goodwill and Other Indefinite-lived Intangible Assets
We record intangible assets based on their fair value on the date of acquisition. Goodwill is recorded for the difference
between the fair value of the purchase consideration over the fair value of the net identifiable tangible and intangible assets acquired.
The brand intangible asset recorded in connection with the Jimmy Choo acquisition was determined to be an indefinite-lived
intangible asset, which is not subject to amortization. We perform an impairment assessment of goodwill and the Jimmy Choo
brand intangible asset on an annual basis, or whenever impairment indicators exist. In the absence of any impairment indicators,
goodwill and the Jimmy Choo brand are assessed for impairment during the fourth quarter of each fiscal year. Judgments regarding
the existence of impairment indicators are based on market conditions and operational performance of the business.
We may assess our goodwill and our indefinite-lived intangible asset for impairment initially using a qualitative approach
to determine whether it is more likely than not that the fair value of these assets is greater than their carrying value. When performing
a qualitative test, we assess various factors including industry and market conditions, macroeconomic conditions and performance
of our businesses. If the results of the qualitative assessment indicate that it is more likely than not that our goodwill and other
indefinite-lived intangible assets are impaired, a quantitative impairment analysis would be performed to determine if impairment
is required. We may also elect to perform a quantitative analysis of goodwill and our indefinite-lived intangible asset initially
rather than using a qualitative approach.
The impairment testing for goodwill is performed at the reporting unit level. The valuation methods used in the quantitative
fair value assessment, discounted cash flow and market multiples method, require our management to make certain assumptions
and estimates regarding certain industry trends and future profitability of our reporting units. If the fair value of a reporting unit
exceeds the related carrying value, the reporting unit's goodwill is considered not to be impaired and no further testing is performed.
If the carrying value of a reporting unit exceeds its fair value, an impairment loss is recorded for the difference. The valuation of
goodwill is affected by, among other things, our business plan for the future and estimated results of future operations. Future
events could cause us to conclude that impairment indicators exist, and, therefore, that goodwill may be impaired.
If we elect to perform a quantitative impairment assessment of our indefinite-lived intangible asset, the fair value of the
Jimmy Choo brand is estimated using a discounted cash flow analysis based on the "relief from royalty" method, assuming that
a third party would be willing to pay a royalty in lieu of ownership for this intangible asset. This approach is dependent on many
factors, including estimates of future growth, royalty rates, and discount rates. Actual future results may differ from these estimates.
Impairment loss is recognized when the estimated fair value of the Jimmy Choo brand intangible assets is less than its carrying
amount.
During the fourth quarter of Fiscal 2018, we elected to perform our annual goodwill impairment analysis for our Michael
Kors brand using a quantitative approach, using the discounted cash flow method to estimate fair value. Based on the results of
these assessments, we concluded that the fair values of the Michael Kors reporting units significantly exceeded the related carrying
amounts and there were no reporting units at risk of impairment. The impairment analyses relating to the Jimmy Choo goodwill
and brand were performed using a qualitative approach due to the proximity to the acquisition date and it was concluded that it is
more likely than not that the fair value of goodwill and brand exceeded their respective carrying values and, therefore, did not
result in impairment. See Note 12 to the accompanying audited financial statements for information relating to our annual
impairment analysis performed during the fourth quarter of Fiscal 2018. There were no impairment charges related to goodwill
in any of the fiscal periods presented.
Share-based Compensation
We grant share-based awards to certain of our employees and directors. The grant date fair value of share options is calculated
using the Black-Scholes option pricing model, which requires us to use subjective assumptions. The closing market price at the
grant date is used to determine the grant date fair value of restricted shares, restricted share units, and performance restricted share
units. These values are recognized as expense over the requisite service period, net of estimated forfeitures, based on expected
attainment of pre-established performance goals for performance grants, or the passage of time for those grants which have only
time-based vesting requirements.
Beginning in Fiscal 2018, we began using our own historical experience in determining the expected holding period and
volatility of our time-based share option awards. In prior periods, we used the simplified method for determining the expected
life of our options and average volatility rates of similar actively traded companies over the estimated holding period, due to
insufficient historical option exercise experience as a public company. Determining the grant date fair value of share-based awards
requires considerable judgment, including estimating expected volatility, expected term, risk-free rate, and forfeitures. If factors
change and we employ different assumptions, the fair value of future awards and resulting share-based compensation expense
may differ significantly from what we have estimated in the past.
34
Derivative Financial Instruments
We use forward currency exchange contracts to manage our exposure to fluctuations in foreign currency for certain of our
transactions. We are exposed to risks on certain purchase commitments to foreign suppliers based on the value of our purchasing
subsidiaries’ local currency relative to the currency requirement of the supplier on the date of the commitment. As such, we enter
into forward currency contracts that generally mature in 12 months or less, which is consistent with the related purchase
commitments. We designate certain contracts related to the purchase of inventory that qualify for hedge accounting as cash flow
hedges. All of our derivative instruments are recorded in our consolidated balance sheets at fair value on a gross basis, regardless
of their hedge designation. The effective portion of 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 effects 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. We use 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. Effectiveness is assessed on a quarterly basis and any portion of the designated
hedge contracts deemed ineffective is recorded to foreign currency gain (loss). 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 in foreign currency gain (loss) in our consolidated statements of operations.
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.
Income Taxes
Deferred income tax assets and liabilities reflect temporary differences between the tax basis and financial reporting basis
of our assets and liabilities and are determined using the tax rates and laws in effect for the periods in which the differences are
expected to reverse. We periodically assess the realizability of deferred tax assets and the adequacy of deferred tax liabilities,
based on the results of local, state, federal or foreign statutory tax audits or our own estimates and judgments.
Realization of deferred tax assets associated with net operating loss and tax credit carryforwards is dependent upon generating
sufficient taxable income prior to their expiration in the applicable tax jurisdiction. We periodically review the recoverability of
our deferred tax assets and provide valuation allowances as deemed necessary to reduce deferred tax assets to amounts that more-
likely-than-not will be realized. This determination involves considerable judgment and our management considers many factors
when assessing the likelihood of future realization of deferred tax assets, including recent earnings results within various taxing
jurisdictions, expectations of future taxable income, the carryforward periods remaining and other factors. Changes in the required
valuation allowance are recorded in income in the period such determination is made. Deferred tax assets could be reduced in the
future if our estimates of taxable income during the carryforward period are significantly reduced or alternative tax strategies are
no longer viable.
We recognize the impact of an uncertain income tax position taken on our income tax returns at the largest amount that is
more-likely-than-not to be sustained upon audit by the relevant taxing authority. The effect of an uncertain income tax position
will not be taken into account if the position has less than a 50% likelihood of being sustained. Our tax positions are analyzed
periodically (at least quarterly) and adjustments are made as events occur that warrant adjustments for those positions. We record
interest expense and penalties payable to relevant tax authorities as income tax expense.
New Accounting Pronouncements
Please refer to Note 2 to the accompanying consolidated financial statements for detailed information relating to recently
adopted and recently issued accounting pronouncements and the associated impacts.
35
Segment Information
We generate revenue through four reporting segments: MK Retail, MK Wholesale, MK Licensing and Jimmy Choo. The
following table presents our total revenue and income from operations by segment for Fiscal 2018, Fiscal 2017 and Fiscal 2016
(in millions):
Total revenue:
MK Retail
MK Wholesale
MK Licensing
Michael Kors
Jimmy Choo
Total revenue
Income from operations:
MK Retail
MK Wholesale
MK Licensing
Michael Kors
Jimmy Choo
Income from operations
MK Retail
Fiscal Years Ended
March 31,
2018
April 1,
2017
April 2,
2016
$
$
$
$
2,711.8
$
2,572.1
$
1,639.3
144.9
4,496.0
222.6
1,775.8
145.8
4,493.7
—
4,718.6
$
4,493.7
$
333.8
$
159.8
$
373.8
58.2
765.8
(16.7)
749.1
$
468.1
62.0
689.9
—
689.9
$
2,394.9
2,143.9
173.3
4,712.1
—
4,712.1
501.4
584.1
89.6
1,175.1
—
1,175.1
We have four primary Michael Kors retail store formats: “Collection” stores, “Lifestyle” stores, outlet stores and e-commerce,
through which we sell our products, as well as licensed products bearing our name, directly to the end consumer throughout the
Americas (United States, Canada and Latin America, excluding Brazil), Europe and certain parts of Asia. In addition to these four
retail formats, we operate concessions in a select number of department stores. Michael Kors “Collection” stores are located in
highly prestigious shopping areas, while Michael Kors “Lifestyle” stores are located in well-populated commercial shopping
locations and leading regional shopping centers. Michael Kors outlet stores, which are generally in outlet centers, extend our reach
to additional consumer groups. Michael Kors e-commerce business includes e-commerce sites in the U.S., Canada, certain parts
of Europe, China and Japan. During Fiscal 2018, we further expanded our Michael Kors e-commerce presence to 14 additional
countries in Europe and South Korea, increasing our total e-commerce site presence to 25 Michael Kors e-commerce sites as
of March 31, 2018.
36
The following table presents the changes in our global network of Michael Kors retail stores and total revenue for the MK
Retail segment by geographic location for Fiscal 2018, Fiscal 2017, and Fiscal 2016 (dollars in millions):
Full price retail stores including concessions:
Number of stores
(Decrease) increase during period
Percentage (decrease) increase vs. prior year
Total gross square footage
Average square footage per store
Outlet stores:
Number of stores
Increase during period
Percentage increase vs. prior year
Total gross square footage
Average square footage per store
MK Retail Revenue - the Americas
MK Retail Revenue - Europe
MK Retail Revenue - Asia
March 31,
2018
April 1,
2017
April 2,
2016
596
(18)
(2.9)%
614
122
24.8%
492
119
31.9%
1,352,858
2,270
1,408,775
2,294
1,140,025
2,317
233
20
9.4 %
955,545
4,101
1,678.4
564.4
469.0
$
$
$
213
37
21.0%
849,184
3,987
1,713.7
507.7
350.7
$
$
$
176
23
15.0%
637,325
3,621
1,779.0
509.6
106.3
$
$
$
The following table presents our Michael Kors retail stores by geographic location:
Store count by region:
The Americas
Europe
Asia
Total
March 31,
2018
April 1,
2017
April 2,
2016
379
198
252 (1)
829
398
201
228 (1)
827
390
177
101
668
(1) Store count for Asia as of March 31, 2018 and April 1, 2017 includes 129 stores and 111 stores, respectively, associated
with the previously licensed business in Greater China (comprised of China, Hong Kong, Macau and Taiwan) acquired
on May 31, 2016.
See Note 3 to the accompanying consolidated financial statements for additional information.
MK Wholesale
We sell Michael Kors products directly to department stores, primarily located across the Americas and Europe to
accommodate consumers who prefer to shop at major department stores. In addition, we sell to specialty stores for those consumers
who enjoy the boutique experience afforded by such stores, as well as to travel retail shops, in the Americas, Europe and Asia. We
also have wholesale arrangements pursuant to which we sell Michael Kors products to our geographic licensees in certain parts
of EMEA (Europe, Middle East and Africa) and Asia, as well as in Brazil. We continue to focus our sales efforts and drive sales
in existing locations by enhancing presentation with our specialized fixtures that effectively communicate our brand and create a
more personalized shopping experience for consumers. We tailor our assortments through wholesale product planning and allocation
processes to better match the demands of our department store customers in each local market.
37
The following table presents the changes in our global network of Michael Kors wholesale doors, as well as the corresponding
revenue for the MK Wholesale segment by geographic location for Fiscal 2018, Fiscal 2017 and Fiscal 2016 (dollars in millions):
Fiscal Years Ended
March 31,
2018
April 1,
2017
April 2,
2016
Number of full-price wholesale doors
Decrease during period
3,544
(63)
3,607
(282)
MK Wholesale revenue - the Americas
MK Wholesale revenue - EMEA
MK Wholesale revenue - Asia
$
$
$
1,234.0
343.9
61.4
$
$
$
1,340.9
376.5
58.4
$
$
$
3,889
(149)
1,628.6
406.4
108.9
MK Licensing
We generate licensing revenue for our Michael Kors brand through product and geographic licensing arrangements. Our
product license agreements allow third parties to use the Michael Kors brand name and trademarks in connection with the
manufacturing and sale of a variety of products, including watches, jewelry, fragrances and beauty, and eyewear. In product
licensing arrangements, we take an active role in the design, marketing and distribution of products under the Michael Kors brand.
Our geographic licensing arrangements allow third parties to use our Michael Kors tradenames in connection with the retail and/
or wholesale sales of our Michael Kors branded products in specific geographic regions, such as Brazil, the Middle East, South
Africa, Eastern Europe, certain parts of Asia and Australia. We acquired direct control of our licensed operations in the Greater
China region on May 31, 2016. The results of the acquired business are now being reported as part of our MK Retail and MK
Wholesale operations. During the second quarter of Fiscal 2017, the Company licensed the right to operate retail stores bearing
the Michael Kors trademark to a third party in Brazil.
Jimmy Choo
The Jimmy Choo business was acquired and consolidated by the Company beginning on November 1, 2017. We generate
revenue through the sale of Jimmy Choo luxury goods to end clients through directly operated Jimmy Choo stores throughout
North America (United States and Canada), 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 tradenames 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 fragrances, sunglasses and eyewear, as well as through geographic licensing arrangements, which
allow third parties to use the Jimmy Choo tradenames in connections with the retail and/or wholesale sales of our Jimmy Choo
branded products in specific geographic regions.
The following table presents our global network of Jimmy Choo retail stores and wholesale doors as of March 31, 2018:
Store count:
Full price retail stores (including concessions)
Outlet stores
Total number of retail stores
Number of full-price wholesale doors
March 31,
2018
158
24
182
629
38
The following table presents Jimmy Choo revenue by geographic location, which has been included in the Company’s
results of operations from November 1, 2017 through March 31, 2018 (in millions):
The Americas
EMEA
Asia
Total
Revenue
37.3
123.0
62.3
222.6
$
$
Key Performance Indicators and Statistics
We use a number of key indicators of operating results to evaluate our performance, including the following (dollars in
millions):
Total revenue
Decrease in comparable store net sales
Gross profit as a percent of total revenue
Income from operations
Income from operations as a percent of total revenue
General Definitions for Operating Results
March 31,
2018
4,718.6
(2.2)%
60.6 %
749.1
15.9 %
$
$
Fiscal Years Ended
$
$
April 1,
2017
4,493.7
(8.3)%
59.2 %
689.9
15.4 %
$
$
April 2,
2016
4,712.1
(4.2)%
59.4 %
1,175.1
24.9 %
Total revenue consists of sales from comparable retail stores and e-commerce sites and non-comparable retail stores and
e-commerce sites, net of returns and markdowns, as well as those made to our wholesale customers, net of returns, discounts,
markdowns and allowances. Additionally, revenue includes royalties and other contributions earned on sales of licensed products
by our licensees as well as contractual royalty rates for the use of our trademarks in certain geographic territories.
Comparable store net sales include sales from a retail store or an e-commerce site that has been operating for one full year
after the end of the first month of its operation under our ownership. For stores that are closed, sales that were made in the final
month of their operations (assuming closure prior to the fiscal month’s end), are excluded from the calculation of comparable store
sales. Additionally, sales for stores that are either relocated, or expanded by a square footage of 25% or greater, in any given fiscal
year, are also excluded from the calculation of comparable store sales at the time of their move or interruption, until such stores
have been in their new location, or are operating under their new size/capacity, for at least one full year after the end of the first
month of their relocation or expansion. All comparable store sales are presented on a 52-week basis. Comparable store sales are
reported on a global basis, which represents management’s view of our Company as an expanding global business.
Constant currency effects are non-U.S. GAAP financial measures, which are provided to supplement our reported operating
results to facilitate comparisons of our operating results and trends in our business, excluding the effects of foreign currency rate
fluctuations. Because we are a global company, foreign currency exchange rates may have a significant effect on our reported
results. We calculate constant currency measures and the related foreign currency impacts by translating the current-year’s reported
amounts into comparable amounts using prior year’s foreign exchange rates for each currency. All constant currency performance
measures discussed below should be considered a supplement to and not in lieu of our operating performance measures calculated
in accordance with U.S. GAAP.
Cost of goods sold includes the cost of inventory sold, freight-in on merchandise and foreign currency exchange gains/
losses related to designated forward contracts for purchase commitments. All retail operating and occupancy costs are included
in selling, general and administrative expenses (see below) and, as a result, our cost of goods sold may not be comparable to that
of other entities that have chosen to include some or all of those expenses as a component of their cost of goods sold.
Gross profit is total revenue minus cost of goods sold. As a result of retail operating and occupancy costs being excluded
from our cost of goods sold, our gross profit may not be comparable to that of other entities that have chosen to include some or
all of those expenses as a component of their gross profit.
39
Selling, general and administrative expenses consist of warehousing and distribution costs, rent for our distribution centers,
payroll, store occupancy costs (such as rent, common area maintenance, store pre-opening, real estate taxes and utilities),
information technology and systems costs, corporate payroll and related benefits, advertising and promotion expense and other
general expenses.
Depreciation and amortization includes depreciation and amortization of fixed and definite-lived intangible assets.
Impairment consists of charges to write-down fixed assets and definite-lived intangible assets to fair value.
Restructuring and other charges includes store closure costs recorded in connection with the Retail Fleet Optimization
Plan, as well as transaction and transition costs recorded in connection with our acquisitions of the Jimmy Choo and MKHKL
businesses (please refer to Note 3 and Note 9 to the accompanying consolidated financial statements for additional information).
Income from operations consists of gross profit minus total operating expenses.
Other (income) expense, net includes insurance settlements, proceeds received related to our anti-counterfeiting efforts
and rental income from our owned distribution center in Europe. In future periods, it may include any other miscellaneous activities
not directly related to our operations.
Interest expense, net represents interest and fees on our revolving credit facilities, senior notes, term loan facilities and
letters of credit (see “Liquidity and Capital Resources” for further detail on our credit facilities), as well as amortization of deferred
financing costs and original issue discount, offset by interest earned on highly liquid investments (investments purchased with an
original maturity of three months or less, classified as cash equivalents).
Foreign currency (gain)/loss includes net gains or losses related to the mark-to-market (fair value) on our forward currency
contracts not designated as accounting hedges and unrealized income or loss from the re-measurement of monetary assets and
liabilities denominated in currencies other than the functional currencies of our subsidiaries.
Noncontrolling interests represents the portion of the equity ownership in the Michael Kors Latin American joint venture,
MK (Panama) Holdings, S.A. and subsidiaries (“MK Panama”). During the three months ended July 1, 2017, we repurchased a
portion of the non-controlling interest in MK Panama for approximately $0.5 million and have a 75% ownership interest in MK
Panama. In addition, on November 1, 2017 we acquired Jimmy Choo, which has controlling financial interests in the Jimmy Choo
Middle East Joint Venture, JC Industry S.r.L (“JCI”), and JC Gulf Trading LLC (“JC Gulf”). As such, noncontrolling interest
includes the portion of the equity ownership in JCI and JC Gulf, which is not attributable to our Company.
40
Results of Operations
Comparison of Fiscal 2018 with Fiscal 2017
The following table details the results of our operations for Fiscal 2018 and Fiscal 2017 and expresses the relationship of
certain line items to total revenue as a percentage (dollars in millions):
Fiscal Years Ended
March 31,
2018
April 1,
2017
$ Change
% Change
% of Total
Revenue for
Fiscal 2018
% of Total
Revenue for
Fiscal 2017
Statements of Operations Data:
Total revenue
Cost of goods sold
Gross profit
Selling, general and administrative expenses
Depreciation and amortization
Impairment of long-lived assets
Restructuring and other charges (1)
Total operating expenses
Income from operations
Other income, net
Interest expense, net
Foreign currency (gain) loss
Income before provision for income taxes
Provision for income taxes
Net income
Less: Net income (loss) attributable to
noncontrolling interests
$ 4,718.6
$ 4,493.7
$ 224.9
1,859.3
2,859.3
1,766.8
208.6
32.7
102.1
1,832.3
2,661.4
1,541.2
219.8
199.2
11.3
2,110.2
1,971.5
749.1
(1.7)
22.3
(13.3)
741.8
149.7
592.1
0.2
689.9
(5.4)
4.1
2.6
688.6
137.1
551.5
(1.0)
552.5
$
27.0
197.9
225.6
(11.2)
(166.5)
90.8
138.7
59.2
3.7
18.2
(15.9)
53.2
12.6
40.6
1.2
39.4
39.4 %
60.6 %
37.4 %
4.4 %
0.7 %
2.2 %
44.7 %
15.9 %
— %
0.5 %
(0.3)%
15.7 %
3.2 %
40.8 %
59.2 %
34.3 %
4.9 %
4.4 %
0.3 %
43.9 %
15.4 %
(0.1)%
0.1 %
0.1 %
15.3 %
3.1 %
5.0 %
1.5 %
7.4 %
14.6 %
(5.1)%
(83.6)%
NM
7.0 %
8.6 %
68.5 %
NM
NM
7.7 %
9.2 %
7.4 %
NM
7.1 %
Net income attributable to MKHL
$
591.9
$
___________________
NM Not meaningful.
(1)
Includes store closure costs recorded in connection with the Retail Fleet Optimization Plan, as well as transaction and
transition costs recorded in connection with our acquisitions of the Jimmy Choo and MKHKL businesses (see Note 3 and
Note 9 to the accompanying consolidated financial statements).
Total Revenue
Total revenue increased $224.9 million, or 5.0%, to $4.719 billion for the fiscal year ended March 31, 2018, compared to
$4.494 billion for the fiscal year ended April 1, 2017, which included net favorable foreign currency effects of $64.3
million primarily related to the strengthening of the Euro, the Chinese Renminbi and the Canadian Dollar, partially offset by the
weakening of the Japanese Yen against the U.S. Dollar in Fiscal 2018, as compared to Fiscal 2017. On a constant currency basis,
our total revenue increased $160.6 million, or 3.6%. Total revenue for Fiscal 2018 included approximately $222.6 million of
incremental revenue attributable to Jimmy Choo, which was acquired and consolidated into the Company’s results of operations
effective November 1, 2017. The increase in revenue from our Michael Kors retail business was largely offset by the decrease in
Michael Kors wholesale revenue, as further described below.
41
The following table details revenues for our four business segments (dollars in millions):
Fiscal Years Ended
March 31,
2018
April 1,
2017
% Change
$ Change
As Reported
Constant
Currency
% of Total
Revenue
for Fiscal
2018
% of Total
Revenue
for Fiscal
2017
$
$
2,711.8
1,639.3
144.9
4,496.0
222.6
4,718.6
$
$
2,572.1
1,775.8
145.8
4,493.7
—
4,493.7
$
$
139.7
(136.5)
(0.9)
2.3
222.6
224.9
5.4 %
(7.7)%
(0.6)%
0.1 %
NM
5.0 %
3.9 %
(9.1)%
(0.6)%
(1.4)%
NM
3.6 %
57.5%
34.7%
3.1%
57.2%
39.5%
3.3%
4.7%
—
Total revenue:
MK Retail
MK Wholesale
MK Licensing
Michael Kors
Jimmy Choo
Total revenue
MK Retail
Revenue from our Michael Kors retail stores increased $139.7 million, or 5.4%, to $2.712 billion for Fiscal 2018, compared
to $2.572 billion for Fiscal 2017, which included net favorable foreign currency effects of $38.9 million. On a constant currency
basis, revenue from our retail stores increased $100.8 million, or 3.9%. We operated 829 Michael Kors retail stores, including
concessions, as of March 31, 2018, compared to 827 retail stores, including concessions, as of April 1, 2017.
Our comparable store sales decreased $50.2 million, or 2.2%, during Fiscal 2018, which included net favorable foreign
currency effects of $35.2 million. Our comparable store sales benefited approximately 230 basis points from the inclusion of e-
commerce sales in comparable store sales. On a constant currency basis, our comparable store sales decreased $85.4 million, or
3.7%. The decrease in our comparable store sales was primarily attributable to lower sales from our women’s accessories, watches
and jewelry product categories, offset in part by higher sales from men’s accessories, women’s apparel and footwear during Fiscal
2018 compared to Fiscal 2017.
Our non-comparable store sales increased $189.9 million during Fiscal 2018, which included net favorable foreign currency
effects of $3.7 million. On a constant currency basis, non-comparable store sales increased $186.2 million. The increase in non-
comparable store sales was primarily attributable to the growth of our Michael Kors retail store network (net of store closures)
and e-commerce operations since April 1, 2017. Our Greater China business acquired on May 31, 2016 contributed incremental
revenues of approximately $42.0 million to non-comparable store sales for Fiscal 2018.
MK Wholesale
Revenue from our Michael Kors wholesale customers decreased $136.5 million, or 7.7%, to $1.639 billion for Fiscal 2018,
compared to $1.776 billion for Fiscal 2017, which included net favorable foreign currency effects of approximately $25.4 million.
On a constant currency basis, our wholesale revenue decreased $161.9 million, or 9.1%. The decrease in our wholesale revenue
was primarily attributable to our strategic decrease in promotional activity, which resulted in a reduction in shipments of Michael
Kors products within our wholesale channel, as previously described, which resulted in lower women’s accessories sales, offset
in part by higher sales from men’s and women’s apparel product lines during Fiscal 2018 as compared to Fiscal 2017. Approximately
$7.9 million of the decrease in wholesale revenue was due to the absence of the prior period wholesale sales to our former licensee
in Greater China.
MK Licensing
Royalties earned on our Michael Kors licensing agreements decreased $0.9 million, or 0.6%, to $144.9 million for Fiscal
2018, compared to $145.8 million for Fiscal 2017. This decrease was primarily attributable to the absence of licensing revenues
from our business in Greater China due to our acquisition of the related operations, lower licensing revenues related to the sales
of fashion watches, jewelry and fragrances, largely offset by higher licensing royalties related to sales of Michael Kors ACCESS
smartwatches and eyewear.
Jimmy Choo
The Jimmy Choo business acquired on November 1, 2017 contributed approximately $222.6 million to our total revenue
for Fiscal 2018.
42
Gross Profit
Gross profit increased $197.9 million, or 7.4%, to $2.859 billion during Fiscal 2018, compared to $2.661 billion for Fiscal
2017, which included net favorable foreign currency effects of $40.0 million. Gross profit as a percentage of total revenue increased
140 basis points to 60.6% during Fiscal 2018, compared to 59.2% during Fiscal 2017. Our gross margin benefited 20 basis points
from the inclusion of Jimmy Choo from the November 1, 2017 acquisition date to March 31, 2018. The increase in our gross profit
margin was primarily attributable to a favorable channel mix due to a higher proportion of Michael Kors retail sales, as well as
an increase in gross profit margin from our MK Retail segment of 160 basis points, primarily driven by favorable geographic mix
of sales, lower cost of goods and decreased promotional activity. The increase in gross profit margin was partially offset by a
decrease of 90 basis points in our MK Wholesale segment gross margin, primarily driven by unfavorable product mix and increased
markdowns, partially offset by lower costs of goods during Fiscal 2018, as compared to Fiscal 2017.
Total Operating Expenses
Total operating expenses increased $138.7 million, or 7.0%, to $2.110 billion during Fiscal 2018, compared to $1.972 billion
for Fiscal 2017. Our operating expenses included a net unfavorable foreign currency impact of approximately $37.7 million. Total
operating expenses as a percentage of total revenue increased to 44.7% in Fiscal 2018, compared to 43.9% in Fiscal 2017. The
components that comprise total operating expenses are detailed below.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $225.6 million, or 14.6%, to $1.767 billion during Fiscal 2018,
compared to $1.541 billion for Fiscal 2017, including a net unfavorable foreign currency impact of $32.4 million. The increase
in selling, general and administrative expenses was primarily due to the following:
•
•
•
•
incremental costs of $134.6 million associated with our newly acquired Jimmy Choo business, which has been
consolidated into our operations beginning on November 1, 2017;
an increase of $47.9 million in retail store and overhead costs (excluding newly acquired businesses), primarily
comprised of increased occupancy costs of $25.6 million, advertising costs of $13.2 million and compensation-related
costs of $7.3 million;
incremental expenses of approximately $22.3 million due to the inclusion of the Greater China business acquired on
May 31, 2016 for the full year in Fiscal 2018; and
an increase of $31.8 million in corporate expenses.
These increases were partially offset by:
•
lower deferred rent of $15.8 million in connection with store closures under our Retail Fleet Optimization Plan.
Selling, general and administrative expenses as a percentage of total revenue increased to 37.4% during Fiscal 2018,
compared to 34.3% for Fiscal 2017, primarily due to expenses associated with the newly acquired Jimmy Choo business.
Depreciation and Amortization
Depreciation and amortization decreased $11.2 million, or 5.1%, to $208.6 million during Fiscal 2018, compared to $219.8
million for Fiscal 2017. The decrease in depreciation and amortization expense was primarily attributable to lower depreciation
due to fixed asset impairment charges recorded in Fiscal 2017 and Fiscal 2018. The depreciation and amortization expense for
Fiscal 2018 included incremental depreciation and amortization of $13.3 million related to the newly acquired Jimmy Choo
business, as well as $5.7 million of incremental depreciation and amortization expenses due to the inclusion of the Greater China
business for the full period in Fiscal 2018, both including amortization of the respective purchase accounting adjustments.
Depreciation and amortization decreased to 4.4% as a percentage of total revenue during Fiscal 2018, compared to 4.9% for Fiscal
2017.
Impairment of Long-Lived Assets
During Fiscal 2018, we recognized long-lived asset impairment charges of $32.7 million, $31.3 million of which related
to underperforming Michael Kors full-price retail store locations, some of which we plan to close as part of the Company’s
previously announced Retail Fleet Optimization Plan and $1.4 million related to wholesale operations. During Fiscal 2017, we
recognized long-lived asset impairment charges of approximately $199.2 million, $198.7 million of which related to fixed assets
and lease rights for underperforming Michael Kors retail store locations and $0.5 million related to our Michael Kors wholesale
locations. Please refer to Note 12 and Note 19 to the accompanying consolidated financial statements for additional information.
43
Restructuring and Other Charges
During Fiscal 2018, we recognized restructuring and other charges of $102.1 million, which were comprised of $40.6
million of transaction costs and $8.9 million of transition costs recorded in connection with the Jimmy Choo acquisition, as well
as restructuring charges of $52.6 million recorded in connection with our Michael Kors brand Retail Fleet Optimization Plan (see
Note 9 to the accompanying consolidated financial statements for additional information). During Fiscal 2017, we recorded $11.3
million of transaction costs related to the acquisition of the Greater China business.
Income from Operations
As a result of the foregoing, income from operations increased $59.2 million, or 8.6%, to $749.1 million during Fiscal 2018,
compared to $689.9 million for Fiscal 2017, which included net favorable foreign currency effects of $2.3 million. Income from
operations as a percentage of total revenue increased to 15.9% in Fiscal 2018, compared to 15.4% in Fiscal 2017.
The following table details income from operations for our four business segments (dollars in millions):
Fiscal Years Ended
March 31,
2018
April 1,
2017
$ Change
% Change
% of Total
Revenue for
Fiscal 2018
% of Total
Revenue for
Fiscal 2017
$
$
333.8
373.8
58.2
765.8
(16.7)
749.1
$
$
159.8
468.1
62.0
689.9
—
689.9
$
$
174.0
(94.3)
(3.8)
75.9
(16.7)
59.2
108.9 %
(20.1)%
(6.1)%
11.0 %
NM
8.6 %
12.3 %
22.8 %
40.2 %
17.0 %
(7.5)%
15.9 %
6.2%
26.4%
42.5%
15.4%
—%
15.4%
Income from operations:
MK Retail
MK Wholesale
MK Licensing
Michael Kors
Jimmy Choo
Income from operations
MK Retail
Income from operations for our MK Retail segment increased $174.0 million, or 108.9%, to $333.8 million during Fiscal
2018, compared to $159.8 million for Fiscal 2017. Income from operations for Fiscal 2018 included restructuring charges of $52.6
million and impairment charges of $31.3 million relating to underperforming Michael Kors retail store locations and store closures
in connection with our previously mentioned Retail Fleet Optimization Plan. Income from operations for Fiscal 2017 included
$198.7 million of impairment charges related to underperforming retail stores. Income from operations as a percentage of retail
revenue increased 610 basis points from 6.2% in Fiscal 2017 to 12.3% during Fiscal 2018. The increase in income from operations
as a percentage of retail revenue was attributable to lower operating expenses of 450 basis points and a 160 basis point improvement
in gross profit margin, as previously discussed. The decrease in operating expenses as a percentage of total revenue was largely
due to a 440 basis point year-over-year decrease in impairment and restructuring charges, as mentioned above, as well as lower
depreciation expenses, offset in part by allocated transaction and transition costs in connection with the Jimmy Choo acquisition
and an increase in retail store related costs.
MK Wholesale
Income from operations for our wholesale segment decreased $94.3 million, or 20.1%, to $373.8 million during Fiscal
2018, compared to $468.1 million for Fiscal 2017. Income from operations as a percentage of wholesale revenue decreased
approximately 360 basis points from 26.4% during Fiscal 2017 to 22.8% during Fiscal 2018, which was primarily attributable to
an increase in operating expenses as a percentage of wholesale revenue of approximately 270 basis points, as well as a 90 basis
point decrease in our wholesale gross profit margin, as previously discussed. The increase in operating expenses as a percentage
of wholesale revenue was primarily attributable to a deleverage in other operating expenses due to lower wholesale revenue, as
well as increased corporate allocated expenses, including transaction and transition costs associated with the Jimmy Choo
acquisition.
44
MK Licensing
Income from operations for our licensing segment decreased $3.8 million, or 6.1%, to $58.2 million during Fiscal 2018,
compared to $62.0 million for Fiscal 2017. Income from operations as a percentage of licensing revenue declined approximately
230 basis points from 42.5% during Fiscal 2017 to 40.2% during Fiscal 2018. The decrease in licensing income from operations
as a percentage of licensing revenue was attributable to increased operating expenses as a percentage of licensing revenue during
Fiscal 2018, as compared to Fiscal 2017, primarily due to increased corporate allocated expenses, including transaction and
transition costs associated with the Jimmy Choo acquisition, partially offset by lower advertising costs as a percentage of licensing
revenue.
Jimmy Choo
During the period from the November 1, 2017 acquisition date to March 31, 2018, we recorded a net loss from operations
for Jimmy Choo of $16.7 million (after amortization of non-cash purchase accounting adjustments and transaction and transition
related costs).
Other Income, net
Other income of $1.7 million during Fiscal 2018 was primarily related to rental income from our owned distribution center
in Europe. Other income of $5.4 million during Fiscal 2017 was primarily comprised of a $3.8 million in insurance settlements
related to the prior-year disruption to our former third-party operated e-commerce fulfillment center, $0.9 million in income related
to our anti-counterfeiting efforts and $0.7 million of rental income from our owned distribution center in Europe.
Interest expense, net
Interest expense, net increased $18.2 million to $22.3 million for Fiscal 2018, as compared to $4.1 million for Fiscal 2017,
primarily due to higher interest expense on long-term borrowings used to finance the acquisition of Jimmy Choo during Fiscal
2018 (see Note 10 for additional information).
Foreign Currency (Gain) Loss
We recognized a net foreign currency gain of $13.3 million during Fiscal 2018, which included net gains on revaluation
and settlement of certain of our accounts payable in currencies other than the functional currency of the applicable reporting units,
and the remeasurement of dollar-denominated intercompany loans with certain of our subsidiaries, as well as a net gain of $3.4
million related to the change in fair value of undesignated forward foreign currency exchange contracts, primarily comprised of
a $4.7 million realized gain related to a forward foreign currency exchange derivative contract to hedge the transaction price of
the Jimmy Choo acquisition (please refer to Note 3 and Note 13 to the accompanying consolidated financial statements for additional
information).
The foreign currency loss of $2.6 million recorded during Fiscal 2017 was primarily attributable to net losses on the
revaluation and settlement of certain of our accounts payable in currencies other than the functional currency of the applicable
reporting units, as well as the remeasurement of dollar-denominated intercompany loans with certain of our subsidiaries. The net
foreign currency loss for Fiscal 2017 also included favorable mark-to-market adjustment of $2.6 million related to our forward
foreign currency contracts not designated as accounting hedges.
Provision for Income Taxes
We recognized $149.7 million of income tax expense during Fiscal 2018, compared with $137.1 million for Fiscal 2017.
Our effective tax rate for Fiscal 2018 was 20.2%, compared to 19.9% for Fiscal 2017. The increase in our effective tax rate was
primarily due to the the re-measurement of uncertain U.S. state and foreign tax positions and the unfavorable effects of U.S. tax
reform. These increases were partially offset by an increase in income in lower tax jurisdictions, primarily in Europe.
Our effective tax rate may fluctuate from time to time due to the effects of changes in U.S. state and local taxes and tax
rates in foreign jurisdictions. In addition, factors such as the geographic mix of earnings, enacted tax legislation and the results of
various global tax strategies, may also impact our effective tax rate in future periods.
Net Income Attributable to MKHL
As a result of the foregoing, our net income attributable to MKHL increased $39.4 million, or 7.1%, to $591.9 million
during Fiscal 2018, compared to $552.5 million for Fiscal 2017.
45
Results of Operations
Comparison of Fiscal 2017 with Fiscal 2016
The following table details the results of our operations for Fiscal 2017 and Fiscal 2016 and expresses the relationship of
certain line items to total revenue as a percentage (dollars in millions):
Fiscal Years Ended
April 1,
2017
April 2,
2016
$ Change
% Change
% of Total
Revenue for
Fiscal 2017
% of Total
Revenue for
Fiscal 2016
Statements of Operations Data:
Total revenue
Cost of goods sold
Gross profit
Selling, general and administrative expenses
Depreciation and amortization
Impairment of long-lived assets
Restructuring and other charges
Total operating expenses
Income from operations
Other income, net
Interest expense, net
Foreign currency loss
Income before provision for income taxes
Provision for income taxes
Net income
Less: Net loss attributable to noncontrolling
interest
$ 4,493.7
$ 4,712.1
1,832.3
2,661.4
1,541.2
219.8
199.2
11.3
1,914.9
2,797.2
1,428.0
183.2
10.9
—
1,971.5
1,622.1
1,175.1
(3.7)
1.7
4.8
1,172.3
334.6
837.7
689.9
(5.4)
4.1
2.6
688.6
137.1
551.5
(1.0)
Net income attributable to MKHL
$
552.5
$
NM Not meaningful.
Total Revenue
(218.4)
(82.6)
(135.8)
113.2
36.6
188.3
11.3
349.4
(485.2)
(1.7)
2.4
(2.2)
(483.7)
(197.5)
(286.2)
40.8 %
59.2 %
34.3 %
4.9 %
4.4 %
0.3 %
43.9 %
15.4 %
(0.1)%
0.1 %
0.1 %
15.3 %
3.1 %
40.6 %
59.4 %
30.3 %
3.9 %
0.2 %
— %
34.4 %
24.9 %
(0.1)%
— %
0.1 %
24.9 %
7.1 %
(4.6)%
(4.3)%
(4.9)%
7.9 %
20.0 %
NM
NM
21.5 %
(41.3)%
45.9 %
141.2 %
(45.8)%
(41.3)%
(59.0)%
(34.2)%
(28.6)%
(34.2)%
(1.4)
839.1
0.4
$ (286.6)
Total revenue decreased $218.4 million, or 4.6%, to $4.494 billion for the fiscal year ended April 1, 2017, compared
to $4.712 billion for the fiscal year ended April 2, 2016, which included net unfavorable foreign currency effects of $11.7
million primarily related to the weakening of the British Pound and the Euro, partially offset by the strengthening of the Japanese
Yen against the U.S. Dollar in Fiscal 2017, as compared to Fiscal 2016. On a constant currency basis, our total revenue decreased
by $206.7 million, or 4.4%. The decrease in our total revenue was primarily attributable to lower Michael Kors wholesale and
licensing revenues, partially offset by increased revenue from our Michael Kors retail business. Total revenue in Fiscal
2017 included approximately $168.3 million of incremental revenue attributable to our recent acquisitions, including $151.1
million related to our acquisition of the Greater China operations on May 31, 2016 and incremental revenues of $4.0 million and
$13.2 million, respectively, resulting from our consolidation of MK Panama and acquisition of MK Korea in Fiscal 2016. Fiscal
2016 included approximately $33.7 million of incremental retail revenue attributable to the inclusion of the 53rd week.
46
The following table details revenues for our three business segments (dollars in millions):
Fiscal Years Ended
April 1,
2017
April 2,
2016
% Change
$ Change
As Reported
Constant
Currency
% of Total
Revenue
for Fiscal
2017
% of Total
Revenue
for Fiscal
2016
$
$
2,572.1
1,775.8
145.8
4,493.7
$
$
2,394.9
2,143.9
173.3
4,712.1
$
$
177.2
(368.1)
(27.5)
(218.4)
7.4 %
(17.2)%
(15.9)%
(4.6)%
7.8 %
(17.0)%
(15.9)%
(4.4)%
57.2%
39.5%
3.3%
50.8%
45.5%
3.7%
Total Revenue:
MK Retail
MK Wholesale
MK Licensing
Total revenue
MK Retail
Revenue from our Michael Kors retail stores increased $177.2 million, or 7.4%, to $2.572 billion for Fiscal 2017,
compared to $2.395 billion for Fiscal 2016, which included unfavorable foreign currency effects of $8.7 million. On a constant
currency basis, revenue from our Michael Kors retail stores increased $185.9 million, or 7.8%. We operated 827 Michael Kors
retail stores, including concessions, as of April 1, 2017, compared to 668 Michael Kors retail stores, including concessions, as
of April 2, 2016.
Our comparable store sales decreased $172.7 million, or 8.3%, during Fiscal 2017, which included net unfavorable
foreign currency effects of $3.9 million. Our comparable store sales benefited approximately 304 basis points from the
inclusion of the North American e-commerce sales in comparable store sales. On a constant currency basis, our comparable
store sales decreased $168.8 million, or 8.1%. The decrease in our comparable store sales was primarily attributable to lower
sales from our women’s accessories, watches and jewelry product categories during Fiscal 2017 compared to Fiscal 2016.
Our non-comparable store sales increased $349.9 million during Fiscal 2017, which included net unfavorable foreign
currency effects of $4.8 million. On a constant currency basis, our non-comparable store sales increased $354.7 million. The
increase in non-comparable store sales was primarily attributable to operating 159 additional stores since April 2, 2016,
including 111 stores associated with our acquisition of the previously licensed operations in Greater China. Our recently
acquired and consolidated businesses contributed approximately $226.9 million to our non-comparable store sales for Fiscal
2017, $206.7 million of which related to Greater China, $15.1 million to South Korea and $5.1 million to Latin America. Fiscal
2016 included approximately $33.7 million of incremental retail revenue attributable to the inclusion of the 53rd week.
MK Wholesale
Revenue from our Michael Kors wholesale customers decreased $368.1 million, or 17.2%, to $1.776 billion for Fiscal
2017, compared to $2.144 billion for Fiscal 2016, which included unfavorable foreign currency effects of $3.0 million. On a
constant currency basis, our Michael Kors wholesale revenue decreased $365.1 million, or 17.0%. The decrease in our Michael
Kors wholesale revenue was primarily attributable to lower sales from our women’s accessories, apparel and footwear product
lines, offset in part by increased men’s sales during Fiscal 2017 as compared to Fiscal 2016. Approximately $51.2 million of
the decrease in Michael Kors wholesale revenue was due to the absence of the prior period wholesale sales to our licensees in
Greater China, South Korea and Latin America as a result of our acquisition and consolidation of the related businesses.
MK Licensing
Royalties earned on our licensing agreements decreased $27.5 million, or 15.9%, to $145.8 million for Fiscal 2017,
compared to $173.3 million for Fiscal 2016. This decrease was primarily attributable to lower licensing revenues related to watches
and lower revenues from our geographic licensing arrangements in Asia due to our recent acquisitions of the related licensed
operations, as well as a decrease in licensing revenues related to jewelry. These decreases were partially offset by higher licensing
revenues related to sales of outerwear.
Gross Profit
Gross profit decreased $135.8 million, or 4.9%, to $2.661 billion during Fiscal 2017, compared to $2.797 billion for Fiscal
2016, which included unfavorable foreign currency effects of $2.0 million. Gross profit as a percentage of total revenue
declined 20 basis points to 59.2% during Fiscal 2017, compared to 59.4% during Fiscal 2016. The slight decrease in our gross
profit margin was primarily driven by a 250 basis point decline in our MK Retail segment gross margin, primarily attributable to
increased promotional activity, which was largely offset by a favorable channel mix due to a higher proportion of retail sales than
in the prior fiscal period, as well a 50 basis point improvement in our MK Wholesale segment gross margin, primarily reflecting
lower allowances during Fiscal 2017, as compared to Fiscal 2016.
47
Total Operating Expenses
Total operating expenses increased $349.4 million, or 21.5%, to $1.972 billion during Fiscal 2017, compared to $1.622
billion for Fiscal 2016. Our operating expenses included a net favorable foreign currency impact of approximately $5.4 million.
Total operating expenses as a percentage of total revenue increased to 43.9% in Fiscal 2017, compared to 34.4% in Fiscal 2016.
The components that comprise total operating expenses are detailed below.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $113.2 million, or 7.9%, to $1.541 billion during Fiscal 2017,
compared to $1.428 billion for Fiscal 2016. The increase in selling, general and administrative expenses was primarily due to the
following:
•
•
an increase of $129.9 million due to the inclusion of the recently acquired businesses in the Greater China and South
Korea regions in our operating results during Fiscal 2017; and
an increase of $31.4 million in retail store occupancy costs, excluding expenses related to acquired businesses, primarily
attributable to the growth in our retail store network and our global e-commerce business.
These increases were partially offset in part by:
•
•
•
a decrease of $29.9 million in corporate expenses, excluding transaction costs and expenses related to acquired
businesses;
a decrease of $12.7 million in selling expenses, excluding acquired businesses; and
lower retail compensation-related expenses of $11.3 million primarily as a result of our cost reduction initiatives.
Selling, general and administrative expenses as a percentage of total revenue increased to 34.3% during Fiscal 2017,
compared to 30.3% for Fiscal 2016. The increase as a percentage of total revenue was primarily due to the increase in our retail
store-related costs as a percentage of revenue during Fiscal 2017, as compared to Fiscal 2016.
Depreciation and Amortization
Depreciation and amortization increased $36.6 million, or 20.0%, to $219.8 million during Fiscal 2017, compared to $183.2
million for Fiscal 2016. Approximately $31.1 million of this increase was attributable to depreciation and amortization expenses
recorded for our newly acquired and consolidated businesses in Greater China, South Korea and Latin America, including
amortization of the reacquired rights intangible asset recognized in connection with the acquisition of the Greater China business.
The remainder of the increase in depreciation and amortization expense was due to an increase in build-out of our new Michael
Kors retail stores and shop-in-shop locations, and investments in our corporate facilities and our information systems infrastructure.
Depreciation and amortization increased to 4.9% as a percentage of total revenue during Fiscal 2017, compared to 3.9% for Fiscal
2016.
Impairment of Long-Lived Assets
During Fiscal 2017, we recognized asset impairment charges of approximately $199.2 million, $198.7 million of which
related to fixed assets and lease rights for underperforming Michael Kors retail store locations that are still in operation and $0.5
million related to our Michael Kors wholesale operations. During Fiscal 2016, fixed asset impairment charges of $10.9 million,
$8.6 million of which related to Michael Kors retail locations that are still in operation, $0.4 million related to our Michael Kors
wholesale operations and $1.9 million related to a corporate fixed asset that is no longer in service. Please refer to Note 11 and Note
18 to the accompanying consolidated financial statements for additional information.
Restructuring and Other Charges
During Fiscal 2017, we recorded $11.3 million of transaction costs related to the acquisition of the Greater China business,
which were previously recorded within selling, general and administrative expenses and reclassified to restructuring and other
charges to conform to Fiscal 2018 presentation.
48
Income from Operations
As a result of the foregoing, income from operations decreased $485.2 million, or 41.3%, to $689.9 million during Fiscal
2017, compared to $1.175 billion for Fiscal 2016, which included net favorable foreign currency effects of $3.4 million. Income
from operations as a percentage of total revenue declined to 15.4% in Fiscal 2017, compared to 24.9% in Fiscal 2016.
The following table details income from operations for our three business segments (dollars in millions):
Fiscal Years Ended
April 1,
2017
April 2,
2016
$ Change
% Change
% of Total
Revenue for
Fiscal 2017
% of Total
Revenue for
Fiscal 2016
159.8
468.1
62.0
689.9
$
$
501.4
584.1
89.6
1,175.1
$
$
(341.6)
(116.0)
(27.6)
(485.2)
(68.1)%
(19.9)%
(30.8)%
(41.3)%
6.2%
26.4%
42.5%
15.4%
20.9%
27.2%
51.7%
24.9%
Income from operations:
MK Retail
MK Wholesale
MK Licensing
Income from operations
$
$
MK Retail
Income from operations for our MK Retail segment declined $341.6 million, or 68.1%, to $159.8 million during Fiscal
2017, compared to $501.4 million for Fiscal 2016, which included impairment charges relating to underperforming Michael Kors
retail stores of $198.7 million and $8.6 million, respectively. Income from operations as a percentage of net retail sales for the
MK Retail segment declined from 20.9% in Fiscal 2016 to 6.2% during Fiscal 2017. Approximately 740 basis points of this decline
was attributable to the above mentioned impairment charges. The remaining 730 basis point decrease in retail income from
operations as a percentage of net retail sales was primarily due to an increase in other operating expenses as a percentage of net
retail sales of approximately 480 basis points, as well as a 250 basis point decrease in gross profit margin, as previously discussed,
during Fiscal 2017 as compared to Fiscal 2016. The increase in total retail operating expenses as a percentage of net retail sales
was largely due to the following: (i) the above-mentioned impairment charges for underperforming Michael Kors retail stores still
in operation; (ii) increased retail store-related costs; (iii) higher depreciation expenses associated with the recently acquired
businesses and new store openings; (iv) increased corporate allocated expenses primarily due to the inclusion of transaction costs
of $11.3 million related to the acquisition of the Greater China business; and (v) amortization of the reacquired rights intangible
asset recognized in connection with our acquisition of the Greater China business.
MK Wholesale
Income from operations for our MK Wholesale segment declined $116.0 million, or 19.9%, to $468.1 million during Fiscal
2017, compared to $584.1 million for Fiscal 2016. Income from operations as a percentage of net wholesale sales decreased
approximately 80 basis points to 26.4%. The decrease in wholesale income from operations as a percentage of wholesale net sales
was primarily due to higher operating expenses as a percentage of net wholesale sales of approximately 130 basis points, partially
offset by a 50 basis point increase in our wholesale gross profit margin, as previously discussed. The increase in operating expenses
as a percentage of wholesale sales was primarily attributable to increased distribution, selling and design costs, as well as higher
depreciation expenses in Fiscal 2017, partially offset by the absence of prior year write-off related to fixed assets.
MK Licensing
Income from operations for our MK Licensing segment decreased $27.6 million, or 30.8%, to $62.0 million during Fiscal
2017, compared to $89.6 million for Fiscal 2016. Income from operations as a percentage of licensing revenue declined
approximately 920 basis points to 42.5%. The decline in licensing income from operations as a percentage of licensing revenue
was due to an increase in operating expenses as a percentage of licensing revenues during Fiscal 2017, as compared to Fiscal 2016.
This increase in operating expenses as a percentage of licensing revenue was primarily due to increased advertising expenses,
depreciation expenses and corporate allocated expenses, including costs related to protection of our intellectual property,
during Fiscal 2017 as compared to Fiscal 2016.
49
Other Income, net
Other income of $5.4 million during Fiscal 2017 was primarily comprised of $3.8 million in insurance settlements related
to the prior-year disruption to our former third party operated e-commerce fulfillment center, $0.9 million of income related to
our anti-counterfeiting efforts and $0.7 million of rental income from our owned distribution center in Europe. During Fiscal 2016,
other income of $3.7 million was primarily comprised of a $3.7 million gain on acquisition of MK Korea (see Note 3 to the
accompanying consolidated financial statements) and $1.0 million in income related to our anti-counterfeiting efforts, partially
offset by $1.0 million of losses related to our joint venture, which were recorded under the equity method of accounting prior to
obtaining controlling interest in MK Panama during the second quarter of Fiscal 2016.
Interest expense, net
Interest expense, net increased $2.4 million to $4.1 million for Fiscal 2017, as compared to $1.7 million for Fiscal 2016,
primarily due to higher interest expense due to an increase in borrowings outstanding and lower interest income due to a decline
in our short-term investments (cash-equivalents) during Fiscal 2017.
Foreign Currency Loss
We recognized foreign currency losses of $2.6 million and $4.8 million during Fiscal 2017 and Fiscal 2016, respectively,
which were primarily attributable to net losses on the revaluation and settlement of certain of our account payable in currencies
other than the functional currency of the applicable reporting units, as well as the remeasurement of dollar-denominated
intercompany loans with certain of our subsidiaries. The net foreign currency losses for Fiscal 2017 and Fiscal 2016 also included
favorable mark-to-market adjustments of $2.6 million and unfavorable mark-to-market adjustments of $2.1 million, respectively,
related to our forward foreign currency contracts not designated as accounting hedges.
Provision for Income Taxes
We recognized $137.1 million of income tax expense during Fiscal 2017, compared with $334.6 million for Fiscal 2016.
Our effective tax rate for Fiscal 2017 was 19.9%, compared to 28.5% for Fiscal 2016. The decrease in our effective tax rate was
primarily due to the favorable effect of global financing activities as well as the increase in taxable income in certain of our non-
U.S. subsidiaries (predominantly European operations) during Fiscal 2017, which are subject to lower statutory income tax rates.
The global financing activities are related to our previously disclosed 2014 move of our principal executive office from Hong
Kong to the United Kingdom (“U.K.”) and decision to become a U.K. tax resident. In connection with this decision, we funded
our international growth strategy through intercompany debt financing arrangements between our U.S., U.K. and Switzerland
subsidiaries in December 2015. Accordingly, due to the difference in the statutory income tax rates between these jurisdictions,
we realized a reduction in our effective tax rate. The impact on our effective tax rate was higher in Fiscal 2017 than in Fiscal 2016
because the debt financing arrangements were initiated near the end of Fiscal 2016. Due to our substantial international growth
and expansion over the past several years and our Company being a U.K. tax resident, we believe that it is most appropriate to
reconcile our effective tax rate to the U.K. statutory tax rate.
Our effective tax rate may fluctuate from time to time due to the effects of changes in U.S. state and local taxes and tax
rates in foreign jurisdictions. In addition, factors such as the geographic mix of earnings, enacted tax legislation and the results of
various global tax strategies, may also impact our effective tax rate in future periods.
Net Loss Attributable to Noncontrolling Interest
During Fiscal 2017 and Fiscal 2016, we recorded a net loss attributable to our noncontrolling interest in MK Panama of $1.0
million and $1.4 million, respectively. These losses represent the share of MK Panama’s net loss that is not attributable to the
Company.
Net Income Attributable to MKHL
As a result of the foregoing, our net income attributable to MKHL declined $286.6 million, or 34.2%, to $552.5
million during Fiscal 2017, compared to $839.1 million for Fiscal 2016, which included net favorable foreign currency effects
of $2.9 million. Fiscal 2017 net income reflected approximately $148.3 million of impairment charges, net of taxes, primarily
related to asset write downs for underperforming Michael Kors retail stores, as described above.
50
Liquidity and Capital Resources
Liquidity
Our primary sources of liquidity are the cash flows generated from our 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, dividends and other corporate
activities. We believe that the cash generated from our 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,
including investments made and expenses incurred in connection with our store growth plans, shop-in-shop growth, investments
in corporate and distribution facilities, continued systems development, e-commerce and marketing initiatives. We spent $120.4
million on capital expenditures during Fiscal 2018, and expect to spend approximately $250.0 million during Fiscal 2019. The
majority of the Fiscal 2018 expenditures related to our retail operations (including e-commerce), with the remainder related to
enhancements to our distribution and information systems infrastructure and our corporate offices, as well as in connection with
new shop-in-shops.
The following table sets forth key indicators of our liquidity and capital resources (in millions):
Balance Sheet Data:
Cash and cash equivalents
Working capital
Total assets
Short-term debt
Long-term debt
Cash Flows Provided By (Used In):
Operating activities
Investing activities
Financing activities
Effect of exchange rate changes
Net decrease in cash and cash equivalents
Cash Provided by Operating Activities
As of
March 31,
2018
April 1,
2017
$
$
$
$
$
163.1
301.8
4,059.0
200.0
674.4
$
$
$
$
$
227.7
598.9
2,409.6
133.1
—
March 31,
2018
Fiscal Years Ended
April 1,
2017
April 2,
2016
$
$
$
1,062.5
(1,533.4)
389.6
15.1
(66.2) $
$
1,034.6
(650.9)
(850.2)
(5.9)
(472.4) $
1,249.5
(381.1)
(1,149.4)
4.1
(276.9)
Cash provided by operating activities increased $27.9 million to $1.063 billion during Fiscal 2018, as compared to $1.035
billion for Fiscal 2017. The increase in cash flows from operating activities was primarily due to an increase related to changes
in our working capital, partially offset by a decrease in our net income after non-cash adjustments. The increase related to our
working capital was primarily attributable to an increase in accrued expenses and other current liabilities primarily driven by
restructuring liabilities recorded in Fiscal 2018 and the timing of tax related payments, and favorable changes in prepaid expenses
and other current assets and inventories primarily due to timing. These increases were partially offset by lower accounts payable
primarily due to the timing of payments and an unfavorable change in accounts receivable primarily due to a higher decline in
wholesale inventory purchases in the prior year.
Cash provided by operating activities decreased $214.9 million to $1.035 billion billion during Fiscal 2017, as compared
to $1.250 billion for Fiscal 2016. The decrease in cash flows from operating activities was primarily due to a decrease in our
net income after non-cash adjustments, as well as a decrease related to changes in our working capital, which was primarily
attributable to an unfavorable change in accrued expenses and other current liabilities primarily due to the timing of tax and
royalty payments, partially offset by favorable changes in inventory and accounts payable due to lower wholesale inventory
purchases and shipments, as well as the timing of payments.
51
Cash Used in Investing Activities
Net cash used in investing activities increased $882.5 million to $1.533 billion during Fiscal 2018, compared to $650.9
million during Fiscal 2017. The decrease in cash was primarily attributable to a $933.9 million increase of cash paid, net of cash
acquired, in connection with our Fiscal 2018 acquisition of the Jimmy Choo business, as compared to our acquisition of the
previously licensed business in Greater China during Fiscal 2017. This decrease in cash was partially offset by lower capital
expenditures of $44.4 million, due to lower spending related to build-outs of new stores and shop-in-shops and lower corporate
expenditures.
Net cash used in investing activities increased $269.8 million to $650.9 million during Fiscal 2017, compared to $381.1
million during Fiscal 2016. The decrease in cash was primarily attributable to $480.6 million of cash paid, net of cash acquired,
in connection with our acquisition of the previously licensed business in Greater China during Fiscal 2017, partially offset by
lower capital expenditures of $204.4 million, attributable to lower corporate expenditures and lower spending to build out new
stores and shop-in-shops, partially offset by capital spending related to our newly acquired operations in China and South
Korea and increased investments in our e-commerce business.
Cash Provided by (Used in) Financing Activities
Net cash provided by financing activities was $389.6 million during Fiscal 2018, as compared to net cash used in financing
activities of $850.2 million during Fiscal 2017. The $1.240 billion increase in cash from financing activities was due to increased
debt borrowings of $590.9 million, which included senior notes and term loan borrowings to finance the acquisition of Jimmy
Choo, net of cash repayments, as well as a decrease of $643.8 million in cash payments to repurchase our ordinary shares.
Net cash used in financing activities decreased $299.2 million to $850.2 million during Fiscal 2017, from $1.149
billion during Fiscal 2016, which was primarily attributable to increased borrowings under our 2015 Credit Facility of $153.4
million, net of debt repayments and a decrease of $147.6 million in cash payments to repurchase our ordinary shares.
52
Debt Facilities
The following table presents a summary of the Company’s borrowing capacity and amounts outstanding as of March 31,
2018 and April 1, 2017 (dollars in millions):
Senior Unsecured Revolving Credit Facility:
Revolving Credit Facility (excluding up to a $500 million accordion feature) (1)
Total Availability
Borrowings outstanding (2)
Letter of credit outstanding
Remaining availability
Term Loan Facility ($1.0 billion) (3)
Borrowings Outstanding, net of debt issuance costs (4)
Remaining availability
4.000% Senior Notes
Borrowings Outstanding, net of debt issuance costs and discount amortization (4)
Other Borrowings (4)
Hong Kong Uncommitted Credit Facility:
Total availability (100.0 million Hong Kong Dollars)
Borrowings outstanding (45.0 million Hong Kong Dollars) (2)
Bank guarantees outstanding (11.8 million Hong Kong Dollars)
Remaining availability
Japan Credit Facility:
Borrowings outstanding
Total and remaining availability (1.0 billion Japanese Yen)
Total borrowings outstanding(1)
Total remaining availability
Fiscal Years Ended
March 31,
2018
April 1,
2017
1,000.0
200.0
15.9
784.1
$
$
1,000.0
127.3
10.6
862.1
229.0
$
— $
444.5
$
0.9
12.7
—
1.5
11.2
$
$
— $
$
9.4
874.4
804.7
$
$
—
—
—
—
12.9
5.8
1.5
5.6
—
—
133.1
867.7
$
$
$
$
$
$
$
$
$
$
$
$
_____________________________
(1) The 2017 Credit Facility contains customary events of default and requires us to maintain a leverage ratio at the end of each
fiscal quarter of no greater than 3.5 to 1, calculated as the ratio of the sum of total indebtedness as of the date of the measurement
plus 6.0 times the consolidated rent expense for the last four consecutive fiscal quarters, to Consolidated EBITDAR 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 deductions. The 2017 Credit Facility also includes other customary covenants that limit additional indebtedness,
guarantees, liens, acquisitions and other investments and cash dividends. As of March 31, 2018 and April 1, 2017, we were
in compliance with all covenants related to our agreements then in effect governing our debt.
(2) Recorded as short-term debt in our consolidated balance sheets as of March 31, 2018 and April 1, 2017.
(3) The $1.0 billion facility was fully utilized to finance a portion of the purchase price of our acquisition of Jimmy Choo on
November 1, 2017, a portion of which was repaid during Fiscal 2018. See Note 3 for additional information.
(4) Recorded as long-term debt in our consolidated balance sheet as of March 31, 2018.
We believe that our 2017 Credit Facility is adequately diversified with no undue concentration in any one financial institution.
As of March 31, 2018, there were 13 financial institutions participating in the facility, with none maintaining a maximum
commitment percentage in excess of 15%. 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 2017 Credit Facility.
See Note 10 to the accompanying consolidated financial statements for detailed information relating to our credit facilities.
53
Share Repurchase Program
The following table presents our treasury share repurchases during the fiscal years ended March 31, 2018 and April 1,
2017 (dollars in millions):
Cost of shares repurchased under share repurchase program
Fair value of shares withheld to cover tax obligations for vested restricted share
awards
Total cost of treasury shares repurchased
$
$
Shares repurchased under share repurchase program
Shares withheld to cover tax withholding obligations
Fiscal Years Ended
March 31,
2018
April 1,
2017
357.8
$
1,000.0
3.2
361.0
$
4.8
1,004.8
7,700,959
92,536
7,793,495
21,756,353
100,552
21,856,905
As of March 31, 2018, the remaining availability under our $1.0 billion share repurchase program was $642.2 million. Share
repurchases may be made in open market or privately negotiated transactions, subject to market conditions, applicable legal
requirements, trading restrictions under the our insider trading policy, and other relevant factors. This program may be suspended
or discontinued at any time.
Contractual Obligations and Commercial Commitments
As of March 31, 2018, our lease commitments and contractual obligations were as follows (in millions):
Fiscal Years Ending
Operating leases
Inventory Purchase Obligations
Other commitments
Short-term debt
Long-term debt
Total
Fiscal
2019
323.9
750.6
64.7
200.0
—
1,339.2
$
$
Fiscal
2020-2021
578.8
—
39.4
—
137.4
755.6
$
$
Fiscal
2022-2023
472.5
—
1.4
—
91.6
565.5
$
$
Fiscal 2024 and
Thereafter
$
$
531.4
—
0.9
—
445.4
977.7
$
$
Total
1,906.6
750.6
106.4
200.0
674.4
3,638.0
Operating lease obligations represent our equipment leases and the minimum lease rental payments under non-cancelable
operating leases for our real estate locations globally. In addition to the above amounts, we are typically required to pay real estate
taxes, contingent rent based on sales volume and other occupancy costs relating to our leased properties for our retail stores.
Inventory purchase obligations represent our contractual agreements relating to future purchases of inventory.
Other commitments include our non-cancelable contractual obligations related to marketing and advertising agreements,
information technology agreements, and supply agreements.
Excluded from the above commitments is $100.8 million of long-term liabilities related to uncertain tax positions, due to
the uncertainty of the time and nature of resolution.
The above table also excludes current liabilities (other than short-term debt) recorded as of March 31, 2018, as these items
will be paid within one year, and non-current liabilities that have no cash outflows associated with them (e.g., deferred taxes).
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. In addition to the commitments in the above table, our off-balance sheet commitments
relating to our outstanding letters of credit were $20.3 million at March 31, 2018, including $4.4 million in letters of credit issued
outside of the 2017 Credit Facility. In addition, as of March 31, 2018, bank guarantees of approximately $1.5 million were supported
by our Hong Kong Credit Facility. 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.
54
Effects of Inflation
We do not believe that our sales or operating results have been materially impacted by inflation during the periods presented
in our financial statements. However, we may experience an increase in cost pressure from our suppliers in the future, which could
have an adverse impact on our gross profit results in the periods effected.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to certain market risks during the normal course of our business, such as risk arising from fluctuations in
foreign currency exchange rates, as well as fluctuations in interest rates. In attempts to manage these risks, we employ certain
strategies to mitigate the effect of these fluctuations. We enter into foreign currency forward contracts to manage our foreign
currency exposure to the fluctuations of certain foreign currencies. The use of these instruments primarily helps to manage our
exposure to our foreign purchase commitments and better control our product costs. We do not use derivatives for trading or
speculative purposes.
Foreign Currency Exchange Risk
We are exposed to risks on certain purchase commitments to foreign suppliers based on the value of our purchasing
subsidiaries’ local currency relative to the currency requirement of the supplier on the date of the commitment. As such, we enter
into forward currency exchange contracts that generally mature in 12 months or less and are consistent with the related purchase
commitments, to manage our exposure to the changes in the value of the Euro and the Canadian Dollar. These contracts are recorded
at fair value in our consolidated balance sheets as either an asset or liability, and are derivative contracts to hedge cash flow risks.
Certain of these contracts are designated as hedges for hedge accounting purposes, while certain of these contracts, are not designated
as hedges for accounting purposes. Accordingly, the changes in the fair value of the majority of these contracts at the balance sheet
date are recorded in our equity as a component of accumulated other comprehensive income, and upon maturity (settlement) are
recorded in, or reclassified into, our cost of sales or operating expenses, in our consolidated statement of operations, as applicable
to the transactions for which the forward currency exchange contracts were established. For those contracts which are designated
as hedges for accounting purposes, any portion of those contracts deemed ineffective would be charged to earnings, in the period
the ineffectiveness was determined.
We perform a sensitivity analysis on our forward currency contracts, both designated and not designated as hedges for
accounting purposes, to determine the effects of fluctuations in foreign currency exchange rates. For this sensitivity analysis, we
assume a hypothetical change in U.S. Dollar against foreign exchange rates. Based on all foreign currency exchange contracts
outstanding as of March 31, 2018, a 10% appreciation or devaluation of the U.S. Dollar compared to the level of foreign currency
exchange rates for currencies under contract as of March 31, 2018, would result in a net increase and decrease, respectively, of
approximately $16.3 million in the fair value of these contracts.
Interest Rate Risk
We are exposed to interest rate risk in relation to borrowings outstanding under our Term Loan Facility, our 2017 Credit
Facility, our Hong Kong Credit Facility and our Japan Credit Facility. Our Term Loan Facility carries interest at a rate that is based
on LIBOR. Our 2017 Credit Facility carries interest rates that are tied to LIBOR and the prime rate, among other institutional
lending rates (depending on the particular origination of borrowing), as further described in Note 10 to the accompanying
consolidated financial statements. Our Hong Kong Credit Facility carries interest at a rate that is tied to the Hong Kong Interbank
Offered Rate. Our Japan Credit Facility carries interest at a rate posted by the Mitsubishi UFJ Financial Group. Therefore, our
statements of operations and comprehensive income and cash flows are exposed to changes in those interest rates. At March 31,
2018, we had $229.0 million, net of debt issuance costs, outstanding under our Term Loan Facility, $200.0 million in short-term
borrowings outstanding under our 2017 Credit Facility, and no borrowings outstanding under our Hong Kong or Japanese Credit
Facilities. At April 1, 2017, we had short-term borrowings of $127.3 million outstanding under our 2015 Credit Facility and short-
term borrowings of approximately $5.8 million outstanding under our Hong Kong Credit Facility. These balances are not indicative
of future balances that may be outstanding under our revolving credit facilities that may be subject to fluctuations in interest rates.
Any increases in the applicable interest rate(s) would cause an increase to the interest expense relative to any outstanding balance
at that date.
Credit Risk
We have outstanding $450.0 million aggregate principal amount of senior notes due 2024. The senior notes bear interest at
a fixed rate equal to 4.000% per year, payable semi-annually. Our senior notes interest rate payable may be subject to adjustments
from time to time if either Moody’s or S&P (or a substitute rating agency), downgrades (or downgrades and subsequently upgrades)
the credit rating assigned to the senior notes.
55
Item 8.
Financial Statements and Supplementary Data
The response to this item is provided in this Annual Report on Form 10-K under Item 15. “Exhibits and Financial Statement
Schedule” and is incorporated herein by reference.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, our principal executive officer and principal financial officer, respectively, of the
design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a - 15(e) and 15(d) - 15(e)
under the Securities and Exchange Act of 1934 (the “Exchange Act”)) as of March 31, 2018. Based on the evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures as of March 31, 2018 are effective.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as
defined under the Exchange Act Rule 13a-15 (f)) to provide reasonable assurance regarding the reliability of financial reporting
and that the consolidated financial statements have been prepared in accordance with U.S. GAAP. Such internal control over
financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the assets; (ii) provide reasonable assurance (A) that transactions
are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP and that receipts and
expenditures of the Company are being made only in accordance with authorizations of management and directors; and
(B) regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material
effect on the financial statements.
Our management assessed the effectiveness of our internal control over financial reporting as of March 31, 2018. In making
this assessment, it used the criteria set forth in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), the 2013 Framework. Based on this assessment, management has determined
that, as of March 31, 2018, our internal control over financial reporting is effective based on those criteria.
On November 1, 2017, we acquired Jimmy Choo (refer to Note 3 to the accompanying consolidated financial statements
for additional information). Jimmy Choo’s assets (excluding intangible assets recorded in connection with the acquisition)
comprised approximately 8.3% of the Company’s total assets at March 31, 2018 and approximately 4.7% of the Company’s total
revenue for Fiscal 2018. As of March 31, 2018, we are in the process of evaluating the internal controls of the acquired business
and integrating it into our existing operations. The acquired business has, therefore, been excluded from management’s assessment
of internal control over financial reporting for Fiscal 2018.
The Company’s internal control over financial reporting as of March 31, 2018, as well as the consolidated financial
statements, have been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report
which appears herein. The audit report appears on page 62 of this report.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the three months ended March 31, 2018,
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
56
Item 9B. Other Information
This Item 9B is being filed solely to update the Item 9B disclosure included in the Company’s Annual Report on Form 10-
K for the fiscal year ended April 1, 2017, filed with the SEC on May 31, 2017, in order to provide the amount of any material
charges relating to the Retail Fleet Optimization Plan by major type of cost that the Company believes are now determinable.
The Company previously disclosed that in connection with the Retail Fleet Optimization Plan, it expects to incur
approximately $100 - $125 million of one-time costs, including lease termination and other store closure costs. During Fiscal
2018, the Company recorded restructuring charges of $52.6 million, which were comprised of lease-related costs of $51.9 million
(inclusive of losses on store lease exits of $29.0 million) and severance and benefit costs of $0.7 million. Most of these charges
were incurred during the fourth fiscal quarter of 2018. The Company continues to expect that it will incur an additional $50-$75
million in future cash expenditures in connection with the Retail Fleet Optimization Plan, consistent with the original range of
one-time costs previously disclosed, and anticipates finalizing the remainder of the planned store closures over the next two fiscal
years.
The exact amounts and timing of the Retail Fleet Optimization Plan charges and future cash expenditures associated therewith
are undeterminable at this time. The Company will either disclose in a Current Report on Form 8-K, or disclose in another periodic
filing with the U.S. Securities and Exchange Commission, the amount of any material charges relating to the Retail Optimization
Plan by major type of cost once such amounts or range of amounts are determinable.
This disclosure is intended to satisfy the requirements of Item 2.05 of Form 8-K.
57
Item 10. Directors, Executive Officers and Corporate Governance
Part III
Information with respect to this Item is included in the Company’s Proxy Statement to be filed in June 2018, which is
incorporated herein by reference.
Item 11. Executive Compensation
Information with respect to this Item is included in the Company’s Proxy Statement to be filed in June 2018, which is
incorporated herein by reference.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth information as of March 31, 2018 regarding compensation plans under which the Company’s
equity securities are authorized for issuance:
Equity Compensation Plan Information
(a)
(b)
(c)
Number of securities
to be issued upon
exercise of outstanding
options, warrants and
rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column (a))
Plan category
Equity compensation plans approved by security holders (1)
Equity compensation plans not approved by security holders (3)
Total
5,270,406
1,375,411
6,645,817
$
$
$
46.98 (2)
4.46 (2)
38.18 (2)
7,193,763
—
7,193,763
(1)
(2)
(3)
Reflects share options, restricted shares and restricted share units issued under the Michael Kors Holdings Limited Amended
and Restated Omnibus Incentive Plan.
Represents the weighted average exercise price of outstanding share awards only.
Reflects share options issued under the Amended and Restated Michael Kors (USA), Inc. Stock Option Plan (the “Option
Plan”), which was in effect prior to our initial public offering. As of March 31, 2018, there were no shares available for
future issuance under the Option Plan.
Item 13. Certain Relationships, Related Transactions and Director Independence
Information with respect to this Item is included in the Company’s Proxy Statement to be filed in June 2018, which is
incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
Information with respect to this Item is included in the Company’s Proxy Statement to be filed in June 2018, which is
incorporated herein by reference.
58
Item 15. Exhibits and Financial Statement Schedules
(a)
The following documents are filed as part of this annual report on Form 10-K:
PART IV
1.
The following consolidated financial statements listed below are filed as a separate section of this Annual
Report on Form 10-K:
Report of Independent Registered Public Accounting Firm - Ernst & Young LLP.
Consolidated Balance Sheets as of March 31, 2018 and April 1, 2017.
Consolidated Statements of Operations and Comprehensive Income for the fiscal years ended
March 31, 2018, April 1, 2017 and April 2, 2016.
Consolidated Statements of Shareholders’ Equity for the fiscal years ended March 31, 2018,
April 1, 2017 and April 2, 2016.
Consolidated Statements of Cash Flows for the fiscal years ended March 31, 2018, April 1, 2017
and April 2, 2016.
Notes to Consolidated Financial Statements for the fiscal years ended March 31, 2018, April 1,
2017 and April 2, 2016.
2.
Exhibits:
Exhibit
No.
2.1
2.2
2.3
3.1
4.1
4.2
4.3
4.4
10.1
EXHIBIT INDEX
Document Description
Share Purchase Agreement dated as of May 31, 2016, by and among Michael Kors (Europe) B.V., Michael Kors (HK)
Limited, Michael Kors Far East Trading Limited and Sportswear Holdings Limited (included as Exhibit 2.1 to the
Company’s Current Report on Form 8-K (File No. 001-35368), filed on June 1, 2016 and incorporated herein by reference).
Cooperation Agreement, dated as of July 25, 2017, by and among Michael Kors Holdings Limited, JAG Acquisitions
(UK) Limited and Jimmy Choo Group Limited (formerly known as Jimmy Choo PLC) (included as Exhibit 2.2 to the
Company's Current Report on Form 8-K (File No. 001-35368), filed on July 25, 2017 and incorporated herein by
reference).
Rule 2.7 Announcement, dated as of July 25, 2017 (included as Exhibit 2.1 to the Company's Current Report on Form
8-K (File No. 001-35368), filed on July 25, 2017 and incorporated herein by reference).
Amended and Restated Memorandum and Articles of Association of Michael Kors Holdings Limited (included as Exhibit
99.3 to the Company’s Current Report on Form 6-K filed on February 14, 2012, and incorporated herein by reference).
Specimen of Ordinary Share Certificate of Michael Kors Holdings Limited (included as Exhibit 4.1 to the Company’s
Registration Statement on Form F-1, as amended (File No. 333-178282), filed on December 2, 2011, and incorporated
herein by reference).
Second Amended and Restated Credit Agreement dated as of August 22, 2017 among Michael Kors Holdings Limited,
Michael Kors (USA), Inc., the foreign subsidiary borrowers party thereto, the guarantors party thereto, the financial
institutions party thereto as lenders and issuing banks and JPMorgan Chase Bank, N.A., as administrative agent (included
as Exhibit 10.1 to the Company's Current Report on Form 8-K (File No. 001-35368), filed on August 23, 2017 and
incorporated herein by reference).
Shareholders Agreement, dated as of July 11, 2011, among Michael Kors Holdings Limited and certain shareholders of
Michael Kors Holdings Limited (included as Exhibit 10.2 to the Company’s Registration Statement on Form F-1, as
amended (File No. 333-178282), filed on December 2, 2011, and incorporated herein by reference).
Indenture, dated as of October 20, 2017, by and among Michael Kors (USA), Inc., Michael Kors Holdings Limited, the
subsidiary guarantors party thereto and U.S. Bank National Association, as trustee (included as Exhibit 4.1 to the
Company's Current Report on Form 8-K (File No. 001-35368), filed on October 20, 2017 and incorporated herein by
reference).
Form of Indemnification Agreement between Michael Kors Holdings Limited and its directors and executive officers
(included as Exhibit 10.5 to the Company’s Registration Statement on Form F-1, as amended (File No. 333-178282),
filed on December 2, 2011, and incorporated herein by reference).
*Pursuant to Item 601(b)(2) of Regulation S-K, certain schedules and similar attachments have been omitted. The Company hereby
agrees to furnish a copy of any omitted schedule or attachment to the Securities and Exchange Commission upon request.
59
Exhibit
No.
10.4
10.5
Document Description
Amended and Restated Michael Kors (USA), Inc. Stock Option Plan (included as Exhibit 10.4 to the Company’s
Registration Statement on Form F-1, as amended (File No. 333-178282), filed on December 2, 2011, and incorporated
herein by reference).
Amended No. 1 to the Amended and Restated Michael Kors (USA), Inc. Share Option Plan. (included as Exhibit 4.9 to
the Company’s Annual Report on Form 20-F for the fiscal year ended March 31, 2012, filed on June 12, 2012, and
incorporated herein by reference).
10.7
10.6 Michael Kors Holdings Limited Amended and Restated Omnibus Incentive Plan (included as Appendix A to the
Company’s Definitive Proxy Statement on Schedule 14A (File No. 001-35368), filed on June 16, 2015, and incorporated
herein by reference).
Third Amended and Restated Employment Agreement, dated as of March 28, 2018, by and among Michael Kors (USA),
Inc., Michael Kors Holdings Limited and Michael Kors.
Third Amended and Restated Employment Agreement, dated as of March 28, 2018, by and among Michael Kors (USA),
Inc., Michael Kors Holdings Limited and John D. Idol.
Amended and Restated Employment Agreement, dated as of May 23, 2013, by and among Michael Kors (USA), Inc.,
Michael Kors Holdings Limited and Joseph B. Parsons (included as Exhibit 10.9 to the Company’s Annual Report on
Form 10-K for the fiscal year ended March 30, 2013 filed on May 29, 2013, and incorporated herein by reference).
10.8
10.9
10.10 Michael Kors Holdings Limited Executive Bonus Program (included as Exhibit 10.1 to the Company’s Quarterly Report
on Form 10-Q for the fiscal quarter ended June 29, 2013 filed on August 8, 2013, and incorporated herein by reference).
10.11 Employment Agreement, dated as of May 12, 2014, by and between Michael Kors (USA), Inc., and Cathy Marie Robison
(included as Exhibit 10.14 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 29, 2014
filed on May 28, 2014, and incorporated herein by reference).
10.12 Employment Agreement, dated as of July 14, 2014, by and between Pascale Meyran and Michael Kors (USA), Inc.
(included as Exhibit 10.14 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 28, 2015,
filed on May 27, 2015, and incorporated herein by reference).
10.13 Form of Employee Non-Qualified Option Award Agreement (included as Exhibit 10.15 to the Company’s Annual Report
on Form 10-K for the fiscal year ended March 28, 2015, filed on May 27, 2015, and incorporated herein by reference).
10.14 Form of Employee Restricted Share Unit Award Agreement (included as Exhibit 10.16 to the Company’s Annual Report
on Form 10-K for the fiscal year ended March 28, 2015, filed on May 27, 2015, and incorporated herein by reference).
10.15 Form of Performance-Based Restricted Share Unit Award Agreement (included as Exhibit 10.17 to the Company’s Annual
Report on Form 10-K for the fiscal year ended March 28, 2015, filed on May 27, 2015, and incorporated herein by
reference).
10.16 Form of Independent Director Restricted Share Unit Award Agreement (included as Exhibit 10.18 to the Company’s
Annual Report on Form 10-K for the fiscal year ended March 28, 2015, filed on May 27, 2015, and incorporated herein
by reference).
10.17 Aircraft Time Sharing Agreement, dated November 24, 2014, by and between Michael Kors (USA), Inc. and John Idol
(included as Exhibit 10.19 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 28, 2015,
filed on May 27, 2015, and incorporated herein by reference).
10.18 Aircraft Time Sharing Agreement, dated December 12, 2014, by and between Michael Kors (USA), Inc. and Michael
Kors (included as Exhibit 10.20 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 28,
2015, filed on May 27, 2015, and incorporated herein by reference).
10.19 Employment Agreement, dated as of April 17, 2017, by and among Michael Kors (USA), Inc., Michael Kors Holdings
Limited and Thomas J. Edwards, Jr. (including as Exhibit 10.19 to the Company’s Annual Report on Form 10-K for the
fiscal year ended April 1, 2017, filed on May 31, 2017, and incorporated herein by reference).
10.20 First Amendment, dated as of October 4, 2017, to the Second Amended and Restated Credit Agreement dated as of
August 22, 2017 among Michael Kors Holdings Limited, Michael Kors (USA), Inc., the foreign subsidiary borrowers
party thereto, the guarantors party thereto, the financial institutions party thereto as lenders and issuing banks and
JPMorgan Chase Bank, N.A., as administrative agent (included as Exhibit 10.1 to the Company's Current Report on
Form 8-K (File No. 001-35368), filed on October 5, 2017 and incorporated herein by reference).
List of subsidiaries of Michael Kors Holdings Limited.
Consent of Ernst & Young LLP.
Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes Oxley Act of 2002.
21.1
23.2
31.1
31.2
32.1
32.2
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
101.1 Interactive Data Files.
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant hereby
certifies that it meets all of the requirements for filing on Form 10-k and that it has duly caused and authorized the undersigned
to sign this report on its behalf.
Date: May 30, 2018
MICHAEL KORS HOLDINGS LIMITED
By:
Name:
Title:
/s/ John D. Idol
John D. Idol
Chairman & Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
Honorary Chairman, Chief Creative Officer and Director
May 30, 2018
Chairman, Chief Executive Officer and Director (Principal Executive
Officer)
May 30, 2018
Chief Financial Officer, Chief Operating Officer and Treasurer
(Principal Financial and Accounting Officer)
May 30, 2018
By:
By:
By:
By:
By:
By:
/s/ Michael Kors
Michael Kors
/s/ John D. Idol
John D. Idol
/s/ Thomas J. Edwards, Jr.
Thomas J. Edwards Jr.
/s/ M. William Benedetto
M. William Benedetto
/s/ Robin Freestone
Robin Freestone
/s/ Judy Gibbons
Judy Gibbons
Director
Director
Director
By:
/s/ Ann McLaughlin Korologos Director
Ann McLaughlin Korologos
By:
By:
By:
/s/ Stephen F. Reitman
Stephen F. Reitman
/s/ Jane Thompson
Jane Thompson
/s/ Jean Tomlin
Jean Tomlin
Director
Director
Director
61
May 30, 2018
May 30, 2018
May 30, 2018
May 30, 2018
May 30, 2018
May 30, 2018
May 30, 2018
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Michael Kors Holdings Limited
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Michael Kors Holdings Limited and subsidiaries (“the
Company”) as of March 31, 2018 and April 1, 2017, and the related consolidated statements of operations and comprehensive
income, shareholders’ equity and cash flows for each of the three years in the period ended March 31, 2018, and the related notes
(collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present
fairly, in all material aspects, the financial position of the Company at March 31, 2018 and April 1, 2017, and the results of its
operations and its cash flow for each of the three years in the period ended March 31, 2018, in conformity with the U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the Company’s internal control over financial reporting as of March 31, 2018, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework) and our report dated May 30, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion
on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ ERNST & YOUNG LLP
We have served as the Company’s auditor since 2014
New York, New York
May 30, 2018
62
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Michael Kors Holdings Limited
Opinion on Internal Control over Financial Reporting
We have audited Michael Kors Holdings Limited and subsidiaries’ (“the Company”) internal control over financial reporting
as of March 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 framework) (“the COSO criteria”). In our opinion, the Company’s maintained,
in all material respects, effective internal control over financial reporting as of March 31, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the consolidated balance sheets of the Company as of March 31, 2018 and April 1, 2017, the related consolidated
statements of operations and comprehensive income, statements of changes in stockholders’ equity and statements of cash flows for
each of the three years in the period ended March 31, 2018, and the related notes and our report dated May 30, 2018 expressed an
unqualified opinion thereon.
As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s
assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of
Jimmy Choo Group Limited, which is included in the fiscal year 2018 consolidated financial statements of the Company and constituted
8.2% of total assets, as of March 31, 2018 and 4.7% of net sales for the year then ended. Our audit of internal control over financial
reporting of the Company also did not include an evaluation of the internal control over financial reporting of Jimmy Choo Group
Limited.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on
Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial
reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of
the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements
in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ ERNST & YOUNG LLP
New York, New York
May 30, 2018
63
MICHAEL KORS HOLDINGS LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
Assets
Current assets
Cash and cash equivalents
Receivables, net
Inventories
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Intangible assets, net
Goodwill
Deferred tax assets
Other assets
Total assets
Current liabilities
Accounts payable
Liabilities and Shareholders’ Equity
Accrued payroll and payroll related expenses
Accrued income taxes
Short-term debt
Accrued expenses and other current liabilities
Total current liabilities
Deferred rent
Deferred tax liabilities
Long-term debt
Other long-term liabilities
Total liabilities
Commitments and contingencies
Shareholders’ equity
Ordinary shares, no par value; 650,000,000 shares authorized; 210,991,091 shares
issued and 149,698,407 outstanding at March 31, 2018; 209,332,493 shares issued
and 155,833,304 outstanding at April 1, 2017
Treasury shares, at cost (61,292,684 shares at March 31, 2018 and 53,499,189 shares
at April 1, 2017)
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings
Total shareholders’ equity of MKHL
Noncontrolling interest
Total shareholders’ equity
Total liabilities and shareholders’ equity
March 31,
2018
April 1,
2017
$
163.1
$
290.5
660.7
147.8
1,262.1
583.2
1,235.7
847.7
56.2
74.1
227.7
265.8
549.3
121.9
1,164.7
591.5
418.1
119.7
73.3
42.3
$
$
$
4,059.0
$
2,409.6
$
294.1
93.0
77.6
200.0
295.6
960.3
128.4
186.3
674.4
88.1
2,037.5
176.3
61.1
60.3
133.1
135.0
565.8
137.8
80.0
—
31.0
814.6
—
—
(3,015.9)
831.1
50.5
4,152.0
2,017.7
3.8
2,021.5
4,059.0
$
(2,654.9)
767.8
(80.6)
3,560.3
1,592.6
2.4
1,595.0
2,409.6
See accompanying notes to consolidated financial statements.
64
MICHAEL KORS HOLDINGS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In millions, except share and per share data)
March 31,
2018
Fiscal Years Ended
April 1,
2017
April 2,
2016
$
4,718.6
$
4,493.7
$
Total revenue
Cost of goods sold
Gross profit
Selling, general and administrative expenses
Depreciation and amortization
Impairment of long-lived assets
Restructuring and other charges (1)
Total operating expenses
Income from operations
Other income, net
Interest expense, net
Foreign currency (gain) loss
Income before provision for income taxes
Provision for income taxes
Net income
Less: Net income (loss) attributable to noncontrolling interest
Net income attributable to MKHL
Weighted average ordinary shares outstanding:
Basic
Diluted
Net income per ordinary share attributable to MKHL:
Basic
Diluted
Statements of Comprehensive Income:
Net income
Foreign currency translation adjustments
Net (loss) gain on derivatives
Comprehensive income
Less: Net income (loss) attributable to noncontrolling interest
Less: Other comprehensive income (loss) attributable to
noncontrolling interest
Comprehensive income attributable to MKHL
$
$
$
$
$
1,859.3
2,859.3
1,766.8
208.6
32.7
102.1
2,110.2
749.1
(1.7)
22.3
(13.3)
741.8
149.7
592.1
0.2
591.9
$
1,832.3
2,661.4
1,541.2
219.8
199.2
11.3
1,971.5
689.9
(5.4)
4.1
2.6
688.6
137.1
551.5
(1.0)
552.5
152,283,586
155,102,885
165,986,733
168,123,813
$
$
$
3.89
3.82
592.1
147.4
(16.2)
723.3
0.2
3.33
3.29
551.5
(8.8)
8.7
551.4
(1.0)
$
$
$
$
0.1
723.0
$
(0.4)
552.8
$
4,712.1
1,914.9
2,797.2
1,428.0
183.2
10.9
—
1,622.1
1,175.1
(3.7)
1.7
4.8
1,172.3
334.6
837.7
(1.4)
839.1
186,293,295
189,054,289
4.50
4.44
837.7
18.5
(32.5)
823.7
(1.4)
0.1
825.0
(1) Restructuring and other charges includes store closure costs recorded in connection with the Retail Fleet Optimization Plan,
as well as transaction and transition costs recorded in connection with the acquisitions of Jimmy Choo Group Limited (formerly
known as Jimmy Choo PLC) and Michael Kors (HK) Limited and Subsidiaries (see Note 3 and Note 9).
See accompanying notes to consolidated financial statements.
65
MICHAEL KORS HOLDINGS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in millions, except share data which is in thousands)
Ordinary Shares
Shares
Amounts
Additional
Paid-in
Capital
Treasury Shares
Shares
Amounts
Accumulated
Other
Comprehensive
(Loss) Income
Retained
Earnings
Total
Equity of
MKHL
Non-
controlling
Interests
Total
Equity
Balance at March 28, 2015
206,487
$
— $
636.7
(6,830) $ (497.7) $
(66.8) $ 2,168.8
$ 2,241.0
$
— $ 2,241.0
Net income (loss)
Other comprehensive (loss) income
Total comprehensive income (loss)
Fair value of noncontrolling
interest in MK Panama
—
—
—
—
Forfeitures of restricted awards, net
of vestings
Exercise of employee share options
(35)
1,632
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
12.7
48.4
21.1
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— (24,812)
(1,152.4)
—
—
—
—
—
—
—
—
839.1
839.1
(14.1)
825.0
—
—
12.7
48.4
21.1
(1.4)
0.1
(1.3)
5.1
—
—
—
837.7
(14.0)
823.7
5.1
—
12.7
48.4
21.1
—
—
—
—
—
—
—
— (1,152.4)
— (1,152.4)
(14.1)
—
—
—
—
—
—
—
—
208,084
$
— $
718.9
(31,642) $(1,650.1) $
(80.9) $ 3,007.8
$ 1,995.7
$
Equity compensation expense
Tax benefits on exercise of share
options
Purchase of treasury shares
Other
Balance at April 2, 2016
Net income (loss)
Other comprehensive income (loss)
Total comprehensive income (loss)
Vesting of restricted awards, net of
forfeitures
Exercise of employee share options
Equity compensation expense
Tax benefits on exercise of share
options
Purchase of treasury shares
Balance at April 1, 2017
Net income
Other comprehensive income
Total comprehensive income
Non-controlling interest of Jimmy
Choo joint ventures
Partial repurchase of non-
controlling interest
Vesting of restricted awards, net of
forfeitures
Exercise of employee share options
Equity compensation expense
Purchase of treasury shares
Redemption of capital/dividends
Other
—
—
—
454
794
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
8.4
33.9
6.6
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— (21,857)
(1,004.8)
—
0.3
—
—
—
—
—
—
(0.1)
(0.1)
552.5
—
—
—
—
—
—
552.5
0.3
552.8
—
8.4
33.9
6.6
209,332
$
— $
767.8
(53,499) $(2,654.9) $
(80.6) $ 3,560.3
$ 1,592.6
$
—
—
—
—
—
542
1,117
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
0.5
—
13.7
49.6
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— (7,794)
(361.0)
—
(0.5)
—
—
—
—
—
131.1
—
—
—
—
—
—
—
—
—
591.9
—
—
—
—
—
—
—
—
(0.2)
—
591.9
131.1
723.0
—
0.5
—
13.7
49.6
(361.0)
(0.2)
(0.5)
—
3.8
(1.0)
(0.4)
(1.4)
—
—
—
—
(0.1)
$ 1,999.5
551.5
(0.1)
551.4
—
8.4
33.9
6.6
2.4
0.2
0.1
0.3
3.1
$ 1,595.0
592.1
131.2
723.3
3.1
(1.0)
(0.5)
—
—
—
—
(1.0)
—
3.8
—
13.7
49.6
(361.0)
(1.2)
(0.5)
$ 2,021.5
— (1,004.8)
— (1,004.8)
Balance at March 31, 2018
210,991
$
— $
831.1
(61,293) $(3,015.9) $
50.5
$ 4,152.0
$ 2,017.7
$
See accompanying notes to consolidated financial statements.
66
MICHAEL KORS HOLDINGS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating
Fiscal Years Ended
March 31,
2018
April 1,
2017
April 2,
2016
$
592.1
$
551.5
$
837.7
activities:
Depreciation and amortization
Equity compensation expense
Impairment of long-lived assets
Losses on store lease exits
Deferred income taxes
Loss on disposal of fixed assets
Amortization of deferred financing costs
Tax benefits on exercise of share options
Amortization of deferred rent
Foreign currency (gains) losses
Gain on acquisition of MK Korea
Other non-cash adjustments
Change in assets and liabilities:
Receivables, net
Inventories
Prepaid expenses and other current assets
Other assets
Accounts payable
Accrued expenses and other current liabilities
Other long-term liabilities
Net cash provided by operating activities
Cash flows from investing activities
Capital expenditures
Purchase of intangible assets
Investment in joint venture
Cash paid for business acquisitions, net of cash acquired
Realized gain on hedge related to Jimmy Choo acquisition
Net cash used in investing activities
Cash flows from financing activities
Debt borrowings
Debt repayments
Repurchase of treasury shares
Exercise of employee share options
Payment of deferred financing costs
Other financing activities
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
Net decrease in cash and cash equivalents
Beginning of period
End of period (including restricted cash of $0.3 million at March 31,
2018 and $1.9 million at April 1, 2017)
Supplemental disclosures of cash flow information
Cash paid for interest
Cash paid for income taxes
Supplemental disclosure of noncash investing and financing activities
Accrued capital expenditures
$
$
$
$
208.6
49.6
32.7
29.0
9.1
4.5
4.4
(7.3)
(4.0)
(13.3)
—
—
19.3
46.0
49.1
(4.8)
(20.9)
56.3
12.1
1,062.5
(120.4)
(3.2)
—
(1,414.5)
4.7
(1,533.4)
2,520.3
(1,783.2)
(361.0)
13.7
—
(0.2)
389.6
15.1
(66.2)
229.6
219.8
33.9
199.2
—
(60.3)
3.4
0.9
(6.6)
9.2
2.6
—
—
59.6
20.6
(0.9)
(7.9)
37.5
(54.4)
26.5
1,034.6
(164.8)
(5.5)
—
(480.6)
—
(650.9)
1,240.0
(1,093.8)
(1,004.8)
8.4
—
—
(850.2)
(5.9)
(472.4)
702.0
163.4
11.0
103.5
26.3
$
$
$
$
229.6
3.5
171.1
22.8
$
$
$
$
183.2
48.4
10.9
—
(1.9)
2.8
0.9
(21.1)
2.6
4.8
(3.7)
2.9
52.5
(16.3)
(5.3)
(0.4)
14.2
125.6
11.7
1,249.5
(369.2)
(11.4)
(1.0)
0.5
—
(381.1)
192.6
(199.8)
(1,152.4)
12.7
(2.4)
(0.1)
(1,149.4)
4.1
(276.9)
978.9
702.0
1.5
273.0
33.6
See accompanying notes to consolidated financial statements.
67
MICHAEL KORS HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business and Basis of Presentation
Michael Kors Holdings Limited (“MKHL,” and together with its subsidiaries, the “Company”) was incorporated in the
British Virgin Islands (“BVI”) on December 13, 2002. The Company is a leading designer, marketer, distributor and retailer of
branded women’s and men’s accessories, apparel and footwear bearing the Michael Kors and Jimmy Choo tradenames and related
trademarks “MICHAEL KORS,” “MICHAEL MICHAEL KORS,” “JIMMY CHOO,” and various other related trademarks and
logos. The Company’s business consists of four reportable segments: Michael Kors (“MK”) Retail, MK Wholesale, MK Licensing
and Jimmy Choo. See Note 19 for additional information.
The 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 subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation. The Company’s audited consolidated financial
statements include the following operations for the periods from the respective acquisition/consolidation date through March 31,
2018:
•
•
•
•
Jimmy Choo Group Limited, formerly known as Jimmy Choo PLC (“Jimmy Choo”), acquired on November 1, 2017;
the previously licensed business in the Greater China region, Michael Kors (HK) Limited and Subsidiaries (“MKHKL”)
with operations in China, Hong Kong, Macau and Taiwan, which was acquired on May 31, 2016;
the previously licensed business in South Korea (“MK Korea”), which was acquired on January 1, 2016; and
the Latin American joint venture, MK (Panama) Holdings, S.A. and subsidiaries (“MK Panama”), in which the Company
obtained controlling interest on June 28, 2015 upon making a series of capital contributions to MK Panama.
See Note 3 for additional information related to the above acquisitions.
The Company utilizes a 52 to 53 week fiscal year ending on the Saturday closest to March 31. As such, the fiscal years
ending on March 31, 2018 and April 1, 2017 (“Fiscal 2018” and “Fiscal 2017”, respectively) contain 52 weeks, whereas the fiscal
year ending on April 2, 2016 (“Fiscal 2016”) contained 53 weeks.
2. 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 related to the Company’s new customer loyalty program, estimates of inventory
recovery, the valuation of share-based compensation, valuation of deferred taxes 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. The Company reclassified $11.3 million of transaction costs recorded in Fiscal 2017 in connection with the
acquisition of MKHKL from selling, general and administrative expenses to restructuring and other charges in the Company’s
consolidated statements of operations and comprehensive income to provide a more transparent disclosure of these costs. In
addition, the Company reclassified $6.6 million and $21.1 million of excess tax benefits from net cash used in financing activities
to net cash provided by operating activities in Fiscal 2017 and Fiscal 2016, respectively, within the Company’s consolidated
statements of cash flows, in connection with the adoption of ASU No. 2016-09.
68
Seasonality
The Company experiences certain effects of seasonality with respect to its business. The Company’s MK Retail segment
generally experiences greater sales during its third fiscal quarter as a result of holiday season sales. The MK Wholesale segment
generally experiences the lowest sales in its first fiscal quarter. The Jimmy Choo segment generally experiences greater sales
during its third fiscal quarter, primarily driven by the product launch calendar and holiday season sales. In the aggregate, the
Company’s first fiscal quarter typically experiences less sales volume relative to the other three quarters and its third fiscal quarter
generally has higher sales volume relative to the other three quarters.
Revenue Recognition
Revenue is recognized when there is persuasive evidence of an arrangement, delivery has occurred, the price has been fixed
and determinable and collectability is reasonably assured. The Company recognizes retail store revenues upon sale of its products
to retail consumers, net of estimated returns. Revenue from sales through the Company’s e-commerce sites is recognized at the
time of delivery to the customer, reduced by an estimate of returns. Wholesale revenue is recognized net of estimates for sales
returns, discounts, markdowns and allowances, after merchandise is shipped and the title and risk of loss are transferred to the
Company’s wholesale customers. To arrive at net sales for retail, gross sales are reduced by actual customer returns as well as by
a provision for estimated future customer returns, which is based on management’s review of historical and current customer
returns. Sales taxes collected from retail customers are presented on a net basis and, as such, are excluded from revenue. To arrive
at net sales for wholesale, gross sales are reduced by provisions for estimated future returns, based on current expectations, as
well as trade discounts, markdowns, allowances, operational chargebacks, and certain cooperative selling expenses. These estimates
are based on such factors as historical trends, actual and forecasted performance, and market conditions, which are reviewed by
management on a quarterly basis.
The following table details the activity and balances of the Company’s sales reserves for the fiscal years ended March 31,
2018, April 1, 2017, and April 2, 2016 (in millions):
Retail
Return Reserves:
Fiscal year ended March 31, 2018
Fiscal year ended April 1, 2017
Fiscal year ended April 2, 2016
Wholesale
Total Sales Reserves:
Fiscal year ended March 31, 2018
Fiscal year ended April 1, 2017
Fiscal year ended April 2, 2016
Balance
Beginning
of Year
Amounts
Charged to
Revenue
Write-offs
Against
Reserves
Balance
at
Year End
$
$
7.3
4.7
2.5
Balance
Beginning
of Year
96.7
110.9
87.5
$
$
160.7
102.4
71.7
Amounts
Charged to
Revenue
257.7
271.1
348.4
$
$
(155.9)
(99.8)
(69.5)
Write-offs
Against
Reserves
(245.8)
(285.3)
(325.0)
$
$
12.1
7.3
4.7
Balance
at
Year End
108.6
96.7
110.9
Royalty revenue generated from product licenses, which includes contributions for advertising, is based on reported sales
of licensed products bearing the Company’s tradenames at rates specified in the license agreements. These agreements are also
subject to contractual minimum levels. Royalty revenue generated by geographic licensing agreements is recognized as it is earned
under the licensing agreements based on reported sales of licensees applicable to specified periods, as outlined in the agreements.
These agreements allow for the use of the Company’s tradenames to sell its branded products in specific geographic regions.
Loyalty Program
During Fiscal 2018, the Company launched its Michael Kors customer loyalty program in the U.S., which allows customers
to earn points on qualifying purchases toward monetary and non-monetary rewards that may be redeemed for purchases at the
Company’s U.S. retail stores and e-commerce site. The Company defers a portion of the initial sales transaction based on the
estimated relative fair value of the benefits using statistical formulas based on projected timing of future redemptions and historical
activity. These amounts include estimated “breakage” for points that are not expected to be redeemed. The deferred revenue, net
of an estimated “breakage,” is recorded as a reduction to revenue in the consolidated statements of income and comprehensive
income and within accrued expenses and other current liabilities in the Company’s consolidated balance sheets.
69
Advertising and Marketing Costs
Advertising and marketing costs are expensed over the period of benefit and are recorded in general and administrative
expenses. Advertising and marketing expense was $167.1 million, $118.7 million and $103.9 million in Fiscal 2018, Fiscal 2017
and Fiscal 2016, respectively.
Cooperative advertising expense, which represents the Company’s participation in advertising expenses of its wholesale
customers, is reflected as a reduction of net sales. Expenses related to cooperative advertising for Fiscal 2018, Fiscal 2017 and
Fiscal 2016, were $6.3 million, $5.4 million and $7.4 million, respectively.
Shipping and Handling
Freight-in expenses are recorded as part of cost of goods sold, along with product costs and other costs to acquire inventory.
The costs of preparing products for sale, including warehousing expenses, are included in selling, general and administrative
expenses. Selling, general and administrative expenses also include the costs of shipping products to the Company’s e-commerce
customers. Shipping and handling costs included within selling, general and administrative expenses in the Company’s consolidated
statements of operations and comprehensive income were $107.6 million, $102.1 million and $98.6 million for Fiscal 2018, Fiscal
2017 and Fiscal 2016, respectively. Shipping and handling costs charged to customers are included in total revenue.
Cash and Cash Equivalents
All highly liquid investments with original maturities of three months or less are considered to be cash equivalents. Included
in the Company’s cash and cash equivalents as of March 31, 2018 and April 1, 2017 are credit card receivables of $21.2 million
and $13.9 million, respectively, which generally settle within two to three business days.
At March 31, 2018 and April 1, 2017, the Company had restricted cash of $0.3 million and $1.9 million, respectively,
primarily related to European customs obligations, which was recorded within prepaid expenses and other current assets in the
Company’s consolidated balance sheets.
Inventories
Inventories consist of finished goods and are stated at the lower of cost or net realizable value. Cost is determined using
the weighted-average cost method. Costs include amounts paid to independent manufacturers, plus duties and freight to bring the
goods to the Company’s warehouses, which are located in the United States, Canada, Holland, Switzerland, United Kingdom,
United Arab Emirates, China, Japan, Hong Kong and South Korea. The Company continuously evaluates the composition of its
inventory and makes adjustments when the cost of inventory is not expected to be fully recoverable. The net realizable value of
the Company’s inventory is estimated based on historical experience, current and forecasted demand, and market conditions. In
addition, reserves for inventory losses are estimated based on historical experience and physical inventory counts. The Company’s
inventory reserves are estimates, which could vary significantly from actual results if future economic conditions, customer demand
or competition differ from expectations. Our historical estimates of these adjustments have not differed materially from actual
results.
Store Pre-opening Costs
Costs associated with the opening of new retail stores and start up activities, are expensed as incurred.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and amortization (carrying value). Depreciation is
recorded on a straight-line basis over the expected remaining useful lives of the related assets. Equipment, furniture and fixtures,
are depreciated over five to seven years, computer hardware and software are depreciated over three to five years. The Company’s
share of the cost of constructing in-store shop displays within its wholesale customers’ floor-space (“shop-in-shops”), which is
paid directly to third-party suppliers, is capitalized as property and equipment and is generally amortized over a useful life of three
to four years. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated remaining
useful lives of the related assets or the remaining lease term, including highly probable renewal periods. The Company includes
all depreciation and amortization expense as a component of total operating expenses, as the underlying long-lived assets are not
directly or indirectly related to bringing the Company’s products to their existing location and condition. Maintenance and repairs
are charged to expense in the year incurred.
70
The Company capitalizes, in property and equipment, direct costs incurred during the application development stage and
the implementation stage for developing, purchasing or otherwise acquiring software for its internal use. These costs are amortized
over the estimated useful lives of the software, generally five years. All costs incurred during the preliminary project stage, including
project scoping and identification and testing of alternatives, are expensed as incurred.
Definite-Lived Intangible Assets
The Company’s definite-lived intangible assets consist of trademarks, lease rights and customer relationships and are stated
at cost less accumulated amortization. Michael Kors trademarks are amortized over twenty years, customer relationships are
amortized over five to eighteen years, and lease rights are amortized over the terms of the related lease agreements, including
highly probable renewal periods, on a straight-line basis. Reacquired rights recorded in connection with the acquisition of MKHKL
are amortized through March 31, 2041, the original expiration date of the Company’s license agreement in the Greater China
region.
Impairment of Long-lived Assets
The Company evaluates its long-lived assets, including fixed assets and definite-lived intangible assets, for impairment
whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable. The
Company’s impairment testing is based on its best estimate of its future operating cash flows. If the sum of estimated undiscounted
future cash flows associated with the asset is less than the asset’s carrying value, an impairment charge is recognized, which is
measured as the amount by which the carrying value exceeds the fair value of the asset. These estimates of cash flow require
significant management judgment and certain assumptions about future volume, sales and expense growth rates, devaluation and
inflation. As such, these estimates may differ from actual cash flows.
Goodwill and Other Indefinite-lived Intangible Assets
The Company records intangible assets based on their fair value on the date of acquisition. Goodwill is recorded for the
difference between the fair value of the purchase consideration over the fair value of the net identifiable tangible and intangible
assets acquired. The brand intangible asset recorded in connection with the Jimmy Choo acquisition was determined to be an
indefinite-lived intangible asset, which is not subject to amortization. The Company performs an impairment assessment of goodwill
and the Jimmy Choo brand intangible asset on an annual basis, or whenever impairment indicators exist. In the absence of any
impairment indicators, goodwill and the Jimmy Choo brand are assessed for impairment during the fourth quarter of each fiscal
year. Judgments regarding the existence of impairment indicators are based on market conditions and operational performance of
the business.
The Company may assess its goodwill and its indefinite-lived intangible asset for impairment initially using a qualitative
approach to determine whether it is more likely than not that the fair value of these assets is greater than their carrying value.
When performing a qualitative test, the Company assesses various factors including industry and market conditions, macroeconomic
conditions and performance of the Company's businesses. If the results of the qualitative assessment indicate that it is more likely
than not that the Company’s goodwill and other indefinite-lived intangible assets are impaired, a quantitative impairment analysis
would be performed to determine if impairment is required. The Company may also elect to perform a quantitative analysis of
goodwill and its indefinite-lived intangible asset initially rather than using a qualitative approach.
The impairment testing for goodwill is performed at the reporting unit level. The valuation methods used in the quantitative
fair value assessment, discounted cash flow and market multiples method, require the Company’s management to make certain
assumptions and estimates regarding certain industry trends and future profitability of the Company’s reporting units. If the fair
value of a reporting unit exceeds the related carrying value, the reporting unit's goodwill is considered not to be impaired and no
further testing is performed. If the carrying value of a reporting unit exceeds its fair value, an impairment loss is recorded for the
difference. The valuation of goodwill is affected by, among other things, the Company’s business plan for the future and estimated
results of future operations. Future events could cause the Company to conclude that impairment indicators exist, and, therefore,
that goodwill may be impaired.
If the Company elects to perform a quantitative impairment assessment of the Company's indefinite-lived intangible asset,
the fair value of the Jimmy Choo brand is estimated using a discounted cash flow analysis based on the "relief from royalty"
method, assuming that a third party would be willing to pay a royalty in lieu of ownership for this intangible asset. This approach
is dependent on many factors, including estimates of future growth, royalty rates, and discount rates. Actual future results may
differ from these estimates. Impairment loss is recognized when the estimated fair value of the Jimmy Choo brand intangible assets
is less than its carrying amount.
71
There were no impairment charges related to goodwill and other indefinite-lived intangible assets in any of the fiscal periods
presented. See Note 12 for information relating to the Company’s annual impairment analysis performed during the fourth quarter
of Fiscal 2018.
Insurance
The Company uses a combination of insurance and self-insurance for losses related to a number of risks, including workers’
compensation and employee-related health care benefits. The Company also maintains stop-loss coverage with third-party insurers
to limit its exposure arising from claims. Self-insurance claims filed and claims incurred but not reported are accrued based upon
management’s estimates of the discounted cost for self-insured claims incurred using actuarial assumptions, historical loss
experience, actual payroll and other data. Although the Company believes that it can reasonably estimate losses related to these
claims, actual results could differ from these estimates.
The Company also maintains other types of customary business insurance policies, including business interruption insurance.
Insurance recoveries represent gain contingencies and are recorded upon actual settlement with the insurance carrier. During Fiscal
2017, the Company received an insurance settlement of $3.8 million related to the prior-year disruption to our former third party
operated e-commerce fulfillment center. This amount was recorded within other income in the Company’s consolidated statement
of operations and comprehensive income for Fiscal 2017.
Share-based Compensation
The Company grants share-based awards to certain employees and directors of the Company. The grant date fair value of
share options is calculated using the Black-Scholes option pricing model. Beginning in Fiscal 2018, the Company began using its
own historical experience in determining the expected holding period and volatility of its time-based share option awards. In prior
periods, the Company used the simplified method for determining the expected life of its options and average volatility rates of
similar actively traded companies over the estimated holding period, due to insufficient historical option exercise experience as
a public company. The risk-free interest rate is derived from the zero-coupon U.S. Treasury Strips yield curve based on the grant’s
estimated holding period. Determining the grant date fair value of share-based awards requires considerable judgment, including
estimating expected volatility, expected term and risk-free rate. If factors change and the Company employs different assumptions,
the fair value of future awards and the resulting share-based compensation expense may differ significantly from what the Company
has estimated in the past.
The closing market price of the Company’s shares on the date of grant is used to determine the grant date fair value of
restricted shares, restricted shares units (RSUs) and performance RSUs. These fair values are recognized as expense over the
requisite service period, net of estimated forfeitures, based on expected attainment of pre-established performance goals for
performance grants, or the passage of time for those grants which have only time-based vesting requirements.
Foreign Currency Translation and Transactions
The financial statements of the majority of the Company’s foreign subsidiaries are measured using the local currency as
the functional currency. The Company’s functional currency is the United States Dollar (“USD”) for MKHL and its United States
based subsidiaries. Assets and liabilities are translated using period-end exchange rates, while revenues and expenses are translated
using average exchange rates over the reporting period. The resulting translation adjustments are recorded separately in
shareholders’ equity as a component of accumulated other comprehensive income (loss). Foreign currency income and losses
resulting from the re-measuring of transactions denominated in a currency other than the functional currency of a particular entity
are included in foreign currency (gain) loss on the Company’s consolidated statements of operations and comprehensive income.
Derivative Financial Instruments
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 July 25, 2017 recommended cash offer for the entire issued and to be issued share capital of Jimmy
Choo, the Company entered into a forward foreign currency exchange contract with a notional amount of £1.115 billion to mitigate
its foreign currency exchange risk related to the acquisition. This derivative contract was not designated as an accounting hedge.
72
Therefore, changes in fair value were recorded to foreign currency (gain) loss in the Company’s consolidated statement of
operations. The Company’s accounting policy is to classify cash flows from derivative instruments in the same category as the
cash flows from the items being hedged. Accordingly, the Company classified the $4.7 million realized gain relating to this
derivative instrument within cash flows from investing activities for Fiscal 2018.
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, the risk being hedged, and the manner in which hedge effectiveness will be assessed
prospectively and retrospectively. The effective portion of 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. Effectiveness is assessed on a quarterly basis and any
portion of the designated hedge contracts deemed ineffective is recorded to foreign currency gain (loss). 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 derivative instruments
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.
Income Taxes
Deferred income tax assets and liabilities have been provided for temporary differences between the tax bases and financial
reporting bases of the Company’s assets and liabilities using the tax rates and laws in effect for the periods in which the differences
are expected to reverse. The Company periodically assesses the realizability of deferred tax assets and the adequacy of deferred
tax liabilities, based on the results of local, state, federal or foreign statutory tax audits or estimates and judgments used.
Realization of deferred tax assets associated with net operating loss and tax credit carryforwards is dependent upon generating
sufficient taxable income prior to their expiration in the applicable tax jurisdiction. The Company periodically reviews the
recoverability of its deferred tax assets and provides valuation allowances, as deemed necessary, to reduce deferred tax assets to
amounts that more-likely-than-not will be realized. The Company’s management considers many factors when assessing the
likelihood of future realization of deferred tax assets, including recent earnings results within various taxing jurisdictions,
expectations of future taxable income, the carryforward periods remaining and other factors. Changes in the required valuation
allowance are recorded in income in the period such determination is made. Deferred tax assets could be reduced in the future if
the Company’s estimates of taxable income during the carryforward period are significantly reduced or alternative tax strategies
are no longer viable.
The Company recognizes the impact of an uncertain income tax position taken on its income tax returns at the largest
amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position
will be recognized if it has less than a 50% likelihood of being sustained. The tax positions are analyzed periodically (at least
quarterly) and adjustments are made as events occur that warrant adjustments for those positions. The Company records interest
expense and penalties payable to relevant tax authorities as income tax expense.
73
Rent Expense, Deferred Rent and Landlord Construction Allowances
The Company leases office space, retail stores and distribution facilities under agreements that are classified as operating
leases. Many of these operating leases include contingent rent provisions (percentage rent), and/or provide for certain landlord
allowances related to tenant improvements and other relevant items. The recognition of rent expense for an operating lease
commences on the earlier of the related lease commencement date or the date of possession of the property. Rent expense is
calculated by recognizing total minimum rental payments (net of any rental abatements, construction allowances and other rental
concessions) on a straight-line basis over the lease term. The difference between straight-line rent expense and rent paid is recorded
as deferred rent, which is classified within short-term and long-term liabilities in the Company’s consolidated balance sheets. The
Company accounts for landlord allowances and incentives as a component of deferred rent, which is amortized over the lease term
as a reduction of rent expense. The Company records rent expense as a component of selling, general and administrative expenses.
Debt Issuance Costs and Unamortized Discounts
The Company defers debt issuance costs directly associated with acquiring third party financing. These debt issuance costs
and any discounts on issued debt are amortized on a straight-line basis, which approximates the effective interest method, as
interest expense over the term of the related indebtedness. Deferred financing fees associated with the Company’s revolving credit
facilities are recorded within prepaid expenses and other current assets. Deferred financing fees and unamortized discounts
associated with the Company’s other borrowings are recorded as an offset to long-term debt in the Company’s consolidated balance
sheets. See Note 10 for additional information.
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 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):
Numerator:
Net income attributable to MKHL
Denominator:
Basic weighted average shares
Weighted average dilutive share equivalents:
Share options and restricted shares/units, and performance
restricted share units
Diluted weighted average shares
Basic net income per share
Diluted net income per share
Fiscal Years Ended
March 31,
2018
April 1,
2017
April 2,
2016
$
591.9
$
552.5
$
839.1
152,283,586
165,986,733
186,293,295
2,819,299
155,102,885
3.89
3.82
$
$
2,137,080
168,123,813
3.33
3.29
$
$
2,760,994
189,054,289
4.50
4.44
$
$
Share equivalents for 1,662,889 shares, 2,034,658 shares and 2,255,271 shares, for Fiscal 2018, Fiscal 2017 and Fiscal
2016, respectively, have been excluded from the above calculation due to their anti-dilutive effect.
74
Recently Adopted Accounting Pronouncements
Business Combinations
In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.
2017-01, “Business Combinations (Topic 805) - Clarifying the Definition of a Business,” to clarify the definition of a business in
order to allow for the evaluation of whether transactions should be accounted for as acquisitions or disposals of assets or businesses.
ASU 2017-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years
with early adoption permitted. The Company adopted ASU 2017-01 during the three months ended December 30, 2017, which
did not have a material impact on its consolidated financial statements.
Share-Based Compensation
In March 2016, the FASB issued ASU No. 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to
Employee Share-Based Payment Accounting,” which simplifies accounting and presentation of share-based payments, primarily
relating to the recognition and classification of excess tax benefits, accounting for forfeitures and tax withholding requirements.
The Company adopted ASU 2016-09 during the first quarter of Fiscal 2018, as required. Accordingly, during Fiscal 2018 excess
tax benefits of $7.3 million which would have been previously reflected within additional paid-in capital, were recognized within
the Company’s provision of income taxes. This change is expected to increase volatility in future provisions for income taxes. In
addition, the Company eliminated windfall tax benefits from the treasury stock method calculation used to compute its diluted
earnings per share. Both of the above changes have been adopted on a prospective basis, whereas cash flows related to excess tax
benefits, previously reflected within financing activities, have been presented within operating activities within the Company’s
consolidated statements of cash flows on a retrospective basis. Cash flows related to excess tax benefits were $6.6 million during
Fiscal 2017. The Company continues to reflect estimated forfeitures in its share-based compensation expense.
Goodwill
In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment,” which simplifies the test for goodwill impairment by eliminating Step 2 of goodwill impairment analysis,
while retaining the option to perform an initial qualitative assessment for a reporting unit to determine if a quantitative impairment
test is required. ASU 2017-04 is effective in the Company’s Fiscal 2021 with early adoption permitted and should be applied on
a prospective basis. The Company early adopted the goodwill impairment testing provisions of ASU 2017-04 during the fourth
quarter of Fiscal 2018, with no impact on its consolidated financial statements.
Recently Issued Accounting Pronouncements
The Company has 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.
Hedge Accounting
On August 28, 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements
to Accounting for Hedging Activities.” The new standard is intended to improve and simplify rules relating to hedge accounting,
including the elimination of periodic hedge ineffectiveness, recognition and presentation of components excluded from hedge
effectiveness assessment, the ability to elect to perform subsequent effectiveness assessments qualitatively, and other provisions
designed to provide more transparency around the economics of a company’s hedging strategy. ASU 2017-12 is effective for the
Company in Fiscal 2020, with early adoption permitted. The Company plans to early adopt ASU 2017-12 in the first quarter of
Fiscal 2019. The adoption of ASU 2017-12 is not expected to have a material impact on the Company’s consolidated financial
statements with respect to its existing forward foreign currency exchange contracts. However upon adoption, the Company will
apply the spot method of designating these contracts under ASU 2017-12 to the net investment hedges that were executed during
the first quarter of Fiscal 2019. See Note 22 for additional information.
Revenue Recognition
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which provides
new guidance for revenues recognized from contracts with customers, and will replace the existing revenue recognition guidance.
ASU 2014-09 requires that revenue is recognized at an amount the company is entitled to upon transferring control of goods or
services to customers, as opposed to when risks and rewards transfer to a customer.
75
In July 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the
Effective Date,” which deferred the effective date of ASU 2014-09 by one year, making it effective for the interim reporting periods
within the annual reporting period beginning after December 15, 2017, or beginning with the Company’s Fiscal 2019. This standard
may be applied retrospectively to all prior periods presented, or retrospectively with a cumulative adjustment to retained earnings
in the year of adoption.
The FASB has issued several additional ASUs to provide implementation guidance on ASU No. 2014-09, including ASU
No. 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers” issued in December
2016, ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical
Expedients” issued in May 2016, ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance
Obligations and Licensing” issued in April 2016, and ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606):
Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” issued in March 2016. The Company will consider
this guidance in evaluating the impact of ASU 2014-09 (collectively, “ASC 606”).
Most of our business is comprised of retail and wholesale operations, where revenue is recognized at a point of time. The
Company has completed the initial assessment of the new standard and is currently progressing in its implementation. While the
evaluation process is not complete, based on our assessment to date, the Company believes that some of the potential impacts of
implementing this standard will include the timing of revenue recognition for its licensing royalties, recognition of breakage
revenue for unredeemed gift cards, as well as expanded financial statement disclosures, including revenue recognition policies to
identify performance obligations to customers and significant judgments in measurement and recognition.
The Company will adopt the standard beginning with the first quarter of Fiscal 2019, as required, using the modified
retrospective method. The Company has completed its evaluation of the cumulative adjustment and has concluded that it will have
an immaterial impact on its retained earnings. This adjustment will be primarily associated with unrecognized gift card breakage
revenue and product licensing revenue previously recorded on a one-month lag.
Lease Accounting
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” which requires lessees to recognize a lease
liability and a right-to-use asset on the balance sheet for all leases, except certain short-term leases. ASU 2016-02 is effective
beginning with the Company’s Fiscal 2020, with early adoption permitted, and must be implemented using a modified retrospective
approach for all leases existing at, or entered into after the beginning of the earliest comparative period that is presented in the
financial statements. The Company is currently evaluating the impact of ASU 2016-02 on its consolidated financial statements
but expects that the adoption of this standard will result in a significant increase in assets and liabilities on its consolidated balance
sheets.
Share-Based Compensation
In May 2017, the FASB issued ASU No. 2017-09, “Compensation-Stock Compensation (Topic 718): Scope of Modification
Accounting”, which simplifies modification accounting for entities that change the terms or conditions of share-based awards.
ASU 2017-09 is effective for the Company’s Fiscal 2019 with early adoption permitted and is required to be applied on a prospective
basis. The Company will evaluate the impact of ASU 2017-09 on any future changes to the terms and conditions of its share-based
compensation awards.
Income Taxes
In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than
Inventory”, which requires recognition of income tax consequences of an intra-entity transfer of an asset other than inventory
when the transfer occurs. ASU 2016-16 is effective and the Company will adopt the standard beginning with the first quarter of
Fiscal 2019, as required, using the modified retrospective method. The Company has completed its evaluation of the cumulative
adjustment and has concluded that it will have an immaterial impact on its retained earnings.
76
3. Acquisitions
Fiscal 2018 Acquisition
Acquisition of Jimmy Choo Group Limited
On November 1, 2017, the Company completed the acquisition of Jimmy Choo, whereby the Company's wholly-owned
subsidiary acquired all of Jimmy Choo’s issued and to be issued shares at a purchase price of 230 pence per share in cash, for a
total transaction value of $1.447 billion, including the repayment of existing debt obligations, which was funded through a
combination of borrowings under the Company’s new $1.0 billion term loan facility, the issuance of the Senior Notes and cash
on hand (please refer to Note 10 for additional information).
The following table summarizes the aggregate purchase price consideration paid to acquire Jimmy Choo in cash (in millions):
Consideration paid to Jimmy Choo shareholders
Repayment of debt and related obligations
Total purchase price
November 1, 2017
$
$
1,181.2
266.2
1,447.4
The Company believes that this combination will further strengthen its future growth opportunities while also increasing
both product and geographic diversification and will allow it to grow its international presence through the formation of a global
fashion luxury group, bringing together industry-leading luxury fashion brands. The Company accounted for this acquisition as
a business combination under the acquisition method of accounting. The following table summarizes the preliminary purchase
price allocation of fair values of the assets acquired and liabilities assumed at the date of acquisition (in millions):
November 1, 2017
Cash and cash equivalents
Accounts receivable
Inventory (1)
Other current assets
Current assets
Property and equipment (2)
Goodwill (3)
Brand (4)
Customer relationships (5)
Lease rights
Deferred tax assets
Other assets
Total assets acquired
Accounts payable
Other current liabilities
Current liabilities
Deferred tax liabilities
Other liabilities
Total liabilities assumed
Less: Noncontrolling interest in joint ventures
Fair value of net assets acquired
Fair value of acquisition consideration
$
$
$
$
$
$
$
34.3
30.7
126.2
63.9
255.1
51.0
684.9
577.8
212.8
5.9
22.5
28.1
1,838.1
129.3
96.5
225.8
134.9
26.9
387.6
3.1
1,447.4
1,447.4
(1)
Includes an inventory step-up adjustment of $9.5 million, which will be recognized as an adjustment to the Company’s
cost of goods sold in its statement of operations over twelve months.
77
(2)
Includes a $7.0 million adjustment to reduce the fair value of Jimmy Choo’s leasehold improvements, which will be
recognized over the remaining lease term.
(3) Represents the difference between the purchase price over the net identifiable tangible and intangible assets acquired
allocated to goodwill, which is not deductible for tax purposes.
(4) Represents the fair value of Jimmy Choo’s brand, which is an indefinite-lived intangible asset due to being essential
to the Company’s ability to operate the Jimmy Choo business for the foreseeable future. The Jimmy Choo brand was
valued using the relief-from-royalty method of the income valuation approach.
(5) Represents customer relationships associated with Jimmy Choo wholesale customers and geographic licensees, which
are being amortized over 15 years and customer relationships with product licensees, which are being amortized over
18 years. These useful lives were estimated based on the time to recover the related future discounted cash flows. These
intangible assets were valued using multi-period excess-earnings valuation method.
Jimmy Choo’s results of operations have been included in our consolidated financial statements beginning on November
1, 2017. Jimmy Choo contributed revenue of $222.6 million and net loss of $14.5 million (after amortization of non-cash purchase
accounting adjustments and transition and transaction costs) for the period from the date of acquisition through March 31, 2018.
The following table summarizes the unaudited pro-forma consolidated results of operations for the fiscal years ended
March 31, 2018 and April 1, 2017 as if the acquisition had occurred on April 3, 2016, the beginning of Fiscal 2017 (in millions):
Pro-forma total revenue
Pro-forma net income
Pro-forma net income per ordinary share attributable to MKHL:
Basic
Diluted
Fiscal Years Ended
March 31, 2018
April 1, 2017
$
$
$
5,012.0
$
623.2
4.09
4.02
$
$
4,984.6
553.9
3.34
3.29
The unaudited pro-forma consolidated results above are based on the historical financial statements of the Company and
Jimmy Choo and are not necessarily indicative of the results of operations that would have been achieved if the acquisition was
completed at the beginning of Fiscal 2017 and are not indicative of the future operating results of the combined company. The
financial information for Jimmy Choo prior to the acquisition has been included in the pro-forma results of operations on a calendar-
year basis and includes certain adjustments to Jimmy Choo’s historical consolidated financial statements to align with U.S. GAAP
and the Company’s accounting policies. The pro-forma consolidated results of operations also include the effects of purchase
accounting adjustments, including amortization charges related to the definite-lived intangible assets acquired, fair value
adjustments relating to leases and fixed assets, and the related tax effects assuming that the business combination occurred on
April 3, 2016. Purchase accounting amortization of the inventory step-up adjustment has been excluded from the above pro-forma
amounts due to the short-term nature of this adjustment. The pro-forma consolidated financial statement also reflect the impact
of debt repayment and borrowings made to finance the acquisition (see Note 10) and exclude historical interest expense for Jimmy
Choo. Transaction costs of $40.6 million for Fiscal 2018, which have been recorded within restructuring and other charges in the
Company’s consolidated statements of operations and comprehensive income, have been excluded from the above pro-forma
consolidated results of operations due to their non-recurring nature.
Other Acquisitions
During the first quarter of Fiscal 2018, the Company repurchased a portion of the non-controlling interest in its Latin
American joint venture, MK Panama for approximately $0.5 million. As of March 31, 2018, the Company has a 75% ownership
interest in MK Panama.
Fiscal 2017 Acquisition
Acquisition of Michael Kors (HK) Limited
On May 31, 2016, the Company acquired 100% of the stock of MKHKL, its licensees in the Greater China region, which
includes China, Hong Kong, Macau and Taiwan. The Company believes that having direct control of this business will allow it
to better manage opportunities and capitalize on the growth potential in the region. This acquisition was funded by a cash payment
of $500.0 million, which may be subject to certain purchase price adjustments. The Company accounted for the acquisition as a
business combination.
78
MKHKL’s results of operations have been included in our consolidated financial statements beginning on June 1, 2016.
MKHKL contributed total revenue of $306.2 million and net income of $13.5 million for Fiscal 2018 (after amortization of non-
cash valuation adjustments). MKHKL contributed total revenue of $212.4 million and net loss of $10.6 million for the period from
the date of acquisition through April 1, 2017 (after amortization of non-cash valuation adjustments and integration costs).
The following table summarizes the unaudited pro-forma consolidated results of operations for the fiscal year ended April 1,
2017 as if the acquisition had occurred on March 29, 2015, the beginning of Fiscal 2016 (in millions):
Pro-forma total revenue
Pro-forma net income
Pro-forma net income per ordinary share attributable to MKHL:
Basic
Diluted
Fiscal Years Ended
April 1, 2017
April 2, 2016
$
$
$
4,520.1
$
548.7
3.31
3.26
$
$
4,839.1
832.2
4.47
4.40
The unaudited pro-forma consolidated results above are based on the historical financial statements of the Company and
MKHKL and are not necessarily indicative of the results of operations that would have been achieved if the acquisition was
completed at the beginning of Fiscal 2016 and are not indicative of the future operating results of the combined company. The
pro-forma consolidated results of operations reflect the elimination of intercompany transactions and include the effects of purchase
accounting adjustments, including amortization charges related to the definite-lived intangible assets acquired (reacquired rights
and customer relationships), fair value adjustments relating to leases, fixed assets and inventory, and the related tax effects assuming
that the business combination occurred on March 29, 2015. The pro-forma consolidated results of operations for Fiscal 2017 also
reflect the elimination of transaction costs of approximately $11.3 million, which have been recorded within restructuring and
other charges in the Company’s consolidated statements of operations and comprehensive income for Fiscal 2017.
Fiscal 2016 Acquisitions
Acquisition of the Previously Licensed Business in South Korea
On January 1, 2016, the Company acquired direct control of its previously licensed business in South Korea upon the related
license expiration. In connection with the acquisition, the Company acquired certain net assets (including inventory and fixed
assets) from the Company’s former licensee in exchange for cash consideration of approximately $3.6 million. The Company
accounted for this acquisition as a business combination and began consolidating the South Korean business into its operations
beginning with the fourth quarter of Fiscal 2016.
This acquisition resulted in a gain of $3.7 million, representing the excess of the fair value of the assets acquired over the
consideration paid, which was recorded in other income in the Company’s consolidated statement of operations and comprehensive
income for Fiscal 2016. The purchase price was negotiated upon the natural expiration of the licensing agreement, which allowed
the Company to negotiate favorable terms for the assets that could no longer be used by the licensee. Prior to recognizing a bargain
purchase gain, the Company reassessed whether all assets acquired and liabilities assumed have been correctly identified, as well
as the key valuation assumptions and business combination accounting procedures for this acquisition. After careful consideration
and review, it was concluded that the recognition of a bargain purchase gain is appropriate for this acquisition.
Acquisition of Controlling Interest in a Joint Venture
During the second quarter of Fiscal 2016, the Company made contributions to MK Panama totaling $18.5 million, consisting
of cash consideration of $3.0 million and the elimination of liabilities owed to the Company of $15.5 million, which increased
the Company’s ownership interest to 75%. As a result of obtaining controlling interest in MK Panama, which was previously
accounted for under the equity method of accounting, the Company began consolidating MK Panama into its operations during
the second quarter of Fiscal 2016. The additional ownership interest provides the Company with more direct control over its
operations in Latin America and will allow it to better manage its opportunities in the region.
79
4. Receivables, net
Receivables, net consist of (in millions):
Trade receivables:
Credit risk assumed by insured
Credit risk retained by Company
Receivables due from licensees
Less: allowances
March 31,
2018
April 1,
2017
$
$
296.2
87.1
15.8
399.1
(108.6)
290.5
$
$
294.0
63.8
11.9
369.7
(103.9)
265.8
Receivables are presented net of allowances for sales returns, discounts, markdowns, operational chargebacks and doubtful
accounts. Sales returns are determined based on an evaluation of current market conditions and historical returns experience.
Discounts are based on open invoices where trade discounts have been extended to customers. Allowances 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 $5.1 million and $0.9 million as of March 31, 2018 and April 1, 2017,
respectively. The March 31, 2018 amount included an allowance due to a bankruptcy of one of our wholesale customers.
5. Concentration of Credit Risk, Major Customers and Suppliers
Financial instruments that subject the Company to concentration of credit risk are cash and cash equivalents and receivables.
As part of its ongoing procedures, the Company monitors its concentration of deposits with various financial institutions in order
to avoid any undue exposure. The Company mitigates its risk by depositing cash and cash equivalents in major financial institutions.
The Company also mitigates its credit risk by obtaining insurance coverage for a substantial portion of its receivables (as
demonstrated in the above table in “Credit risk assumed by insured”). For Fiscal 2018, Fiscal 2017 and Fiscal 2016, revenue
related to our largest Michael Kors wholesale customer, Macy’s, accounted for approximately 7.8%, 8.9% and 12.7%, respectively,
of total revenue. The accounts receivable related to this customer were substantially insured for all three fiscal years. No other
customer accounted for 10% or more of the Company’s total revenues during Fiscal 2018, Fiscal 2017 or Fiscal 2016.
The Company contracts for the purchase of finished goods principally with independent third-party contractors, whereby
the contractor is generally responsible for all manufacturing processes, including the purchase of piece goods and trim. Although
the Company does not have any long-term agreements with any of its manufacturing contractors, the Company believes it has
mutually satisfactory relationships with them. The Company allocates product manufacturing among agents and contractors based
on their capabilities, the availability of production capacity, quality, pricing and delivery. The inability of certain contractors to
provide needed services on a timely basis could adversely affect the Company’s operations and financial condition. The Company
also has relationships with various agents who source Michael Kors finished goods with numerous contractors on its behalf. For
Fiscal 2018, Fiscal 2017 and Fiscal 2016, one agent sourced approximately 23.9%, 21.8% and 23.2%, respectively, and one
contractor accounted for approximately 19.9%, 23.2% and 21.2%, respectively, of Michael Kors finished goods purchases, based
on unit volume. For the period covering November 1, 2017 through March 31, 2018 one contractor accounted for approximately
16.0% of Jimmy Choo’s finished goods purchases, based on unit volume.
80
6. Property and Equipment, Net
Property and equipment, net, consists of (in millions):
Leasehold improvements
In-store shops
Furniture and fixtures
Computer equipment and software
Equipment
Building
Land
Less: accumulated depreciation and amortization
Construction-in-progress
March 31,
2018
April 1,
2017
$
$
551.0
273.9
270.9
266.3
116.7
51.6
16.2
1,546.6
(1,001.6)
545.0
38.2
583.2
$
$
507.9
256.0
244.1
226.2
104.4
40.6
14.0
1,393.2
(833.9)
559.3
32.2
591.5
Depreciation and amortization of property and equipment for the fiscal years ended March 31, 2018, April 1, 2017, and
April 2, 2016, was $182.3 million, $197.7 million and $172.2 million, respectively. During Fiscal 2018, the Company recorded
fixed asset impairment charges of $27.5 million, $26.1 million of which related to underperforming Michael Kors full-price retail
store locations, some of which will be closed as part of the Company’s previously announced Retail Fleet Optimization Plan (as
defined in Note 9) and $1.4 million related to wholesale locations expected to be closed. During Fiscal 2017 and Fiscal 2016, the
Company recorded fixed asset impairment charges of $169.0 million and $10.9 million, respectively, primarily related to
underperforming retail locations.
7. Intangible Assets and Goodwill
The following table details the carrying values of the Company’s intangible assets other than goodwill (in millions):
Definite-lived intangible assets:
Reacquired rights
Trademarks
Lease rights
Customer relationships
Indefinite-lived intangible assets:
Jimmy Choo brand
Total intangible assets, excluding
goodwill
March 31, 2018
April 1, 2017
Gross
Carrying
Amount
Accumulated
Amortization (1)
Net
Gross
Carrying
Amount
Accumulated
Amortization (1)
Net
$
$
400.4
23.0
80.1
231.3
734.8
$
29.4
17.4
58.3
8.1
113.2
$
371.0
5.6
21.8
223.2
621.6
$
400.4
23.0
74.2
5.0
502.6
$
13.4
16.3
53.8
1.0
84.5
387.0
6.7
20.4
4.0
418.1
614.1
—
614.1
—
—
—
$ 1,348.9
$
113.2
$ 1,235.7
$
502.6
$
84.5
$
418.1
________________________________
(1)
Includes $5.2 million and $30.2 million, respectively, of impairment charges recorded during Fiscal 2018 and Fiscal
2017 in connection with underperforming full-price retail stores. There were no impairment charges related to the
Company’s amortized intangibles assets during Fiscal 2016. See Note 12 for additional information.
81
Reacquired rights relate to the Company’s reacquisition of the rights to use its trademarks and to import, sell, advertise and
promote certain of its products in the previously licensed territories in the Greater China region and are being amortized through
March 31, 2041, the expiration date of the related license agreement. The trademarks relate to the Michael Kors brand name and
are amortized over twenty years. Customer relationships are amortized over five to eighteen years. Lease rights are amortized
over the respective terms of the underlying lease, including highly probable renewal periods. Amortization expense for the
Company’s definite-lived intangibles was $26.3 million, $22.1 million and $11.0 million, respectively, for each of the fiscal years
ended March 31, 2018, April 1, 2017 and April 2, 2016.
Indefinite-lived intangible assets other than goodwill included the Jimmy Choo brand , which was was recorded in connection
with the acquisition of Jimmy Choo and has an indefinite life due to being essential to the Company’s ability to operate the Jimmy
Choo business for the foreseeable future.
Estimated amortization expense for each of the next five years is as follows (in millions):
Fiscal 2019
Fiscal 2020
Fiscal 2021
Fiscal 2022
Fiscal 2023
Thereafter
$
$
34.4
34.1
34.0
33.4
32.5
453.2
621.6
The future amortization expense above reflects weighted-average estimated remaining useful lives of 23.0 years for
reacquired rights, 4.8 years for trademarks, 16.9 years for customer relationships and 7.0 years for lease rights.
The following table details the changes in goodwill for each of the Company’s reportable segments (in millions):
MK Retail
MK Wholesale
MK Licensing
Jimmy Choo
Total
Balance at April 1, 2017
Acquisition of Jimmy Choo
Foreign currency translation
Balance at March 31, 2018
$
$
91.9
$
25.9
$
1.9
$
— $
—
—
—
—
—
—
684.9
43.1
91.9
$
25.9
$
1.9
$
728.0
$
119.7
684.9
43.1
847.7
The Company’s goodwill and the Jimmy Choo brand is not subject to amortization but is evaluated for impairment annually
in the last quarter of each fiscal year, or whenever impairment indicators exist.
During the fourth quarter of Fiscal 2018, the Company elected to perform its annual goodwill impairment analysis for its
Michael Kors brand using a quantitative approach, using the discounted cash flow method to estimate fair value. Based on the
results of these assessments, the Company concluded that the fair values of the Michael Kors reporting units significantly exceeded
the related carrying amounts and there were no reporting units at risk of impairment. The goodwill impairment analysis relating
to the Jimmy Choo brand was performed using a qualitative assessment, due to the proximity to the acquisition date, to determine
whether it is more likely than not that the fair value of its reporting units was less than their carrying amounts. As part of the its
assessment, the Company considered qualitative factors, including the projected financial performance of Jimmy Choo, as well
as various industry, market and macroeconomic factors. Based on this assessment, the Company qualitatively concluded that it is
more likely than not that the fair value of the Jimmy Choo reporting units exceeded its carrying value and, therefore, did not result
in an impairment. There were no impairment charges related to goodwill in any of the fiscal periods presented.
The Company also performed a qualitative impairment assessment to determine whether it is more likely than not that the
fair value of its Jimmy Choo brand indefinite-lived intangible asset was less than the carrying amount. As part of this assessment,
the Company considered qualitative factors, including the projected financial performance of Jimmy Choo, as well as various
industry, market and macroeconomic factors. Based on this assessment, the Company qualitatively concluded that it was more
likely than not that the fair value of the Jimmy Choo brand exceeded its carrying value and, therefore, did not result in an impairment.
82
8. Current Assets and Current Liabilities
Prepaid expenses and other current assets consist of the following (in millions):
Prepaid taxes
Prepaid rent
Leasehold incentive receivable
Other
March 31,
2018
April 1,
2017
$
$
78.5
22.7
9.4
37.2
147.8
$
$
56.6
21.7
12.0
31.6
121.9
Accrued expenses and other current liabilities consist of the following (in millions):
Other taxes payable
Restructuring liability
Accrued rent
Accrued capital expenditures
Accrued advertising and marketing
Gift cards and retail store credits
Professional services
Accrued interest
Unrealized loss on forward foreign exchange contracts
Deferred income
Advance royalties
Other
March 31,
2018
April 1,
2017
$
$
54.3
44.8
34.5
26.4
22.6
16.0
14.1
8.7
7.7
4.3
4.1
58.1
295.6
$
$
29.2
—
21.5
20.5
10.7
12.9
7.1
0.3
0.4
0.1
5.0
27.3
135.0
9. Restructuring and Other Charges
On May 31, 2017, the Company announced that it plans to close between 100 and 125 of its Michael Kors full-price retail
stores over the next two years, in order to improve the profitability of its retail store fleet (“Retail Fleet Optimization Plan”). Over
this time period, the Company expects to incur approximately $100 - $125 million of one-time costs associated with these store
closures. Collectively, the Company anticipates ongoing annual savings of approximately $60 million as a result of store closures
and lower depreciation and amortization expense as a result of the impairment charges recorded during Fiscal 2017 and Fiscal
2018.
During Fiscal 2018, the Company closed 47 of its Michael Kors full-price retail stores under the Retail Fleet Optimization
Plan and recorded restructuring costs of $52.6 million. The Company anticipates finalizing the remainder of the planned store
closures under the Retail Fleet Optimization Plan over the next two fiscal years. The below table presents a summary of cash
charges recorded in connection with this plan for the MK Retail segment and the Company’s remaining restructuring liability (in
millions):
Balance as of April 1, 2017
Additions charged to expense
Balance sheet reclassifications (2)
Payments
Balance as of March 31, 2018
Severance and
benefit costs
Lease-related
costs
Total
$
$
— $
0.7
—
(0.5)
0.2
$
—
51.9 (1)
12.2
(19.5)
44.6
$
$
—
52.6
12.2
(20.0)
44.8
Includes losses on store lease exits of $29.0 million.
(1)
(2) Primarily consists of reclassification of deferred rent balances for locations subject to closure to a restructuring liability.
83
Other Charges
During Fiscal 2018, the Company recorded transaction costs of $40.6 million in connection with the Jimmy Choo acquisition
within restructuring and other charges in its consolidated statements of operations. In addition, restructuring and other charges
included transition costs of $8.9 million for Fiscal 2018, which were incurred in connection with the Jimmy Choo acquisition.
During Fiscal 2017, the Company recorded transaction costs of $11.3 million related to the acquisition of the Greater China
business. See Note 3 for additional information relating to these acquisitions.
10. Debt Obligations
The following table presents the Company’s debt obligations (in millions):
Term Loan
4.000% Senior Notes due 2024
Revolving Credit Facilities
Other
Total debt
Less: Unamortized debt issuance costs
Less: Unamortized discount on long-term debt
Total carrying value of debt
Less: Short-term debt
Total long-term debt
Bridge Credit Agreement
March 31,
2018
April 1,
2017
229.8
450.0
200.0
0.9
880.7
4.2
2.1
874.4
200.0
674.4
$
$
—
—
133.1
—
133.1
—
—
133.1
133.1
—
$
$
On July 25, 2017, the Company and certain of its subsidiaries, as loan parties, entered into a bridge credit agreement
providing for a term loan facility in the principal amount of £1.115 billion with the lenders from time to time party thereto and
JPMorgan Europe Limited, as administrative agent. In connection with Term Loan Facility provided for under the 2017 Credit
Facility, as described and defined below, the commitments under the bridge credit agreement were reduced to approximately
£344.2 million as of September 30, 2017 and eliminated in their entirety as a result of the October 20, 2017 issuance of $450.0
million 4.000% senior notes due 2024. As a result, the bridge credit agreement was terminated.
Senior Unsecured Revolving Credit Facility
On August 22, 2017, the Company entered into a second amended and restated senior unsecured credit facility (as amended,
the “2017 Credit Facility”) with, among others, JPMorgan Chase Bank, N.A., as administrative agent, which replaced its prior
2015 senior unsecured revolving credit facility (“2015 Credit Facility”). The Company and its U.S., Canadian, Dutch and Swiss
subsidiaries are the borrowers under the 2017 Credit Facility. The borrowers and certain material subsidiaries of the Company
provide unsecured guarantees of the 2017 Credit Facility. The 2017 Credit Facility provides for a $1.0 billion revolving credit
facility (the “Revolving Credit Facility”), which may be denominated in U.S. Dollars and other currencies, including Euros,
Canadian Dollars, Pounds Sterling, Japanese Yen and Swiss Francs. The Revolving Credit Facility also provides sub-facilities for
the issuance of letters of credit of up to $75.0 million and swing line loans of up to $50.0 million. The 2017 Credit Facility also
provides for a $1.0 billion term loan facility (the “Term Loan Facility”) to finance a portion of the purchase price of the Company’s
acquisition of Jimmy Choo. The Revolving Credit Facility expires on August 22, 2022. The Term Loan Facility is divided into
two tranches, a $600.0 million tranche that matures on the third anniversary of the initial borrowing of the term loans and a $400.0
million tranche that matures on the fifth anniversary of the initial borrowing of the term loans. The Company has the right to
prepay its borrowings under the Term Loan Facility at any time in whole or in part. The Company has the ability to expand its
borrowing availability under the 2017 Credit Facility in the form of revolving commitments or term loans by up to an additional
$500.0 million, subject to the agreement of the participating lenders and certain other customary conditions.
On November 1, 2017, the Company’s $1.0 billion Term Loan Facility was fully drawn to pay a portion of the acquisition
consideration for Jimmy Choo and other related fees and expenses. The loans under the Term Loan Facility are required to be
repaid on the last business day of March, June, September and December of each year, commencing after the last business day of
the first full fiscal quarter after the initial borrowing, in installments equal to 2.50% of the aggregate original principal amount of
the term loans. During Fiscal 2018, the Company made accelerated payments on the Term Loans on a pro-rata basis. As of March 31,
2018, the carrying value of borrowings outstanding under the Term Loan Facility was $229.0 million, net of debt issuance costs.
84
During the first quarter of Fiscal 2019, the Company repaid an additional $90.0 million principal amount of borrowings
outstanding under the Term Loan Facility on a pro-rata basis.
Borrowings under the Revolving Credit Facility bear interest, at the Company’s option, at the following rates:
•
•
•
•
for any loans (except loans denominated in Canadian Dollars), the greater of Adjusted LIBOR for the applicable interest
period and zero, plus an applicable margin based on the Company’s public debt rating;
for loans denominated in U.S. Dollars, an alternate base rate, which is the greatest of: (a) the prime rate publicly announced
from time to time by JPMorgan Chase, (b) the greater of the federal funds effective rate and the Federal Reserve Bank of
New York overnight bank funding rate and zero, plus 50 basis points, and (c) the greater of the one-month London Interbank
Offered Rate adjusted for statutory reserve requirements for Eurocurrency liabilities (“Adjusted LIBOR”) and zero, plus
100 basis points, in each case, plus an applicable margin based on the Company’s public debt ratings;
for loans denominated in Canadian Dollars, the Canadian prime rate, which is the greater of the PRIMCAN Index rate and
the rate applicable to one-month Canadian Dollar banker’s acceptances quoted on Reuters (“CDOR”), plus 100 basis points,
plus an applicable margin based on the Company’s public debt ratings; or
for loans denominated in Canadian Dollars, the average CDOR rate for the applicable interest period, plus 10 basis points
per annum, plus an applicable margin based on the Company’s public debt ratings.
Borrowings under the Term Loan Facility bear interest, at the Company’s option, at (a) the alternate base rate plus an
applicable margin based on the Company’s public debt ratings; or (b) the greater of Adjusted LIBOR for the applicable interest
period and zero, plus an applicable margin based on the Company’s public debt ratings.
The 2017 Credit Facility requires the Company to maintain a leverage ratio as of the end of each fiscal quarter of no greater
than 3.5 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 2017 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 March 31, 2018,
the Company was in compliance with all covenants related to this agreement.
The 2017 Credit Facility contains events of default customary for financings of this type, including, but not limited to,
payment of defaults, material inaccuracy of representations and warranties, covenant defaults, cross-defaults to certain
indebtedness, certain events of bankruptcy or insolvency, certain events under The Employee Retirement Income Security Act,
material judgments, actual or asserted failure of any guaranty supporting the 2017 Credit Facility to be in full force and effect,
and changes of control. If such an event of default occurs, the lenders under the 2017 Credit Facility would be entitled to take
various actions, including, but not limited to, terminating the commitments and accelerating amounts outstanding under the 2017
Credit Facility, subject to “certain funds” limitations in connection with the transaction governing the Term Loan Facility.
As of March 31, 2018, the Company had borrowings of $200.0 million outstanding under the 2017 Revolving Credit Facility.
Stand-by letters of credit of $15.9 million were outstanding as of March 31, 2018. There were borrowings of $127.3 million
outstanding under the prior 2015 Revolving Credit Facility as of April 1, 2017, which were recorded within short-term debt in the
Company’s balance sheet as of April 1, 2017. At March 31, 2018, the amount available for future borrowings under the 2017
Revolving Credit Facility was $784.1 million.
Senior Notes
On October 20, 2017, Michael Kors (USA), Inc. (the “Issuer”), the Company’s wholly owned subsidiary, completed its
offering of $450.0 million aggregate principal amount of 4.000% senior notes due 2024 (the “Senior Notes”) at an issue price of
99.508% of aggregate principal amount, pursuant to an exemption from registration under the Securities Act of 1933, as amended.
The Senior Notes were issued under an indenture dated October 20, 2017, among the Issuer, the Company, the subsidiary guarantors
party thereto and U.S. Bank National Association, as trustee (the “Indenture”). The Senior Notes were issued to finance a portion
of the Company’s acquisition of Jimmy Choo and certain related refinancing transactions.
The Senior Notes bear interest at a rate of 4.000% per year, subject to adjustments from time to time if either Moody’s or
S&P (or a substitute rating agency therefore) downgrades (or downgrades and subsequently upgrades) the credit rating assigned
to the Senior Notes. Interest on the Senior Notes is payable semi-annually on May 1 and November 1 of each year, beginning on
May 1, 2018.
85
The Senior Notes are unsecured and are guaranteed by the Company and its existing and future subsidiaries that guarantee
or are borrowers under the 2017 Credit Facility (subject to certain exceptions, including subsidiaries organized in China), including,
following the closing of the acquisition, Jimmy Choo and all of its existing and future subsidiaries who are guarantors or borrowers
under the 2017 Credit Facility (subject to certain exceptions, including subsidiaries organized in China).
The Senior Notes may be redeemed at the Company’s option at any time in whole or in part at a price equal to 100% of
the principal amount, plus accrued and unpaid interest, plus a “make-whole” amount calculated at the applicable Treasury Rate
plus 30 basis points.
The Senior Notes rank equally in right of payment with all of the Issuer’s and guarantors’ existing and future senior unsecured
indebtedness, senior in right of payment to any future subordinated indebtedness, effectively subordinated in right of payment to
any of the Company’s subsidiaries’ obligations (including secured and unsecured obligations) and any of the Company’s secured
obligations, to the extent of the assets securing such obligations.
The Indenture contains covenants, including those that limit the Company’s ability to create certain liens and enter into
certain sale and leaseback transactions. In the event of a “Change of Control Triggering Event,” as defined in the Indenture, the
Issuer will be required to make an offer to repurchase the Senior Notes at a repurchase price in cash equal to 101% of the aggregate
principal amount of the Senior Notes being repurchased plus any unpaid interest. These covenants are subject to important
limitations and exceptions, as per the Indenture.
As of March 31, 2018, the carrying value of the Senior Notes was $444.5 million, net of issuance costs and unamortized
discount. See Note 22 for cross-currency swaps executed during the first quarter of Fiscal 2019.
Japan Credit Facility
In November 2017, the Company’s subsidiary in Japan entered into a short term credit facility (“Japan Credit Facility”)
with Mitsubishi UFJ Financial Group (“MUFJ”) (the “Bank”) which may be used to fund general working capitals needs of
Michael Kors Japan K.K. through November 29, 2018, subject to the Bank’s discretion. The Japan Credit Facility provides Michael
Kors Japan K.K. with a revolving credit line of up to ¥1.0 billion (approximately $9.4 million). The Japan Credit Facility bears
interest at a rate posted by the Bank plus 0.300% two business days prior to the date of borrowing or the date of interest renewal.
As of March 31, 2018, the Company had no borrowings outstanding under the Japan Credit Facility.
Hong Kong Credit Facility
In November 2017, the Company’s Hong Kong subsidiary, MKHKL, renewed its uncommitted credit facility (“HK Credit
Facility”) with HSBC (the “Bank”), which may be used to fund general working capital needs of MKHKL through November 30,
2018 subject to the Bank’s discretion. The HK Credit Facility provides MKHKL with a revolving line of credit of up to 100.0
million Hong Kong Dollars (approximately $12.7 million), and may be used to support bank guarantees. In addition, this credit
facility provides for a business card facility of up to 0.4 million Hong Kong Dollars (less than $0.1 million). Borrowings under
the HK Credit Facility must be made in increments of at least 5.0 million Hong Kong Dollars and bear interest at the Hong Kong
Interbank Offered Rate (“HIBOR”) plus 150 basis points. As of April 1, 2017, borrowings outstanding under the HK Credit Facility
were 45.0 million Hong Kong Dollars (approximately $5.8 million), which were recorded within short-term debt in the Company’s
consolidated balance sheet as of April 1, 2017. As of March 31, 2018, there were no borrowings outstanding under the HK Credit
Facility. As of March 31, 2018, bank guarantees supported by this facility were 11.8 million Hong Kong Dollars (approximately
$1.5 million). At March 31, 2018, the amount available for future borrowings under the HK Credit Facility was 88.2 million Hong
Kong Dollars (approximately $11.2 million).
Other
In addition to the above, the Company had letters of credit outstanding of $4.4 million as of March 31, 2018, which have
been issued outside of its credit facilities, and were primarily related to lease guarantees for Jimmy Choo.
11. Commitments and Contingencies
Leases
The Company leases office space, retail stores and warehouse space under operating lease agreements that expire at various
dates through September 2043. In addition to minimum rental payments, the leases require payment of increases in real estate
taxes and other expenses incidental to the use of the property.
86
Rent expense for the Company’s operating leases consists of the following (in millions):
Minimum rentals
Contingent rent
Total rent expense
Fiscal Years Ended
March 31,
2018
April 1,
2017
April 2,
2016
$
$
271.8
80.4
352.2
$
$
257.0
75.5
332.5
$
$
193.5
64.4
257.9
Future minimum lease payments under the terms of these noncancelable operating lease agreements are as follows (in
millions):
Fiscal years ending:
2019
2020
2021
2022
2023
Thereafter
$
$
323.9
299.3
279.5
251.2
221.3
531.4
1,906.6
As of March 31, 2018, the future minimum lease payments in the table above were reduced by total noncancelable future
sublease rental income of $11.8 million.
The Company has issued stand-by letters of credit to guarantee certain of its retail and corporate operating lease commitments,
aggregating $20.3 million at March 31, 2018, including $15.9 million in letters of credit issued under the 2017 Credit Facility.
Other Commitments
As of March 31, 2018, the Company also has other contractual commitments aggregating $1.731 billion, which consist of
inventory purchase commitments of $750.6 million, debt obligations of $874.4 million and other contractual obligations of $106.4
million, which primarily relate to obligations related to the Company’s marketing and advertising agreements, information
technology agreements and supply agreements.
Long-term Employment Contract
The Company has an employment agreement with one of its officers that provided for continuous employment through the
date of the officer’s death or permanent disability at a salary of $1.35 million. In addition to salary, the agreement provided for an
annual bonus and other employee related benefits.
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.
12. 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:
87
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 March 31, 2018 and April 1, 2017, the fair values of the Company’s foreign currency forward contracts, the Company’s
only derivative instruments, 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, as detailed in Note 13.
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 March 31, 2018, using:
Fair value at April 1, 2017, 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)
Forward foreign currency exchange
contracts - assets
Forward foreign currency exchange
contracts - liabilities
$
$
— $
— $
— $
— $
7.7
$
— $
— $
— $
4.7
0.4
$
$
—
—
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. Please refer to Note 10 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):
4.000% Senior Notes
Term Loan
Revolving Credit Facilities
March 31, 2018
April 1, 2017
Carrying Value
Estimated
Fair Value
Carrying Value
Estimated
Fair Value
$
$
$
444.5
229.0
200.0
$
$
$
448.1
231.2
200.0
$
$
$
— $
— $
$
133.1
—
—
133.1
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 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 is assessed for impairment
at least annually, while its other long-lived assets, including fixed assets 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.
88
The following table details the carrying values and fair values of the Company’s long-lived assets that have been impaired
(in millions):
Fiscal 2018:
Lease Rights
Fixed Assets
Customer relationships
Total
Fiscal 2017:
Lease Rights
Fixed Assets
Total
Fiscal 2016:
Fixed Assets
Carrying Value
Prior to
Impairment
Fair Value
Impairment
Charge
$
$
$
$
$
4.7
30.5
1.0
36.2
33.5
186.9
220.4
10.9
$
$
$
$
$
0.5
3.0
—
3.5
3.3
17.9
21.2
$
$
$
$
4.2
27.5
1.0
32.7
30.2
169.0
199.2
— $
10.9
Please refer to Notes 6, 7 and 19 for additional information.
13. Derivative Financial Instruments
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.
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 March 31, 2018 and April 1, 2017 (in millions):
Notional Amounts
Current Assets (1)
Current Liabilities (2)
March 31,
2018
April 1,
2017
March 31,
2018
April 1,
2017
March 31,
2018
April 1,
2017
Fair Values
Designated forward foreign
currency exchange contracts
Total
$
$
161.7
161.7
$
$
167.5
167.5
$
$
— $
— $
4.7
4.7
$
$
7.7
7.7
$
$
0.4
0.4
(1) Recorded within prepaid expenses and other current assets in the Company’s audited consolidated balance sheets.
(2) Recorded within accrued expenses and other current liabilities in the Company’s audited consolidated balance sheets.
The Company records and presents the fair values of all of its derivative assets and liabilities in its consolidated balance
sheet on a gross basis as shown in the above table. However, the Company has derivative liabilities of $7.7 million as of March 31,
2018 and derivative assets and liabilities of $4.7 million and $0.3 million, respectively, as of April 1, 2017, which are subject to
master netting arrangements. If the Company were to offset and record the asset and liability balances for its derivative instruments
on a net basis in accordance with the terms of its master netting arrangements, which provide for the right to setoff amounts for
similar transactions denominated in the same currencies, the March 31, 2018 liability would remain unchanged and derivative net
assets and net liabilities as of April 1, 2017 would be $4.5 million and $0.2 million, respectively. The Company’s master netting
arrangements do not require cash collateral to be pledged by the Company or its counterparties. The Company’s derivative financial
instruments were not subject to master netting arrangements in prior fiscal years.
89
Changes in the fair value of the effective portion of the Company’s forward foreign currency exchange contracts that are
designated as accounting hedges are recorded in equity as a component of accumulated other comprehensive income, and are
reclassified from accumulated other comprehensive income into earnings when the items underlying the hedged transactions are
recognized into earnings, as a component of cost of sales within the Company’s consolidated statements of operations and
comprehensive income. The following table summarizes the impact of the effective portion of gains and losses on the forward
contracts designated as hedges (in millions):
Fiscal Year Ended March 31, 2018
Fiscal Year Ended April 1, 2017
Fiscal Year Ended April 2, 2016
Pre-Tax
Loss
Recognized
in OCI
Pre-tax Loss
Reclassified from
Accumulated OCI
into Earnings
Pre-Tax
Gain
Recognized
in OCI
Pre-tax Gain
Reclassified from
Accumulated OCI
into Earnings
Pre-Tax
Loss
Recognized
in OCI
Pre-tax Gain
Reclassified from
Accumulated OCI
into Earnings
Designated hedges
$
(22.4) $
(4.0)
$
10.2
$
0.4
$
(25.2) $
10.9
Amounts related to ineffectiveness were not material during all periods presented. The Company expects that substantially
all of the amounts recorded in accumulated other comprehensive loss at March 31, 2018 will be reclassified into earnings during
the next twelve months, based upon the timing of inventory purchases and turnover. These amounts are subject to fluctuations in
the applicable currency exchange rates.
During Fiscal 2018, Fiscal 2017 and Fiscal 2016, the Company recognized net gains of $3.4 million, net gains of $2.6
million and net losses of $2.1 million respectively, related to the change in the fair value of undesignated forward foreign currency
exchange contracts within foreign currency loss (gain) in the Company’s consolidated statements of operations and comprehensive
income. The Fiscal 2018 amount included a $4.7 million gain related to the derivative contract entered into on July 25, 2017 to
mitigate foreign currency exchange risk associated with the Jimmy Choo acquisition that was settled on October 30, 2017.
14. Shareholders’ Equity
Share Repurchase Program
On May 25, 2017, the Company’s Board of Directors authorized a $1.0 billion share repurchase program. During Fiscal
2018 and Fiscal 2017, the Company repurchased 7,700,959 shares and 21,756,353 shares, respectively, at a cost of $357.8 million
and $1.000 billion, respectively, under its share-repurchase programs through open market transactions. As of March 31, 2018,
the remaining availability under the Company’s share repurchase program was $642.2 million. Share repurchases may be made
in open market or privately negotiated transactions, subject to market conditions, applicable legal requirements, trading transactions
under the Company's insider trading policy and other relevant factors. The program may be suspended or discontinued at any time.
The Company also has in place a “withhold to cover” repurchase program, which allows the Company to withhold ordinary
shares from certain executive officers and directors to satisfy minimum tax withholding obligations relating to the vesting of their
restricted share awards. During Fiscal 2018 and Fiscal 2017, the Company withheld 92,536 shares and 100,552 shares, respectively,
with a fair value of $3.2 million and $4.8 million, respectively, in satisfaction of minimum tax withholding obligations relating
to the vesting of restricted share awards.
90
15. Accumulated Other Comprehensive Income (Loss)
The following table details changes in the components of accumulated other comprehensive income (loss), net of taxes for
Fiscal 2018, Fiscal 2017 and Fiscal 2016 (in millions):
Foreign
Currency
Translation
(Losses)
Gains
Net Gains
(Losses) on
Derivatives (1)
Other
Comprehensive
(Loss)/Gain
Attributable to
MKHL
Other
Comprehensive
Income (Loss)
Attributable to
Noncontrolling
Interest
Total Other
Comprehensive
(Loss) Income
Balance at March 28, 2015
$
(96.1)
$
29.3
$
(66.8) $
— $
(66.8)
Other comprehensive income (loss) before
reclassifications
Less: amounts reclassified from AOCI to
earnings (2)
Other comprehensive income (loss), net of tax
Balance at April 2, 2016
Other comprehensive (loss) income before
reclassifications
Less: amounts reclassified from AOCI to
earnings (2)
Other comprehensive (loss) income, net of tax
Balance at April 1, 2017
Other comprehensive (loss) income before
reclassifications
Less: amounts reclassified from AOCI to
earnings (2)
Other comprehensive (loss) income, net of tax
Balance at March 31, 2018
18.4
—
18.4
(77.7)
(8.4) (3)
—
(8.4)
(86.1)
(22.6)
9.9
(32.5)
(3.2)
9.0
0.3
8.7
5.5
147.3 (3)
(19.6)
—
147.3
61.2
$
$
(3.4)
(16.2)
(10.7) $
(4.2)
9.9
(14.1)
(80.9)
0.6
0.3
0.3
(80.6)
127.7
(3.4)
131.1
50.5
$
0.1
—
0.1
0.1
(0.4)
—
(0.4)
(0.3)
0.1
—
0.1
(0.2) $
(4.1)
9.9
(14.0)
(80.8)
0.2
0.3
(0.1)
(80.9)
127.8
(3.4)
131.2
50.3
(1)
(2)
(3)
Accumulated other comprehensive income related to net gains (losses) on derivative financial instruments is net of
a tax provision (benefit) of $(1.4) million, $0.8 million, and $(0.3) million, respectively, as of March 31, 2018,
April 1, 2017 and April 2, 2016. Other comprehensive income (loss) before reclassifications related to derivative
instruments for Fiscal 2018, Fiscal 2017, and Fiscal 2016 is net of a tax provision (benefit) of $(2.8) million, $1.2
million, and $(2.6) million, respectively.
Reclassified amounts relate to the Company’s forward foreign currency exchange contracts for inventory purchases
and are recorded within cost of goods sold in the Company’s consolidated statements of operations and comprehensive
income. The amounts reclassified from other comprehensive income for Fiscal 2018 and Fiscal 2016 are net of a tax
(benefit) provision of $(0.6) million and $1.0 million, respectively. Tax effect related to Fiscal 2017 was not material.
Foreign currency translation (losses) gains include net losses of $9.2 million and net gains of $2.4 million for Fiscal
2018 and Fiscal 2017, respectively, on intra-entity transactions that are of a long-term investment nature. Foreign
currency translation gains for Fiscal 2018 also includes an $88.8 million translation gain relating to the newly acquired
Jimmy Choo business.
16. Share-Based Compensation
The Company issues equity grants to certain employees and directors of the Company at the discretion of the Company’s
Compensation and Talent Committee. The Company has two equity plans, one adopted in Fiscal 2008, the Michael Kors (USA),
Inc. Stock Option Plan (as amended and restated, the “2008 Plan”), and the other adopted in the third fiscal quarter of Fiscal 2012
and amended and restated with shareholder approval in May 2015, the Michael Kors Holdings Limited Amended and Restated
Omnibus Incentive Plan (the “Incentive Plan”). The 2008 Plan only provided for grants of share options and was authorized to
issue up to 23,980,823 ordinary shares. As of March 31, 2018, there were no shares available to grant equity awards under the
2008 Plan. The Incentive Plan allows for grants of share options, restricted shares and restricted share units, and other equity
awards, and authorizes a total issuance of up to 15,246,000 ordinary shares. At March 31, 2018, there were 7,193,763 ordinary
shares available for future grants of equity awards under the Incentive Plan. Option grants issued from the 2008 Plan generally
expire ten years from the date of the grant, and those issued under the Incentive Plan generally expire seven years from the date
of the grant.
91
Share Options
Share options are generally exercisable at the fair market value on the date of grant and vest on a pro-rata basis over a four
year service period. The following table summarizes the share options activity during Fiscal 2018, and information about options
outstanding at March 31, 2018:
Outstanding at April 1, 2017
Granted
Exercised
Canceled/forfeited
Outstanding at March 31, 2018
Vested or expected to vest at March 31, 2018
Vested and exercisable at March 31, 2018
Number of
Options
$
4,791,045
208,264
$
(1,116,857) $
(85,832) $
$
$
$
3,796,620
3,776,873
3,132,123
Weighted
Average
Exercise price
Weighted
Average
Remaining
Contractual
Life (years)
Aggregate
Intrinsic
Value
(in millions)
28.55
34.68
12.34
67.04
32.78
32.78
29.28
2.63 $
2.63
2.19 $
124.6
112.8
There were 664,497 unvested options and 3,132,123 vested options outstanding at March 31, 2018. The total intrinsic value
of options exercised during Fiscal 2018 and Fiscal 2017 was $48.0 million and $30.5 million, respectively. The cash received from
options exercised during Fiscal 2018 and Fiscal 2017 was $13.7 million and $8.3 million, respectively. As of March 31, 2018, the
remaining unrecognized share-based compensation expense for nonvested share options was $5.1 million, which is expected to
be recognized over the related weighted-average period of approximately 1.85 years.
The weighted average grant date fair value for options granted during Fiscal 2018, Fiscal 2017 and Fiscal 2016, was $11.62,
$13.79 and $14.35, respectively. The following table represents assumptions used to estimate the fair value of options:
Expected dividend yield
Volatility factor
Weighted average risk-free interest rate
Expected life of option
Restricted Shares and Restricted Share Units
Fiscal Years Ended
March 31,
2018
April 1,
2017
April 2,
2016
0.0%
36.3%
1.8%
4.69 years
0.0%
30.1%
1.1%
4.75 years
0.0%
31.1%
1.6%
4.75 years
The Company grants restricted shares and restricted share units at the fair market value on the date of the grant. Expense
for restricted share awards is based on the closing market price of the Company’s shares on the date of grant and is recognized
ratably over the vesting period net of expected forfeitures.
Restricted share grants generally vest in equal increments on each of the four anniversaries of the date of grant. In addition,
the Company grants two types of restricted share unit (“RSU”) awards: time-based RSUs and performance-based RSUs. Time-
based RSUs generally vest in full either generally around the first anniversary of the date of grant for our independent directors,
or in equal increments on each of the four anniversaries of the date of grant. Performance-based RSUs vest in full on the second
or third anniversary of the date of grant, subject to the employee’s continued employment during the vesting period (unless the
employee is retirement-eligible) and only if certain pre-established cumulative performance targets are met. Expense related to
performance-based RSUs is recognized ratably over the performance period, net of forfeitures, based on the probability of
attainment of the related performance targets. The potential number of shares that may be earned ranges from 0%, if the minimum
level of performance is not attained, to 150%, if the level of performance is at or above the predetermined maximum achievement
level.
92
The following table summarizes restricted share activity during Fiscal 2018:
Unvested at April 1, 2017
Granted
Vested
Canceled/forfeited
Unvested at March 31, 2018
Restricted Shares
Number of Unvested
Restricted Shares
Weighted
Average Grant
Date Fair Value
185,425
$
— $
(114,121) $
(7,156) $
$
64,148
84.12
—
79.97
90.87
90.75
The total fair value of restricted shares vested was $4.0 million, $6.7 million and $14.4 million during Fiscal 2018, Fiscal
2017 and Fiscal 2016, respectively. As of March 31, 2018, the remaining unrecognized share-based compensation expense for
non-vested restricted share grants was $1.6 million, which is expected to be recognized over the related weighted-average period
of approximately 0.29 years.
The following table summarizes the RSU activity during Fiscal 2018:
Unvested at April 1, 2017
Granted
Decrease due to performance condition
Vested
Canceled/forfeited
Unvested at March 31, 2018
Service-based
Performance-based
Number of
Restricted
Share Units
Weighted
Average Grant
Date Fair Value
Number of
Restricted
Share Units
Weighted
Average Grant
Date Fair Value
1,470,767
1,390,454
$
$
— $
(453,695) $
(280,009) $
$
2,127,517
48.39
38.57
—
48.20
44.46
42.53
$
401,777
363,848
$
(12,891) $
(95,202) $
— $
$
657,532
58.50
51.56
92.93
84.95
—
50.16
The total fair value of service-based RSUs vested during Fiscal 2018, Fiscal 2017 and Fiscal 2016 was $17.9 million, $13.7
million and $1.1 million, respectively. The total fair value of performance-based RSUs vested during Fiscal 2018 and Fiscal 2017
was $3.6 million and $10.9 million, respectively. As of March 31, 2018, the remaining unrecognized share-based compensation
expense for non-vested service-based and performance-based RSU grants was $65.4 million and $17.5 million, respectively, which
is expected to be recognized over the related weighted-average periods of approximately 2.51 years and 2.78 years, respectively.
Share-Based Compensation Expense
The following table summarizes compensation expense attributable to share-based compensation for Fiscal 2018, Fiscal
2017 and Fiscal 2016 (in millions):
Fiscal Years Ended
March 31,
2018
April 1,
2017
April 2,
2016
Share-based compensation expense
Tax benefits related to share-based compensation expense
$
$
49.6
9.7
$
$
33.9
11.2
$
$
48.4
15.7
Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from
those estimates. The Company estimates forfeitures based on its historical forfeiture rate to date. The estimated value of future
forfeitures for equity grants as of March 31, 2018 is approximately $3.0 million.
93
17. Taxes
The Company is a United Kingdom tax resident and is incorporated in the British Virgin Islands. MKHL’s subsidiaries are
subject to taxation in the U.S. and various other foreign jurisdictions, which are aggregated in the “Non-U.S.” information captioned
below.
Income before provision for income taxes consisted of the following (in millions):
$
$
$
U.S.
Non-U.S.
Total income before provision for income taxes
The provision for income taxes was as follows (in millions):
Current
U.S. Federal
U.S. State
Non-U.S.
Total current
Deferred
U.S. Federal
U.S. State
Non-U.S.
Total deferred
Fiscal Years Ended
March 31,
2018
April 1,
2017
April 2,
2016
124.1
617.7
741.8
$
$
228.4
460.2
688.6
$
$
737.5
434.8
1,172.3
Fiscal Years Ended
March 31,
2018
April 1,
2017
April 2,
2016
$
131.2
$
47.6
15.6
77.4
140.6
23.9
0.9
(15.7)
9.1
20.4
45.8
197.4
(34.1)
(5.0)
(21.2)
(60.3)
137.1
$
268.0
14.3
54.2
336.5
0.3
1.0
(3.2)
(1.9)
334.6
Total provision for income taxes
$
149.7
$
The Company’s provision for income taxes for the years ended March 31, 2018, April 1, 2017 and April 2, 2016 was different
from the amount computed by applying statutory U.K. or U.S. federal income tax rates to the underlying income from continuing
operations before income taxes and equity in net income of affiliates as a result of the following:
Provision for income taxes at the U.K. (2018-2017), U.S. (2016)
statutory tax rate
State and local income taxes, net of federal benefit
Effects of global financing arrangements
U.S. tax reform
Differences in tax effects on foreign income
Foreign tax credit
Liability for uncertain tax positions
Effect of changes in valuation allowances on deferred tax assets
Withholding tax
Other
Effective tax rate
94
Fiscal Years Ended
March 31,
2018
April 1,
2017
April 2,
2016
19.0 %
0.5 %
(15.6)%
2.0 %
6.7 %
— %
6.6 %
0.3 %
1.2 %
(0.5)%
20.2 %
20.0 %
1.3 %
(13.7)%
— %
11.1 %
0.3 %
— %
0.5 %
— %
0.4 %
19.9 %
35.0 %
1.2 %
(2.8)%
— %
(5.1)%
(0.2)%
— %
(0.2)%
— %
0.6 %
28.5 %
U.S. Tax Reform
On December 22, 2017, the United States (“U.S.”) government enacted comprehensive tax legislation commonly referred
to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act includes significant changes to the U.S. corporate income tax system
including, among other things, lowering U.S. statutory federal tax rate and implementing a territorial tax system. As the Company
has a March 31 fiscal year-end, the lower tax rate will be phased in, resulting in a U.S. statutory federal tax rate of approximately
32% for Fiscal 2018 and a 21% U.S. statutory federal tax rate for fiscal years thereafter. The Tax Act also adds many new provisions,
including changes to bonus depreciation, limits on the deductions for executive compensation and interest expense, a tax on global
intangible low-taxed income (“GILTI”), the base erosion anti-abuse tax (“BEAT”) and a deduction for foreign derived intangible
income (“FDII”). The Company is still evaluating the impact of these provisions of the Tax Act, which do not apply until 2019,
and thus, has not adjusted any net deferred tax assets of its foreign subsidiaries for the new tax.
As part of the transition to the new territorial tax system, the Tax Act imposes a tax on the mandatory deemed repatriation
of earnings of the Company’s foreign subsidiaries. In addition, the reduction of the U.S. statutory federal tax rate has caused the
Company to re-measure its U.S. deferred tax assets and liabilities. In accordance with Accounting Standards Codification (“ASC”)
740, the Company recorded the effects of the tax law change during Fiscal 2018, which resulted in a provisional charge of $21.2
million, comprised of an estimated deemed repatriation tax charge of $3.0 million and an estimated deferred tax charge of $18.2
million due to the re-measurement of the Company’s net U.S. deferred tax assets. Conversely, the Company realized a $6.1 million
net benefit for Fiscal 2018 due to the corporate tax rate reductions. While the Tax Act has negatively impacted the Company’s
results of operations for Fiscal 2018 by approximately 200 basis points, the lower corporate rate is expected to result in an ongoing
reduced tax rate for the Company.
In December 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) 118 to provide
guidance for companies that would allow for a measurement period of up to one year after the enactment date of the Tax Act to
finalize the recording of the related tax impacts. The final transition impacts of the Tax Act may differ from the above estimate,
possibly materially, due to, among other things, changes in interpretations of the Tax Act, any legislative action to address questions
that arise because of the Tax Act, or any changes in accounting standards for income taxes or related interpretations in response
to the Tax Act. In addition, once the Company finalizes certain tax positions when it files its 2017 U.S. tax return, it will be able
to conclude whether any further adjustments are required to its deferred tax balances in the U.S., as well as to the total liability
associated with the one-time mandatory tax. The Company believes that the analysis performed to date is sufficient to calculate
a reasonable estimate of the impacts of the Tax Act.
Significant components of the Company’s deferred tax assets (liabilities) consist of the following (in millions):
Deferred tax assets
Inventories
Payroll related accruals
Deferred rent
Net operating loss carryforwards
Stock compensation
Sales allowances
Other
Valuation allowance
Total deferred tax assets
Deferred tax liabilities
Goodwill and intangibles
Depreciation
Other
Total deferred tax liabilities
Net deferred tax liabilities
95
Fiscal Years Ended
March 31,
2018
April 1,
2017
$
$
$
3.8
1.6
24.5
30.6
16.8
6.0
27.0
110.3
(13.8)
96.5
(240.6)
14.0
—
(226.6)
(130.1) $
9.0
2.2
39.5
17.7
26.2
10.0
14.7
119.3
(7.2)
112.1
(112.3)
(2.7)
(3.8)
(118.8)
(6.7)
The Company maintains valuation allowances on deferred tax assets applicable to subsidiaries in jurisdictions for which
separate income tax returns are filed and where realization of the related deferred tax assets from future profitable operations is
not reasonably assured. Deferred tax valuation allowances increased approximately $7.6 million, $4.4 million and $3.3 million
in Fiscal 2018, Fiscal 2017 and Fiscal 2016, respectively. The Company remeasured and reduced valuation allowances amounting
to approximately $1.0 million in Fiscal 2018 and released valuation allowances of approximately $0.6 million and $5.6 million
in Fiscal 2017 and Fiscal 2016, respectively, as a result of the attainment and expectation of achieving profitable operations in
certain countries comprising the Company’s European operations, for which deferred tax valuation allowances had been previously
established.
At March 31, 2018, the Company had non-U.S. net operating loss carryforwards of approximately $162.4 million, a portion
of which will begin to expire in 2021.
As of March 31, 2018 and April 1, 2017, the Company has liabilities related to its uncertain tax positions, including accrued
interest, of approximately $107.4 million and $29.1 million, respectively, which are included in other long-term liabilities in the
Company’s audited consolidated balance sheets. The March 31, 2018 balance includes certain tax reserves which were recorded
in purchase accounting upon the acquisition of Jimmy Choo, in addition to foreign income tax reserves the Company recorded
during Fiscal 2018.
The total amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was approximately
$100.8 million, $26.5 million and $16.8 million as of March 31, 2018, April 1, 2017 and April 2, 2016, respectively. A reconciliation
of the beginning and ending amounts of unrecognized tax benefits, excluding accrued interest, for Fiscal 2018, Fiscal 2017 and
Fiscal 2016, are presented below (in millions):
Fiscal Years Ended
March 31,
2018
April 1,
2017
April 2,
2016
Unrecognized tax benefits beginning balance
Additions related to prior period tax positions
Additions related to current period tax positions
Decreases in prior period positions due to lapses in statute of
limitations
Decreases related to audit settlements
Unrecognized tax benefits ending balance
$
$
$
26.5
30.4 (1)
45.0
(0.7)
(0.4)
100.8
$
16.8
1.7
10.3
(2.3)
—
26.5
$
$
19.9
—
5.8
(5.7)
(3.2)
16.8
(1) Primarily relates to the Jimmy Choo acquisition.
The Company classifies interest expense and penalties related to unrecognized tax benefits as components of the provision
for income taxes. Interest expense recognized in the consolidated statements of operations and comprehensive income for Fiscal
2018, Fiscal 2017 and Fiscal 2016 was approximately $6.6 million, $2.5 million and $1.7 million, respectively.
The total amount of unrecognized tax benefits relating to the Company’s tax positions is subject to change based on future
events including, but not limited to, the settlements of ongoing tax audits and assessments and the expiration of applicable statutes
of limitations. The Company anticipates that the balance of gross unrecognized tax benefits, excluding interest and penalties, will
be reduced by approximately $30.8 million during the next twelve months, primarily due to the anticipated tax ruling regarding
the deductibility of an intercompany loss in one of our subsidiaries. However, the outcomes and timing of such events are highly
uncertain and changes in the occurrence, expected outcomes, and timing of such events could cause the Company’s current estimate
to change materially in the future.
The Company files income tax returns in the U.S., for federal, state, and local purposes, and in certain foreign jurisdictions.
With few exceptions, the Company is no longer subject to examinations by the relevant tax authorities for years prior to its fiscal
year ended March 28, 2015.
The Company is in the process of evaluating the impact of the Tax Act on its permanent reinvestment assertion. Prior to
the enactment of the Tax Act, the Company’s policy with respect to its undistributed earnings of the U.S. and non-U.S. subsidiaries
is to consider those earnings to be either indefinitely reinvested or able to be repatriated tax-neutral, as such, U.S. federal and state
income taxes were not previously recorded on these earnings. As substantially all of the Company’s earnings of foreign subsidiaries
are deemed to have been repatriated as part of the one-time transition tax, no additional U.S. income taxes or foreign withholding
96
taxes have been provided on these earnings. Undistributed earnings of subsidiaries considered to be either indefinitely reinvested
or able to be repatriated tax-neutral amounted to $2.542 billion at March 31, 2018. The Company will complete its evaluation
within the measurement period allowed by the Securities and Exchange Commission and record the tax effects of any change in
its assertion in the period that its analysis is completed and that it is able to make a reasonable estimate of any unrecognized tax
liability related to its foreign investments, if practicable.
18. Retirement Plans
The Company maintains defined contribution plans for employees, who become eligible to participate after three months
of service. Features of these plans allow participants to contribute to a plan a percentage of their compensation, up to statutory
limits depending upon the country in which a plan operates, and provide for mandatory and/or discretionary matching contributions
by the Company, which vary by country. During Fiscal 2018, Fiscal 2017, and Fiscal 2016, the Company recognized expenses of
approximately $11.6 million, $9.1 million, and $10.1 million, respectively, related to these retirement plans.
19. Segment Information
Prior to the third quarter of Fiscal 2018, the Company’s business consisted of three reportable segments for its Michael
Kors brand: Retail, Wholesale and Licensing. In connection with the acquisition of Jimmy Choo, the Company evaluated its
reportable segments and concluded that Jimmy Choo represents a separate reportable segment. As such, the Company now operates
its business through four operating segments—MK Retail, MK Wholesale, MK Licensing and Jimmy Choo—which are based on
its business activities and organization. The reportable segments are segments of the Company for which separate financial
information is available and for which operating results are evaluated regularly by the Company’s chief operating decision maker
in deciding how to allocate resources, as well as in assessing performance. The primary key performance indicators are revenue
and operating income for each segment. The Company’s reportable segments represent channels of distribution that offer similar
merchandise, customer experience and sales/marketing strategies.
The Company’s four reportable segments are as follows:
• MK Retail — segment includes sales through Michael Kors operated stores, including “Collection,” “Lifestyle” including
“concessions,” and outlet stores located throughout the Americas (U.S., Canada and Latin America, excluding Brazil),
Europe and certain parts of Asia, as well as Michael Kors e-commerce sales. Products sold through the MK Retail segment
include women’s apparel, accessories (which include handbags and small leather goods such as wallets), men’s apparel,
footwear and licensed products, such as watches, jewelry, fragrances and beauty, and eyewear.
• MK Wholesale — segment includes sales primarily to major department stores and specialty shops throughout the
Americas, Europe and Asia. Products sold through the MK Wholesale segment include accessories (which include
handbags and small leather goods such as wallets), footwear and women’s and men’s apparel. The Company also has
wholesale arrangements pursuant to which it sells products to Michael Kors geographic licensees in certain parts of
EMEA (Europe, Middle East and Africa) and Asia, as well as in Brazil.
• MK Licensing — segment includes royalties and other contributions earned on licensed products and use of the Company’s
trademarks, and rights granted to third parties for the right to operate retail stores and/or sell the Company’s products in
certain geographic regions such as Brazil, the Middle East, South Africa, Eastern Europe, certain parts of Asia and
Australia.
•
Jimmy Choo — segment includes revenue generated from sales of luxury footwear, handbags and small leather goods
through directly operated Jimmy Choo stores throughout North America (United States and Canada), EMEA and certain
parts of Asia, as well as through Jimmy Choo 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
fragrance, sunglasses and eyewear.
All intercompany revenues are eliminated in consolidation and are not reviewed when evaluating segment performance.
Corporate overhead expenses are allocated to the segments based upon specific usage or other allocation methods.
97
The following table presents the key performance information of the Company’s reportable segments (in millions):
Total revenue:
MK Retail
MK Wholesale
MK Licensing
Michael Kors
Jimmy Choo
Total revenue
Income from operations:
MK Retail
MK Wholesale
MK Licensing
Michael Kors
Jimmy Choo
Income from operations
March 31,
2018
Fiscal Years Ended
April 1,
2017
April 2,
2016
$
$
$
$
2,711.8
1,639.3
144.9
4,496.0
222.6
4,718.6
333.8
373.8
58.2
765.8
(16.7)
749.1
$
$
$
$
2,572.1
1,775.8
145.8
4,493.7
—
4,493.7
159.8
468.1
62.0
689.9
—
689.9
$
$
$
$
2,394.9
2,143.9
173.3
4,712.1
—
4,712.1
501.4
584.1
89.6
1,175.1
—
1,175.1
Depreciation and amortization expense for each segment are as follows (in millions):
Depreciation and amortization(1):
MK Retail
MK Wholesale
MK Licensing
Michael Kors
Jimmy Choo
Total depreciation and amortization
Fiscal Years Ended
March 31,
2018
April 1,
2017
April 2,
2016
$
$
135.8
$
156.1
$
57.2
2.4
195.4
13.2
208.6
$
61.6
2.1
219.8
—
219.8
$
114.5
67.3
1.4
183.2
—
183.2
(1) Excluded from the above table are impairment charges, which are detailed in the below table and in Note 6, Note 7 and Note
12.
The Company does not have identifiable assets separated by segment. See Note 7 to the accompanying consolidated financial
statements for the Company’s goodwill by reportable segment.
The following table presents the Company’s impairment charges by asset type (in millions):
Impairment Charges:
MK Retail assets
MK Wholesale assets
Corporate assets
Total impairment
March 31,
2018
Fiscal Years Ended
April 1,
2017
April 2,
2016
$
$
31.3
1.4
—
32.7
$
$
198.7
0.5
—
199.2
$
$
8.6
0.4
1.9
10.9
98
Total revenue (based on country of origin) and long-lived assets by geographic location are as follows (in millions):
Revenue:
The Americas (U.S., Canada and Latin America)(1)
EMEA
Asia
Total revenue
Long-lived assets:
The Americas (U.S., Canada and Latin America)(1)
EMEA
Asia
Total Long-lived assets:
March 31,
2018
Fiscal Years Ended
April 1,
2017
April 2,
2016
$
$
$
$
3,033.2
1,092.7
592.7
4,718.6
March 31,
2018
327.3
1,050.3
441.3
1,818.9
$
$
$
$
3,140.7
943.9
409.1
4,493.7
As of
April 1,
2017
356.1
197.7
455.8
1,009.6
$
$
$
$
3,506.6
990.3
215.2
4,712.1
April 2,
2016
507.7
284.2
33.7
825.6
(1) Net revenues earned in the U.S. during Fiscal 2018, Fiscal 2017, and Fiscal 2016 were $2.818 billion, $2.935 billion and
$3.304 billion, respectively. Long-lived assets located in the U.S. as of March 31, 2018 and April 1, 2017 were $303.3 million
and $328.8 million, respectively.
Total revenue by major product category are as follows (in millions):
Fiscal Years Ended
March 31,
2018
3,057.0
656.9
604.6
249.7
150.4
4,718.6
$
$
% of
Total
64.8%
13.9%
12.8%
5.3%
3.2%
April 1,
2017
3,061.4
462.0
543.2
281.3
145.8
4,493.7
$
$
% of
Total
68.1% $
10.3%
12.1%
6.3%
3.2%
$
April 2,
2016
3,179.7
491.0
543.7
324.4
173.3
4,712.1
% of
Total
67.5%
10.4%
11.5%
6.9%
3.7%
Accessories
Footwear
Apparel
Licensed product
Licensing revenue
Total Revenue
20. Related Party Transactions
The Company’s Chief Creative Officer, Michael Kors, and the Company’s Chief Executive Officer, John Idol, and certain
of the Company’s former shareholders, including Sportswear Holdings Limited, jointly owned Michael Kors Far East Holdings
Limited, a BVI company, prior to the Company’s acquisition of MKHKL on May 31, 2016, which eliminated their ownership
interests. On April 1, 2011, the Company entered into certain licensing agreements with certain subsidiaries of Michael Kors Far
East Holdings Limited, including MKHKL, (the “Licensees”), which provided the Licensees with certain exclusive rights for use
of the Company’s trademarks within China, Hong Kong, Macau and Taiwan, and to import, sell, advertise and promote certain of
the Company’s products in these regions, as well as to own and operate stores bearing the Company’s tradenames. The agreements
between the Company and the Licensees were scheduled to expire on March 31, 2041, and could be terminated by the Company
at certain intervals if minimum sales benchmarks were not met. Royalties earned under these agreements were approximately $1.2
million during the two months ended May 31, 2016 preceding the acquisition, and were approximately $7.6 million during Fiscal
2016. These royalties were driven by Licensee adjusted net sales of the Company’s goods, as defined in the licensing agreement,
to their customers of approximately $28.9 million during the two months ended May 31, 2016 preceding the acquisition, and
approximately $169.8 million during Fiscal 2016. In addition, the Company sold certain inventory items to the Licensees through
its wholesale segment at terms consistent with those of similar licensees in the region. During the two months ended May 31, 2016
preceding the acquisition, amounts recognized as net sales in the Company’s consolidated statement of operations and
comprehensive income related to these sales were approximately $7.9 million, and were $62.8 million in Fiscal 2016. Please refer
to Note 3 for additional information relating to the Company’s acquisition of MKHKL on May 31, 2016.
99
A former executive officer of the Company (who is no longer a related party as of October 31, 2016) is married to a former
employee of one of the Company’s suppliers of fixtures for its shop-in-shops, retail stores and showrooms. Purchases from this
supplier, while deemed to be a related party, were $1.7 million and $3.4 million during Fiscal 2017 and Fiscal 2016, respectively.
21. Selected Quarterly Financial Information (Unaudited)
The following table summarizes the Fiscal 2018 and Fiscal 2017 quarterly results (dollars in millions):
Fiscal 2018
Total revenue
Gross profit
Income from operations
Net income
Net income attributable to MKHL
Weighted average ordinary shares outstanding:
$
$
$
$
$
Fiscal Quarter Ended (1)
July 1,
2017
September 30,
2017
December 30,
2017
March 31,
2018
952.4
574.7
149.4
125.5
125.5
$
$
$
$
$
$
1,146.6
690.8
$
199.1 (2) $
$
202.7
$
202.9
$
1,440.1
884.0
$
313.5 (3) $
$
219.4
$
219.4
1,179.5
709.8
87.1 (4)
44.5
44.1
Basic
Diluted
154,486,898
156,871,518
151,781,340
154,168,094
152,047,963
154,623,339
150,818,144
154,252,751
Fiscal 2017
Total revenue
Gross profit
Income (loss) from operations (5)
Net income (loss)
Net income (loss) attributable to MKHL
Weighted average ordinary shares outstanding:
$
$
$
$
$
Fiscal Quarter Ended (1)
July 2,
2016
October 1,
2016
December 31,
2016
April 1,
2017
987.9
591.3
186.9
146.3
147.1
$
$
$
$
$
1,088.2
644.7
203.7
160.7
160.9
$
$
$
$
$
1,352.8
805.7
341.9
271.3
271.3
$
$
$
$
$
1,064.8
619.7
(42.6)
(26.8)
(26.8)
Basic
Diluted
174,158,571
176,613,751
166,695,631
168,839,967
163,148,597
165,214,045
159,944,132
161,827,486
(1) All fiscal quarters presented contain 13 weeks.
(2) Fiscal quarter ended September 30, 2017 includes impairment charges of $16.3 million and restructuring charges of
$5.9 million associated with underperforming Michael Kors full-price retail stores, as well as transaction and transition
costs of $17.4 million related to the Jimmy Choo acquisition.
(3) Fiscal quarter ended December 30, 2017 includes impairment charges of $2.6 million and restructuring charges of $2.4
million associated with underperforming Michael Kors full-price retail stores, as well as transaction and transition
costs of $25.6 million related to the Jimmy Choo acquisition.
(4) Fiscal quarter ended March 31, 2018 includes impairment charges of $13.8 million and restructuring charges of $44.3
million associated with underperforming Michael Kors full-price retail stores, as well as transaction and transition
costs of $6.5 million related to the Jimmy Choo acquisition.
(5) Fiscal quarter ended July 2, 2016 contains $11.3 million in transaction costs related to the acquisition of the previously
licensed Greater China business; fiscal quarter ended October 1, 2016 contains $4.9 million in retail fixed asset
impairment charges; fiscal quarter ended December 31, 2016 contains $0.5 million in wholesale fixed asset impairment
charges; and fiscal quarter ended April 1, 2017 contains $193.8 million in retail long-lived asset impairment charges.
100
22. Subsequent Events
During the first quarter of Fiscal 2019, the Company entered into fixed-to-fixed cross currency swap agreements with
notional amounts of $290.0 million and $44.0 million to hedge its net investments in Euro-denominated and Japanese Yen-
denominated subsidiaries, respectively, against future volatility in the exchange rates between U.S. Dollar and these currencies.
Under the terms of these contracts, which mature in November 2024, the Company will exchange the quarterly fixed rate payments
made under its Senior Notes for fixed rate payments of 1.585% in Euros and 0.89% in Japanese Yen. These contracts have been
designated as net investment hedges.
The Company has elected the spot method of designating these contracts under ASU 2017-12 and, as such, changes in the
fair value of these contracts related to undiscounted spot changes will be recorded within foreign currency translation gains and
losses (“CTA”) as a component of AOCI on the Company’s consolidated balance sheets. Interest accruals and coupon payments
will be recognized directly in interest expense, thus reflecting a Euro and a Japanese Yen fixed rate, respectively. Upon
discontinuation of the hedge, the changes in spot value and any amounts excluded from the assessment of hedge effectiveness that
have not been recognized in earnings will remain within CTA until the hedged net investment is sold, diluted, or liquidated.
101
Exhibit 10.7
THIRD AMENDED AND RESTATED EMPLOYMENT AGREEMENT
This THIRD AMENDED AND RESTATED EMPLOYMENT AGREEMENT, (this “Agreement”) effective as
of April 1, 2018 (the “Effective Date”), by and among MICHAEL KORS HOLDINGS LIMITED, a British Virgin Islands
corporation having its principal executive office in London, United Kingdom (“MKHL”), MICHAEL KORS (USA), INC., a
Delaware corporation having its principal executive office in New York County, New York (the “Corporation” and, together with
MKHL, the “Company Parties”), and MICHAEL D. KORS (“Kors”). The Company Parties and Kors may be referred to in this
Agreement collectively as the “parties.”
Employment Agreement with Kors, dated as of May 20, 2015 (the “Restated Employment Agreement”); and
WHEREAS, the Company Parties have previously entered into that certain Second Amended and Restated
WHEREAS, the parties desire to amend and restate the Restated Employment Agreement to make changes to
the compensation of Kors and to otherwise modify the Restated Employment Agreement in accordance with the terms and
provisions herein contained.
hereto hereby agree as follows:
NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein, the parties
1.
Term. The term of the employment of Kors under this Agreement shall continue until terminated in
accordance with and subject to the terms and provisions of this Agreement (the “Term”). This Agreement shall be effective as of
the Effective Date. Until the Effective Date, the terms and conditions of Kors’ employment by the Company Parties shall be
governed by the Restated Employment Agreement which shall remain in full force and effect through and including March 31,
2018.
2.
Offices and Positions. The Company Parties agree to continue to employ Kors, and Kors agrees to
continue to be employed by the Company Parties as the Honorary Chairman and Chief Creative Officer, on the terms and subject
to the conditions contained herein. During the Term, each of the Company Parties shall use its best efforts to cause Kors to be
appointed or elected, as the case may be, to the Board of Directors of each of the Company Parties (the “Company Boards”). Kors
agrees that upon termination of his employment with the Company Parties for any reason, he shall resign immediately from each
of the Company Boards, as well as from any officerships and/or directorships with any subsidiaries of MKHL. During the Term,
each of the Company Parties shall consult with Kors regarding the hiring of any Chief Executive Officer (or equivalent executive
officer) of any of the Company Parties.
3.
Duties.
(a)
Throughout the Term, Kors shall devote substantially all of his business time exclusively to
the business of the Company Parties and their respective affiliates to design collections of apparel, accessories and related products
as needed by the Company Parties and its affiliates and to promote the business and affairs of the Company Parties and their
respective affiliates, in each case, with respect to the MICHAEL KORS brand. It is agreed and understood that, during the Term,
Kors will have creative and aesthetic control of the products produced and sold under or bearing the “MICHAEL KORS” trademark
and any variation of such name and the initials of such name in whatever form or style and all related trade names, copyrights,
logos and similar rights (the “Marks”), including exclusive control of the design of such products; provided, that this sentence
shall not apply to any attempted exercise by Kors of the foregoing rights that is not commercially reasonable.
(b)
Throughout the Term, Kors shall not, without the prior written consent of the Company Parties,
directly or indirectly, render services to or for any other person or firm whether or not for compensation or engage in any activity
that, in either case, is in competition with the business of MKHL and its subsidiaries (MKHL and its subsidiaries collectively, the
“MK Group”); provided, however, that Kors may participate in charitable activities not inconsistent with the intent of this
Agreement. The making of passive personal investments shall not be prohibited hereunder. In addition, subject to Section 3(a),
Kors may participate in literary, theatrical or artistic activities, but only if and to the extent that the Company Parties shall have
determined in advance (in their reasonable discretion) that such activities would not be detrimental to the Marks.
4.
Compensation.
(a)
Salary. Throughout the Term, Kors’ base salary (the “Base Salary”) shall be at the rate of US
$1,350,000 per annum, which, except as otherwise set forth in the second to last sentence of this Section 4(a), shall be payable by
the Corporation to Kors in periodic installments in accordance with the Corporation’s customary payroll practices in effect from
time to time. The Base Salary shall be subject to possible increases at the sole discretion of the MKHL Board (or appropriate
committee thereof, including the Compensation and Talent Committee the “Compensation Committee”); provided, however, that
in no event shall Kors’ Base Salary during the Term be reduced below US$1,350,000 or otherwise reduced after any increase,
except with Kors’ written consent. The term “Base Salary” as utilized in this Agreement shall refer to Kors’ annual base salary
as then in effect. A portion of Kors’ Base Salary equal to one-fourth (1/4) the annual retainer paid to MKHL’s independent directors
together with the meeting fees payable to the independent directors for the applicable quarter shall be payable to Kors by MKHL
on a quarterly basis at the same time such retainer and meeting payments are paid to the independent directors of MKHL. For the
avoidance of doubt, this is not additional Base Salary or other compensation for Kors but merely an allocation of Base Salary from
the Corporation employer to MKHL for services performed by Kors as a director of MKHL.
(b)
Annual Cash Incentive.
(i)
Cash Incentive. During the Term and commencing with MKHL’s fiscal year
beginning April 1, 2018, Kors shall be eligible to earn the annual cash incentive payments described in this Section 4(b)(i) in
accordance with, and subject to, the terms and conditions of, the Company Parties’ then existing executive cash incentive program
which is a component of the Michael Kors Holdings Limited Amended and Restated Omnibus Incentive Plan as the same may be
amended or modified by MKHL from time to time in its sole discretion (subject to shareholder approval if required) (the “Incentive
Plan”). The annual cash incentive payment (the “Cash Incentive”) shall be a percentage of Kors’ Base Salary (with incentive
levels set at 100% threshold - 200% target - 400% maximum). Such incentive levels may be increased by the MKHL Board (or
appropriate committee thereof, including the Compensation Committee) for any fiscal year in its sole discretion but shall not be
decreased below the incentive levels set forth in this Agreement without the written consent of Kors. The Cash Incentive shall be
based upon the achievement of performance goals established by the MKHL Board (or appropriate committee thereof, including
the Compensation Committee) over a performance period also established by the MKHL Board (or appropriate committee thereof,
including the Compensation Committee). The MKHL Board (or appropriate committee thereof, including the Compensation
Committee) may base such performance goals upon such appropriate criteria as they may determine. Kors must be employed by
the Corporation on the date that the Cash Incentive is actually paid which shall be the same date that annual cash incentives are
paid to other senior executives of the Corporation. The MKHL Board (or appropriate committee thereof, including the Compensation
Committee) must certify the level of the attainment of the applicable performance goal for the performance period and the amount
of the Cash Incentive payable to Kors with respect to such performance period. Once certified, the Cash Incentive will be paid
to Executive reasonably promptly and in no event later than June 30 next following the last day of the applicable performance
period.
(ii)
Clawback. Notwithstanding the foregoing, if the MKHL Board (or appropriate
committee thereof, including the Compensation Committee) determines that Kors was overpaid, in whole or in part, as a result
of a restatement of the reported financial or operating results of MKHL due to material non-compliance with financial reporting
requirements (unless due to a change in accounting policy or applicable law), the Company shall be entitled to recover or cancel
the difference between (i) any Cash Incentive payment that was based on having met or exceeded performance targets and (ii) the
Cash Incentive payment that would have been paid to or earned by Kors had the actual payment or accrual been calculated based
on the accurate data or restated results, as applicable (the “Overpayment”). If the MKHL Board (or appropriate committee thereof,
including the Compensation Committee) determines that there has been an Overpayment, the Company Parties shall be entitled
to demand that Executive reimburse the Corporation for the Overpayment. To the extent Kors does not make reimbursement of
the Overpayment, the Company Parties shall have the right to enforce the repayment through the reduction of future salary or the
reduction or cancellation of outstanding and future incentive compensation and/or to pursue all other available legal remedies in
law or in equity. The MKHL Board (or appropriate committee thereof, including the Compensation Committee) may make
determinations of Overpayment at any time through the end of the third (3rd) fiscal year following the year for which the inaccurate
performance criteria were measured; provided, that if steps have been taken within such period to restate MKHL’s financial or
operating results, the time period shall be extended until such restatement is completed. This Section 4(b)(ii) is in addition to any
clawback, forfeiture, recoupment or repayment requirements which may be imposed pursuant to Section 304 of the Sarbanes-
Oxley Act of 2002, the Dodd-Frank Act of 2010 or any other applicable rules and regulations of the U.S. Securities and Exchange
Commission as may be in effect from time to time.
Other Compensation. In addition to what is required pursuant to Section 5, the Corporation
may pay, but shall have no obligation to pay, to Kors such additional compensation in the form of bonuses, fringe benefits or
otherwise in such amounts and at such times as the MKHL Board (or appropriate committee thereof, including the Compensation
Committee) shall from time to time determine in its sole and absolute discretion.
(c)
5.
Benefits.
to the following:
(a)
In addition to the compensation described in Section 4, during the Term, Kors shall be entitled
(i)
Kors shall be entitled to participate in all Corporation employee benefit plans (to the
extent Kors is eligible therefor), including, without limitation, any health and retirement plans, in each case subject to any applicable
laws which shall be in effect from time to time and on the same basis as is available to the other senior executives of the Corporation,
in accordance with, and subject to, the terms and conditions of such plans and programs (including, without limitation, any eligibility
limitations) as they may be amended or modified by the Corporation from time to time in its sole discretion. If any such benefit
plan shall be unavailable to Kors by reason of his nationality or residence, the Corporation shall use it best efforts to provide a
substantially equivalent benefit, through another source, at its expense.
(ii)
Kors shall be eligible, in the discretion of the MKHL Board (or appropriate committee
thereof, including the Compensation Committee), for share option awards, restricted share unit awards and other share-based
awards on an annual basis at the same time long-term incentive grants are awarded to other senior executives of the Corporation,
and shall be made pursuant to the long-term incentive plan generally applicable to eligible employees of the Corporation (currently
the Incentive Plan), in accordance with, and subject to, the terms and conditions of the Incentive Plan as the same may be amended
or modified by MKHL in its sole discretion (subject to shareholder approval if required) and the applicable long-term incentive
award agreement. Such eligibility is not a guarantee of participation in or of the receipt of any award, payment or other compensation
under the Incentive Plan or any other incentive or benefit plans or programs. The MKHL Board (or appropriate committee thereof,
including the Compensation Committee) shall determine all terms of participation (including, without limitation, the size and type
of any award, payment or other compensation and the timing and conditions of receipt thereof by Kors).
(iii)
Except in the case of the termination of Kors for Cause, in which case any share-
based awards granted to Kors under the Incentive Plan shall be forfeited and any share options granted to Kors under the Incentive
Plan shall immediately terminate (whether or not vested and/or exercisable), any such share-based incentive awards that have
become vested and/or exercisable prior to the date of Kors’ termination of employment hereunder (the “Termination Date”) shall
remain vested and/or exercisable after the Termination Date in accordance with the terms and conditions of the Incentive Plan
and/or any applicable long-term incentive award agreement. Except as otherwise provided herein, the terms of the Incentive Plan
or any other incentive plans shall govern Kors’ rights and obligations thereunder during the Term and at and after the Termination
Date.
(iv)
The Corporation shall provide the health and medical insurance coverage referred to
in Section 5(a)(i) above at its own cost without contribution from Kors. The Corporation also shall pay during the Term the
premiums on (A) the whole life insurance policy (the “Whole Life Policy”) currently in place on the life of Kors and (B) the US
$500,000 term life insurance policy (the “Term Life Policy”) currently in place on the life of Kors, both of which policies are
owned by Kors. Upon termination of this Agreement, the Corporation shall cease to pay premiums on the Whole Life Policy and
the Term Life Policy and Kors shall thereafter be solely responsible for the payment of any premiums on both such policies.
The Corporation shall provide Kors with an automobile and driver for transportation
to and from the Corporation's offices and for other business purposes. Such automobile shall be a Mercedes-Benz S-Class or an
automobile at least substantially equivalent in price thereto.
(v)
(b)
In addition to the foregoing, Kors acknowledges and agrees that the Corporation may apply
for, and purchase, key-man life insurance covering Kors (the “Key-Man Insurance”). The Corporation shall own all rights in any
such Key-Man Insurance policies and the proceeds thereof, and Kors shall not have any right, title or interest therein. Kors agrees
to assist the Corporation, at the Corporation’s expense, in obtaining such Key-Man Insurance by, among other things, submitting
to the customary examinations and correctly preparing, signing and delivering such applications and other documents as may be
required by potential insurers.
Anything to the contrary herein notwithstanding, in the event of the occurrence of a condition
that may with the passage of time constitute a Permanent Disability (as defined below) of Kors, then the Corporation shall continue
to pay to Kors his Base Salary and all other compensation and benefits owed to Kors hereunder until the termination of this
(c)
Agreement as provided in Section 10 below, less any payments received by Kors from any disability insurance policy whose
premiums are paid by the Corporation. For purposes of this Agreement, the term “Permanent Disability” shall mean any mental
or physical condition that: (i) prevents Kors from reasonably discharging his services and employment duties hereunder; (ii) is
attested to in writing by a physician who is licensed to practice in the State of New York and is mutually acceptable to Kors and
the Company Parties (or, if Kors and the Company Parties are unable to mutually agree on a physician, the MKHL Board may
select a physician who is a chairman of a department of medicine at a university-affiliated hospital in the City of New York); and
(iii) continues, for any one or related condition, during any period of six (6) consecutive months or for a period aggregating six
(6) months in any twelve (12) month period; and such Permanent Disability shall be deemed to have occurred on the last day of
such applicable six (6) month period.
Vacation; Meetings. Kors shall be entitled to six (6) weeks of vacation annually, and such additional
vacation time as may be agreed to by the Chairman of the Board. Kors shall be entitled to additional time off for attendance at
meetings, conventions and educational courses, as the Chairman or the Board may from time to time allow.
6.
7.
Expenses; Indemnification.
(a)
The Corporation shall reimburse Kors for the reasonable business expenses (including travel
at the highest class of service available and the use of the corporate jet or private charter in accordance with the Corporation’s
policy) incurred by Kors in the course of performing his duties for MKHL and the Corporation, subject to Kors’ compliance with
the policies and procedures for reimbursement generally in effect from time to time for senior officers of the Corporation.
(b)
The Corporation and/or MKHL (as applicable) will indemnify Kors and hold him harmless
to the maximum extent permitted by applicable law, against all costs, charges, liabilities and expenses incurred or sustained by
him in connection with any action, suit, claim or proceeding to which he may be made a party by reason of his being an officer,
director or employee of the Corporation or of any other member of the MK Group; provided, however, that in no event shall Kors
be indemnified for acts taken by him in bad faith or in breach of his duty of loyalty to the any of the Company Parties under
applicable law. Notwithstanding the foregoing, Kors’ indemnification and hold harmless rights under this Section 7 shall in no
event be less favorable in any respect than the terms of any indemnification and hold harmless rights provided by the Corporation
and/or MKHL to any senior executive of the Corporation under an employment agreement, indemnification agreement or otherwise.
The provisions of this subsection (b) shall survive the termination of this Agreement.
8.
Confidentiality; Intellectual Property Rights.
(a)
Kors acknowledges that his work for and with the Company Parties and the other members
of the MK Group will bring him into close contact with the confidential affairs of the MK Group, including, without limitation,
confidential information and trade secrets concerning the MK Group’s working methods, processes, business and other plans,
programs, designs, products, profit formulas, customer names, customer requirements and supplier names (collectively,
“Confidential Information”). “Confidential Information” shall not include (i) information generally known to the public,
(ii) information properly received by Kors outside his engagement with the Company Parties (or any predecessor of the Company
Parties) or any other member of the MK Group from any third party not affiliated with the MK Group and not under any duty to
any of the Company Parties not to disclose such information, and (iii) any materials, including designs and products created by
Kors and which are otherwise “Confidential Information”, to the extent approved in writing by the Company Parties, which
approval shall not be unreasonably withheld. Kors acknowledges that such Confidential Information is reposed in him in trust
and he shall, both during and for a period of three years after the Term (or such longer period as the Company Parties may be
bound to keep any such Confidential Information confidential pursuant to any agreement or otherwise), maintain such Confidential
Information in confidence and, except as may be required under applicable law, neither disclose to others nor use such Confidential
Information personally without written permission of the Company Parties. Kors agrees, upon termination of this Agreement, to
return to the Company Parties all documents or recorded material of any type (including all copies thereof) which may be in his
possession or under his control dealing with the Confidential Information.
(b)
All trademarks, designs, copyrights and other intellectual property created by or at the direction
of Kors in the course of his employment by the Corporation shall remain the property of, and be exclusively owned by, the
Corporation without further act of either party. Kors shall, at the reasonable request of the Corporation, execute such documents
as may be reasonably necessary to confirm or evidence the Corporation’s ownership of such property.
(c)
The obligations of this Section 8 shall survive the termination of this Agreement.
Notwithstanding anything to the contrary set forth herein or in any other agreement to which Kors, on the one hand, and the
Corporation or any other member of the MK Group, on the other hand, are parties or by which they are bound, (i) the obligations
of confidentiality contained herein and therein, as they relate to the transactions contemplated by this Agreement, shall not apply
to the "structure or the tax aspects" (as that phrase is used in Section 1.6011-4T(a)(3) (or any successor provision) of the Treasury
Regulations promulgated under Section 6011 of the Code) of such transactions and (ii) nothing prohibits Kors from reporting
possible violations of federal law or regulation to any governmental agency or entity, including but not limited to the Department
of Justice, the Securities and Exchange Commission, the Congress, and any agency Inspector General, or making other disclosures
that are protected under the whistleblower provisions of federal law or regulation; Kors does not need the prior authorization of
the Company’s General Counsel or legal department to make any such reports or disclosures and Kors is not required to notify
the Company that Kors has made such reports or disclosures. Kors understands that an individual will not be held criminally or
civilly liable under any federal or state trade secret law for the disclosure of a trade secret that is made (i) in confidence to a
government official or to an attorney solely for the purpose of reporting or investigating a suspected violation of law or (ii) in a
complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal. Kors further understands
that an individual who files a lawsuit for retaliation by an employer for reporting a suspected violation of law may disclose the
trade secret to the attorney of the individual and use the trade secret information in the court proceeding if the individual files any
document containing the trade secret under seal and does not disclose the trade secret except pursuant to court order.
9.
Notices. Any notice or request permitted or required hereunder shall be in writing deemed sufficient
when delivered in person or mailed by certified mail, postage prepaid, or transmitted by facsimile, and addressed if to the Company
Parties, c/o the Corporation at the Corporation's principal executive offices in New York, New York, Facsimile No.: (646) 354 4826,
Attn: Chief Executive Officer, and if to Kors, to his home address on file with the Corporation, with copy to:
Patterson Belknap, Webb & Tyler LLP
1133 Avenue of the Americas
New York, New York 10036-6710
Attention: Peter J. Schaeffer, Esq.
Facsimile No.: (212) 336-2222
or to such other address as may be provided by such notice.
10.
No Termination.
(a)
The Corporation may not terminate the Agreement and Kors’ employment hereunder for any
reason other than Cause (as defined below). It is expressly understood that Kors is to be employed hereunder until he dies or
becomes Permanently Disabled (in which case this Agreement shall immediately terminate and the Corporation shall only be liable
to promptly pay to Kors or his estate (as applicable) the Accrued Obligations, Prior Period Bonus Payment, and Pro Rata Bonus
Payment (each as defined below)); provided, however, that Kors has not been terminated for Cause as aforesaid. In the event that
the Company Parties materially breach their obligations hereunder, including, without limitation, the Corporation's obligations to
make payments pursuant to Section 4 hereof, then upon thirty (30) days’ notice to the Company Parties (which notice shall describe
such breach in reasonable detail), unless the Company Parties (i) cure such breach within such thirty (30)-day period (or, if the
breach cannot reasonably be cured within such thirty (30)-day period, initiates all possible action that substantially cures the breach
within such thirty (30)-day period) to Kors’ reasonable satisfaction (which curative action, at a minimum, places Kors in a no less
favorable economic and financial position than he would have been in had the breach not occurred) and (ii) provides evidence
satisfactory to Kors that the Company Parties have done so, Kors may terminate his employment under this Agreement and in
such event shall be relieved of all his further obligations hereunder and entitled to exercise any rights and remedies he may have
at law or in equity with respect to such material breach. In the event of such termination due to breach by the Company Parties,
the Corporation shall, in addition and not in limitation to any other rights and remedies Kors may have hereunder, at law or in
equity, (A) promptly (i) pay Kors any Base Salary earned but not yet paid prior to the date of termination (to be paid in accordance
with the Company’s normal payroll practices); (ii) pay Kors for any unused accrued vacation during the calendar year, (iii) reimburse
Kors for any expenses pursuant to Section 7(a) and (iv) permit Kors to maintain his vested equity awards in accordance with
Section 5(a)(iii) (collectively, the “Accrued Obligations”), (B) pay any Cash Incentive with respect to any applicable performance
period that was completed prior to Kors’ termination from employment but which has not yet been paid, and in the case of this
clause (B), such Cash Incentive shall be paid at such time as it would have otherwise been paid to Kors hereunder had his employment
not been terminated and such Cash Incentive amounts shall be subject to certification by the MKHL Board (or appropriate committee
thereof, including the Compensation Committee) as described in Section 4 of this Agreement (the “Prior Period Bonus Payment”),
and (C) an amount representing the amount of the Cash Incentive payable for the fiscal year in which the Termination Date occurs,
based on actual performance over the course of the applicable performance period, assuming Kors’ employment had not been
terminated hereunder, multiplied by a fraction, the numerator of which is the number of days Kors was employed hereunder during
the applicable performance period and the denominator of which is the full number of days in the applicable performance period
(the “Pro Rata Bonus Payment”).
“Cause” shall mean: (i) the material breach by Kors of any material provision contained in this Agreement
(including, without limitation, the provisions set forth in Section 3 hereof), which breach continues without the cure thereof by
Kors for a period of thirty (30) days following written notice thereof from the Company Parties to Kors (which notice shall describe
Kors’ breach in reasonable detail); (ii) the conviction of Kors for fraudulent or criminal conduct adversely affecting the Corporation;
and (iii) the commission by Kors of any willful, reckless, or grossly negligent act which has a material adverse effect on the
Company Parties or their respective products, trademarks or goodwill (including, without limitation, the reputation thereof).
(b)
If Kors shall terminate his employment under this Agreement without the consent of the
Company Parties other than by reason of Kors’ death, Permanent Disability or pursuant to the third sentence of Section
10(a) of this Agreement, the Corporation shall only remain responsible to Kors for (i) the Accrued Obligations and (ii)
the Prior Period Bonus Payment. All other obligations of the Company Parties shall cease and, subject to Section 11, the
parties hereto shall be relieved of all further obligations hereunder.
11.
Kors Non-Competition. If Kors shall have terminated this Agreement pursuant to Section 10(b), for
the remainder of Kors’ lifetime, (i) Kors agrees to serve as an independent and exclusive design consultant to the Corporation for
a fee of US$1,000,000 per year, payable monthly in arrears in equal installments with such duties as shall be mutually agreed
between Kors and the Company Parties in good faith at such time, and (ii) in consideration thereof, Kors shall not, without the
written consent of the MKHL Board, engage anywhere in the world where the Company Parties or any other member of the MK
Group is doing business, directly or indirectly, as a designer, consultant, officer, director, employee, agent, proprietor, partner or
shareholder in any business (other than on behalf of the Company Parties or any other member of the MK Group) which engages
in activities in competition with the Company Parties or any other member of the MK Group to the extent those activities were
carried on by the Company Parties or any other member of the MK Group during the Term; provided, however, that the Company
Parties may terminate such consulting arrangement and cease making such payments at any time, in which event Kors’ obligations
to serve as a consultant to the Company Parties and to comply with such non-competition restrictions shall immediately terminate.
Notwithstanding the foregoing, at any time, Kors may own up to 5% of the common stock or other securities of any public
corporation and may have an interest as a member or limited partner in any limited liability company or partnership, provided he
provides no services or advice of any kind to any such corporation, limited liability company or partnership.
Other Lines of Business; Transfer or Encumbrance of Marks. The MK Group shall not enter into any
new line of business without the consent of Kors if Kors shall reasonably determine that such line of business is detrimental to
the Marks.
12.
13.
Miscellaneous. This Agreement (i) constitutes the entire agreement between the parties concerning
the subjects hereof and supersedes all prior agreements (except for any long-term incentive award agreements entered into between
MKHL and Kors), (ii) may not be assigned by Kors without the prior written consent of the Company Parties, but shall be binding
upon and inure to the benefit of Kors’ heirs, legal representatives and permitted assigns (without limiting the generality of the
foregoing, the provisions of Sections 4 and 7 hereof specifically shall inure to the benefit of such heirs, legal representatives,
successors and permitted assigns), (iii) may be assigned by the Company Parties in connection with any transfer of all or a substantial
portion of such entity’s assets and shall be binding upon, and inure to the benefit of, the Company Parties’ successors and assigns,
and (iv) may not be amended, modified or supplemented except by a writing signed by each party.
14.
Arbitration. All disputes arising under this Agreement including but not limited to any claim for specific
performance under Section 15 of this Agreement shall be submitted to binding arbitration in accordance with the rules of commercial
arbitration of the American Arbitration Association of the City of New York. Any arbitration proceeding shall be conducted in
New York, New York before a single arbitrator or, if requested by either party, by a panel of three arbitrators.
Specific Enforcement. In addition to any remedies available to the parties at law, the parties each
acknowledge that they would be irreparably damaged and there would be no adequate remedy at law for breach of either's obligations
hereunder and, accordingly, this Agreement is to be specifically enforced if not performed according to its terms.
15.
not affect the validity of any other provision.
16.
Severability. The provisions of this Agreement are severable. The invalidity of any provision shall
17.
Governing Law. This Agreement shall be construed and governed in all respects under the laws of the
State of New York (without reference to such State’s conflict of law rules).
or interpret the contents hereof.
18.
Headings. Headings in this Agreement are for convenience of reference only and shall not define, limit
19.
Taxes. All payments to be made to and on behalf of Kors under this Agreement will be subject to
required withholding of federal, state and local income and employment taxes, and to related record reporting requirements,
including, with respect to the retainer and meeting payments referred to in the last sentence of Section 4(a), applicable U.K.
statutory reductions.
20.
Code Section 409A.
(a)
It is the intention of the parties hereto that, to the extent any amounts or benefits payable under
or otherwise with respect to this Agreement constitute nonqualified deferred compensation that is or may be subject to Section
409A of the Code and the treasury regulations or other official pronouncements thereunder (herein, collectively, “Section 409A”),
the provisions of this Agreement shall be interpreted and administered in a manner (which may, as appropriate, include amendments
to this Agreement) that will enable such amounts or benefits to satisfy the requirements of Section 409A (either pursuant to
qualifying for an exemption from coverage under Section 409A or satisfying the substantive provisions for compliance with such
section).
(b)
For purposes of any reimbursement of expenses due to Kors or the provision of in-kind benefits
with respect to Kors (including, without limitation, pursuant to Section 7 above), such reimbursements shall be made in a manner
consistent with Code Section 409A, including Treasury Regulation Section 1.409A-3(i)(1)(iv). In that regard (i) the amount of
expenses eligible for reimbursement, or in-kind benefits provided, during a calendar year shall not affect the expenses eligible for
reimbursement, or in-kind benefits to be provided, in any other taxable year, (ii) the reimbursement of eligible expenses shall be
made on or before the end of the calendar year following the calendar year in which the expense was incurred, and (iii) the right
to reimbursement or in-kind benefits shall not be subject to liquidation or exchange for another benefit.
(c)
In the event that any amount or benefit payable under or otherwise with respect to this
Agreement is conditioned on Kors’ termination of employment and such amount or benefit is not otherwise exempt from Section
409A, such termination of employment shall mean a “separation from service” within the meaning of Section 409A. In addition,
if any such payment is conditioned on a separation from service by Kors and Kors shall then be a “specified employee” (as defined
in Treasury Regulation section 1.409A-1(i)), then, to the extent necessary to avoid a violation of Section 409A, the portion of any
such payment that would otherwise be paid within the six-month period immediately following Kors’ separation from service
shall instead be deferred and paid in a single sum on the first day following the end of such six-month period.
[Remainder of page intentionally left blank]
IN WITNESS WHEREOF, this Agreement is entered into as of March 28, 2018.
MICHAEL KORS HOLDINGS LIMITED
By:
/s/ John D. Idol
Name: John D. Idol
Title: Chairman & Chief Executive Officer
MICHAEL KORS (USA), INC.
By:
/s/ John D. Idol
Name: John D. Idol
Title: Chairman & Chief Executive Officer
/s/ Michael Kors
Michael D. Kors
Exhibit 10.8
THIRD AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
This THIRD AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this “Agreement”), effective as
of April 1, 2018 (the “Effective Date”), by and among MICHAEL KORS HOLDINGS Limited, a British Virgin Islands
corporation having its principal executive office in London, United Kingdom (“MKHL”), Michael Kors (USA), Inc., a Delaware
corporation having its principal executive office in New York County, New York (the “Company” and, together with MKHL, the
“Company Parties”), and JOHN D. IDOL (“Executive”). The Company Parties and Executive may be referred to in this Agreement
collectively as the “parties.”
WHEREAS, the Company Parties have previously entered into that certain Second Amended and Restated
Employment Agreement with the Executive, dated as of May 20, 2015 (the “Restated Employment Agreement”); and
WHEREAS, the parties desire to amend and restate the Restated Employment Agreement to extend the
Executive’s term of employment, to make changes to the compensation of Executive and to otherwise modify the Restated
Employment Agreement in accordance with the terms and provisions herein contained.
NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties
hereto hereby agree as follows:
1.
Employment.
(a)
The Company Parties agree to continue to employ Executive, and the Executive agrees to
continue to be employed by the Company Parties as the Chairman and Chief Executive Officer, on the terms and subject to the
conditions contained herein which such terms and conditions shall be effective as of the Effective Date. Until the Effective Date,
the terms and conditions of Executive’s employment by the Company Parties shall be governed by the Restated Employment
Agreement which shall remain in full force and effect through and including March 31, 2018.
(b)
As Chairman and Chief Executive Officer, Executive shall have general authority over the
business of MKHL and shall manage the day-to-day operations of MKHL; provided, however, that Executive understands and
agrees that (i) the Board of Directors of MKHL (the “Board”) will be responsible for setting overall strategic goals of MKHL and
its subsidiaries (including, without limitation, the Company) and advising Executive with respect thereto, and (ii) the Board’s and/
or certain of its members’ active strategic involvement in matters relating to design direction, marketing concepts, production
logistics and financial objectives shall not be deemed to constitute managing day-to-day operations. Executive will report only
to the Board, and, subject to any existing contractual obligations of MKHL and its subsidiaries, all other executives of MKHL and
its subsidiaries shall report to Executive, unless Executive determines otherwise. Executive acknowledges and agrees that, except
as otherwise provided in accordance with Section 1(d), the Company Parties will be his sole employers in respect of the services
contemplated by this Agreement, and the Company Parties will provide all payments and benefits to Executive under this
Agreement.
(c)
At the request of MKHL, Executive further agrees, without additional compensation, to act
as an officer and/or director of subsidiaries of MKHL in addition to the Company. At the direction of MKHL, any rights and
obligations of the Company hereunder may be assigned, in whole or in part, to such subsidiaries; provided that the Company
Parties obligations with respect to compensation and benefits, including, without limitation, Base Salary (as defined below), shall
remain the Company Parties’ obligations, unless Executive consents in writing to such assignment, which such consent shall not
be unreasonably withheld or delayed.
(d)
During Executive’s employment hereunder, each of the Company Parties shall use its best
efforts to cause Executive to be elected or appointed, as the case may be, to the position of Chairman of the Board of each of the
Company Parties (the “Company Boards”). Executive agrees that upon termination of his employment hereunder for any reason,
he shall resign immediately from each of the Company Boards, as well as from any officerships and/or other directorships with
any subsidiaries of MKHL.
Executive shall devote substantially all of his full business time and attention and his best
efforts to the performance of his duties hereunder; provided, however, that Executive may engage in charitable, educational, civic
(e)
and religious activities and may participate as an investor, officer or director or otherwise manage passive personal investments
owned by or for the benefit of Executive or members of his immediate family, but only to the extent such activities and service
are permitted under Section 9(c) of this Agreement and do not interfere with the performance of Executive’s duties and
responsibilities hereunder.
2.
Term. The term of the employment of Executive under this Agreement shall continue through March
31, 2021 (the “Initial Term”), subject to the terms and provisions of this Agreement. After the expiration of the Initial Term, this
Agreement shall be automatically renewed for additional one-year terms (each, a “Renewal Term”) unless either the Company
Parties or Executive gives written notice to the other of the termination of this Agreement at least ninety (90) days in advance of
the next successive one-year term. Any election by the Company Parties or Executive not to renew such employment at the end
of the Initial Term or any Renewal Term shall be at the sole, absolute discretion of the Company Parties or Executive, respectively.
The period Executive is employed hereunder during the Initial Term and any such Renewal Terms is referred to herein as the
“Term”.
3.
Salary. During the Term, Executive’s base salary (“Base Salary”) shall be at the rate of US$1,350,000
per year, which, except as otherwise set forth in the last sentence of this Section 3, shall be payable by the Company to Executive
in accordance with the Company’s customary payroll practices in effect from time to time. The Base Salary shall be subject to
possible increases at the sole discretion of the MKHL Board (or appropriate committee thereof, including the Compensation and
Talent Committee of the Board (the “Compensation Committee”)); provided, however, that in no event shall Executive’s Base
Salary during the Term be reduced below US$1,350,000 or otherwise reduced after any increase except with Executive’s written
consent. The term “Base Salary” as utilized in this Agreement shall refer to Executive’s annual base salary as then in effect. A
portion of Executive’s Base Salary equal to one-fourth (1/4) of the annual retainer paid to MKHL’s independent directors together
with meeting fees payable to the independent directors for the applicable quarter shall be payable to Executive by MKHL on a
quarterly basis at the same time such retainer and meeting payments are paid to the independent directors of MKHL. For the
avoidance of doubt, this is not additional Base Salary or other compensation for Executive but merely an allocation of Base Salary
from the Company employer to MKHL for services performed by Executive as a director of MKHL.
4.
Annual Cash Incentive.
(a)
Cash Incentive. During the Term and commencing with MKHL’s fiscal year beginning April
1, 2018, Executive shall be eligible to earn the annual cash incentive payments described in this Section 4 in accordance with, and
subject to, the terms and conditions of, MKHL’s then existing executive cash incentive program which is a component of the
Michael Kors Holdings Limited Amended and Restated Omnibus Incentive Plan as the same may be amended or modified by
MKHL from time to time in its sole discretion (subject to shareholder approval if required) (the “Incentive Plan”). The annual
cash incentive payment (the “Cash Incentive”) shall be a percentage of Executive’s Base Salary (with incentive levels set at 100%
threshold - 200% target - 400% maximum). Such incentive levels may be increased by the MKHL Board (or appropriate committee
thereof, including the Compensation Committee) for any fiscal year in its sole discretion but shall not be decreased below the
incentive levels set forth in this Agreement without the written consent of Executive. The Cash Incentive shall be based upon the
achievement of performance goals established by the MKHL Board (or appropriate committee thereof, including the Compensation
Committee) over a performance period also established by the MKHL Board (or appropriate committee thereof, including the
Compensation Committee). The MKHL Board (or appropriate committee thereof, including the Compensation Committee) may
base such performance goals upon such appropriate criteria as they may determine. Executive must be employed by the Company
on the date that the Cash Incentive is actually paid which shall be the same date that annual cash incentives are paid to other senior
executives of the Company. The MKHL Board (or appropriate committee thereof, including the Compensation Committee) must
certify the level of the attainment of the applicable performance goal for the performance period and the amount of the Cash
Incentive payable to Executive with respect to such performance period. Once certified, the Cash Incentive will be paid to Executive
reasonably promptly and in no event later than June 30 next following the last day of the applicable performance period.
(b)
Clawback. Notwithstanding the foregoing, if the MKHL Board (or appropriate committee
thereof, including the Compensation Committee) determines that Executive was overpaid, in whole or in part, as a result of a
restatement of the reported financial or operating results of MKHL due to material non-compliance with financial reporting
requirements (unless due to a change in accounting policy or applicable law), the Company Parties shall be entitled to recover or
cancel the difference between (i) any Cash Incentive payment that was based on having met or exceeded performance targets and
(ii) the Cash Incentive payment that would have been paid to or earned by Executive had the actual payment or accrual been
calculated based on the accurate data or restated results, as applicable (the “Overpayment”). If the Compensation Committee
determines that there has been an Overpayment, the Company Parties shall be entitled to demand that Executive reimburse the
Company for the Overpayment. To the extent Executive does not make reimbursement of the Overpayment, the Company Parties
shall have the right to enforce the repayment through the reduction of future salary or the reduction or cancellation of outstanding
and future incentive compensation and/or to pursue all other available legal remedies in law or in equity. The MKHL Board (or
appropriate committee thereof, including the Compensation Committee) may make determinations of Overpayment at any time
through the end of the third (3rd) fiscal year following the year for which the inaccurate performance criteria were measured;
provided, that if steps have been taken within such period to restate MKHL’s financial or operating results, the time period shall
be extended until such restatement is completed.
5.
Long-Term Incentive Compensation.
(a)
Share-Based Awards. Executive shall be eligible, in the discretion of the MKHL Board (or
appropriate committee thereof, including the Compensation Committee), for share option awards, restricted share unit awards and
other share-based awards on an annual basis at the same time long-term incentive grants are awarded to the other senior executives,
and shall be made pursuant to the long-term incentive plan generally applicable to eligible employees of the Company (currently
the Incentive Plan), in accordance with, and subject to, the terms and conditions of the Incentive Plan as the same may be amended
or modified by MKHL in its sole discretion (subject to shareholder approval if required) and the applicable long-term incentive
award agreement. Such eligibility is not a guarantee of participation in or of the receipt of any award, payment or other compensation
under the Incentive Plan or any other incentive or benefit plans or programs. The MKHL Board (or appropriate committee thereof,
including the Compensation Committee) shall determine all terms of participation (including, without limitation, the size and type
of any award, payment or other compensation and the timing and conditions of receipt thereof by Executive).
(b)
Effect of Termination. Upon termination of employment (the “Termination Date”) for any
reason, any share-based incentive awards that have become vested and/or exercisable prior to the Termination Date shall remain
vested and/or exercisable after the Termination Date and all unvested long-term incentive awards shall be forfeited, in each case,
in accordance with the terms and conditions of the Incentive Plan and/or any applicable long-term incentive award agreement.
Notwithstanding anything to the contrary in the Incentive Plan and/or any applicable long-term incentive award agreement, in the
event Executive is terminated for Cause (as hereinafter defined), Executive’s vested long-term incentive awards as of the
Termination Date shall not be forfeited.
6.
Employee Benefits.
Generally. During the Term, Executive shall be entitled to participate in any and all Company
employee benefit plans and programs which generally are made available to senior executives of the Company, in accordance
with, and subject to, the terms and conditions of such plans and programs (including, without limitation, any eligibility limitations)
as they may be amended or modified by the Company from time to time in its sole discretion.
(a)
US$50,000 per annum, for the US$5,000,000 whole life insurance policy presently maintained by Executive.
(b)
Life Insurance. During the Term, the Company shall pay the premiums, up to a maximum of
Vacation. During the Term, Executive shall be entitled to six (6) weeks of paid vacation in
each calendar year of the Company. Executive shall forfeit any vacation time that remains unused at the end of any calendar year.
(c)
Transportation. During the Term, the Company shall provide Executive with an automobile
and driver for transportation to and from the Company’s offices and for other business purposes. Such automobile shall be a
Mercedes-Benz S-Class or an automobile at least substantially equivalent in price thereto.
(d)
Expense Reimbursement. During the Term, the Company shall reimburse Executive for all
reasonable and necessary expenses (including first class air travel and the use of the corporate aircraft) incurred by Executive
incident to the performance of his duties hereunder, in accordance with the Company’s policies and procedures.
(e)
7.
Termination of Employment.
(a)
Death and Total Disability. Executive’s employment under this Agreement shall terminate
immediately upon his death or Total Disability (as defined below). For purposes of this Agreement, the term “Total Disability”
shall mean any mental or physical condition that: (i) prevents Executive from reasonably discharging his services and employment
duties hereunder; (ii) is attested to in writing by a physician who is licensed to practice in the State of New York and is mutually
acceptable to Executive and the Company Parties (or, if the Executive and the Company Parties are unable to mutually agree on
a physician, the MKHL Board may select a physician who is a chairman of a department of medicine at a university-affiliated
hospital in the City of New York); and (iii) continues, for any one or related condition, during any period of six (6) consecutive
months or for a period aggregating six (6) months in any twelve (12) month period. Total Disability shall be deemed to have
occurred on the last day of such applicable six (6) month period.
Cause. The Company Parties shall at all times, upon written notice to Executive given at least
ten (10) days prior to the Termination Date, have the right to terminate this Agreement and the employment of Executive hereunder
for Cause (as defined below); provided, however, that prior to such termination taking effect, Executive shall have been given an
opportunity to meet with the Board, and a majority of the Board shall have thereafter voted to terminate Executive’s employment.
(b)
For purposes of this Agreement, the term “Cause” means the occurrence of any one of the following
events: (i) Executive’s gross negligence, willful misconduct or dishonesty in performing his duties hereunder; (ii) Executive’s
conviction of a felony (other than a felony involving a traffic violation); (iii) Executive’s commission of a felony involving a fraud
or other business crime against MKHL or any of its subsidiaries; or (iv) Executive’s breach of any of the covenants set forth in
Section 9 hereof; provided that, if such breach is curable, Executive shall have an opportunity to correct such breach within thirty
(30) days after written notice by the Company to Executive thereof.
(c)
Executive Termination Without Good Reason. Executive agrees that he shall not terminate
his employment with the Company Parties for any reason other than Good Reason without giving the Company Parties at least
six (6) months’ prior written notice of the effective date of such termination. Executive acknowledges that the Company Parties
retain the right to waive the notice requirement, in whole or in part, and accelerate the effective date of Executive’s termination.
If the Company elects to waive the notice requirement, in whole or in part, the Company shall have no further obligations to
Executive under this Agreement other than to make the payments specified in Section 8(a). After Executive provides a notice of
termination, the Company may, but shall not be obligated to, provide Executive with work to do and the Company may, in its
discretion, in respect of all or part of an unexpired notice period, (i) require Executive to comply with such conditions as it may
specify in relation to attending at, or remaining away from, the Company’s places of business, or (ii) withdraw any powers vested
in, or duties assigned to, Executive. For purposes of a notice of termination given pursuant to this Section 7(c), the Termination
Date shall be the last day of the six (6) month notice period, unless the Company elects to waive the notice requirement as set
forth herein.
For purposes of this Agreement, “Good Reason” means and shall be deemed to exist if: (i) Executive
is assigned duties or responsibilities that are inconsistent in any material respect with the scope of the duties or responsibilities of
his title or position, as set forth in this Agreement; (ii) the Company or MKHL fails to perform substantially any material term of
this Agreement, and, if such failure is curable, fails to correct such failure within thirty (30) days after written notice by Executive
to the Company or MKHL, as applicable; (iii) Executive’s office is relocated more than fifty (50) miles from its location immediately
prior to such relocation; (iv) the Company or MKHL fails to have this Agreement assumed by a successor following a Change in
Control (as defined in the Incentive Plan); (v) Executive’s duties or responsibilities are significantly reduced, except with respect
to any corporate action initiated or recommended by Executive and approved by the Board; (vi) Executive is involuntarily removed
from the Board and the Company Board (other than in connection with a termination of employment for Cause, voluntary
termination without Good Reason, death or Total Disability); or (vii) subject to the proviso set forth in the third sentence of Section
1(b) above, the Board is managing the day-to-day operations of the Company and, after receipt of written notice from Executive
to such effect (and sufficient time to cease such involvement), the Board continues to do so.
Executive Termination for Good Reason. Executive may terminate his employment hereunder
for Good Reason (and this Agreement shall accordingly terminate) by providing written notice of his intention to terminate, and
specifying the circumstances relating thereto, to the MKHL Board within thirty (30) days following the occurrence of any of the
events specified above as constituting Good Reason and at least ten (10) days prior to the Termination Date.
(d)
8.
Consequences of Termination or Breach.
(a)
Termination Due to Death or Total Disability, for Cause, or Without Good Reason. If
Executive’s employment under this Agreement is terminated under Sections 7(a) or 7(b) hereunder, or Executive terminates his
employment for any reason other than Good Reason, Executive shall not thereafter be entitled to receive any compensation and
benefits under this Agreement other than for (i) Base Salary earned but not yet paid prior to the Termination Date (to be paid in
accordance with the Company’s normal payroll practices), (ii) vested equity in accordance with Section 5(b), (iii) payment for
any untaken accrued vacation during the calendar year, (iv) reimbursement of any expenses pursuant to Section 6(e) incurred prior
to the Termination Date, and (v) any Cash Incentive with respect to any performance period that was completed prior to Executive’s
termination from employment but which has not yet been paid (with such Cash Incentive to be paid at such time as it would have
otherwise been paid to Executive hereunder had his employment not been terminated and such Cash Incentive amount shall be
subject to certification by the MKHL Board (or appropriate committee thereof, including the Compensation Committee) as
described in Section 4 of this Agreement (collectively, the “Accrued Obligations”), plus, in the case of termination due to death
or Total Disability only, the Pro Rata Cash Incentive Payment (as defined in Section 8(b) below) and, in the case of death only,
proceeds from the life insurance policy referenced in Section 6(b). If Executive’s employment under this Agreement is terminated
by the Company for Cause, Executive shall not thereafter be entitled to receive any compensation and benefits under this Agreement
other than for the Accrued Obligations set forth in clauses (i) through (iv) above.
(b)
Termination Without Cause or With Good Reason. If Executive’s employment under this
Agreement is terminated by the Company Parties without Cause (which right the Company shall have at any time and for any
reason during the Term) and other than for the reasons provided for in Section 7(a) above, or Executive terminates his employment
for Good Reason, the sole obligations of the Company Parties to Executive shall be: (i) to make the payments described in Section
8(a) for Accrued Obligations, (ii) to make the Pro Rata Cash Incentive Payment and (iii) to pay to Executive in a single lump sum
payment, within thirty (30) days from the Termination Date, a separation payment equal to two (2) times (A) Executive’s Base
Salary and (B) the Cash Incentive paid or payable to Executive pursuant to Section 4(a) with respect to MKHL’s last full fiscal
year ended prior to the Termination Date (collectively, the “Separation Payments”). For purposes of this Agreement, “Pro Rata
Cash Incentive Payment” shall mean an amount representing the amount of the Cash Incentive payable for the fiscal year in which
the Termination Date occurs, based on actual performance over the course of the applicable performance period, assuming
Executive’s employment had not been terminated hereunder, multiplied by a fraction, the numerator of which is the number of
days Executive was employed hereunder during the applicable performance period and the denominator of which is the full number
of days in the applicable performance period. Executive acknowledges and agrees that in the event the Company Parties terminate
Executive’s employment without Cause and other than for the reasons provided for in Sections 7(a) or 7(b) or Executive terminates
his employment for Good Reason, Executive’s sole remedy shall be to receive the payments specified in this Section 8(b).
No Duty to Mitigate. Executive shall not be required to mitigate the amount of any damages
that Executive may incur or other payments to be made to Executive hereunder as a result of any termination or expiration of this
Agreement, nor shall any payments to Executive be reduced by any other payments Executive may receive, except as may otherwise
be set forth herein.
(c)
9.
Restrictive Covenants and Confidentiality.
No-Hire. During the two (2) year period following the Termination Date, Executive shall not
employ or retain (or participate in or arrange for the employment or retention of) any person who was employed or retained by
the Company Parties or any of their respective parents, subsidiaries or affiliates within the one (1) year period immediately
preceding such employment or retention.
(a)
(b)
Confidentiality. Recognizing that the knowledge, information and relationship with
customers, suppliers and agents, and the knowledge of the Company Entities and their respective parents’, subsidiaries’ and
affiliates’ business methods, systems, plans and policies, which Executive shall hereafter establish, receive or obtain as an employee
of the Company Parties or any such parent, subsidiary or affiliate, are valuable and unique assets of the businesses of the Company
Parties and their respective parents, subsidiaries and affiliates, Executive agrees that, during and after the Term hereunder, he shall
not (otherwise than pursuant to his duties hereunder) disclose, without the prior written approval of the Board acting upon the
advice of counsel, any such knowledge or information pertaining to the Company Parties or any of their respective parents,
subsidiaries and affiliates, their business, personnel or policies, to any person, firm, corporation or other entity, for any reason or
purpose whatsoever. The provisions of this Section 9(b) shall not apply to information which is or shall become generally known
to the public or the trade (except by reason of Executive’s breach of his obligations hereunder), information which is or shall
become available in trade or other publications and information which Executive is required to disclose by law or an order of a
court of competent jurisdiction. If Executive is required by law or a court order to disclose such information, he shall notify the
Company Parties of such requirement and provide the Company Parties an opportunity (if the Company so elects) to contest such
law or court order. Executive agrees that all tangible materials containing confidential information, whether created by Executive
or others which shall come into Executive’s custody or possession during Executive’s employment shall be and is the exclusive
property of the Company Parties or their respective parents, subsidiaries and affiliates. Upon termination of Executive’s
employment for any reason whatsoever, Executive shall immediately surrender to the Company Parties all confidential information
and property of the Company Parties and their respective parents, subsidiaries or affiliates in Executive’s possession.
(c)
Non-Compete. Executive agrees that during the Term, Executive will not engage in, or carry
on, directly or indirectly, either for himself or as an officer or director of a corporation or as an employee, agent, associate, or
consultant of any person, partnership, business or corporation, any Competitive Business (as defined below); provided, that
Executive may own ten percent (10%) or less in a Competitive Business as a passive investor so long as Executive does not manage
(whether as a director, officer or otherwise) or exercise influence or control over such business. For purposes of this Agreement,
“Competitive Business” shall mean a business which directly competes in any material respects with the Company Parties or their
respective parents, subsidiaries, or affiliates.
10.
Injunction. It is recognized and hereby acknowledged by the parties hereto that a breach or violation
by Executive of any of the covenants or agreements contained in Section 9 of this Agreement may cause irreparable harm and
damage to the Company Parties or their respective parents, subsidiaries or affiliates, the monetary amount of which may be virtually
impossible to ascertain. Therefore, Executive recognizes and hereby agrees that the Company Parties and their respective parents,
subsidiaries and affiliates shall be entitled to an injunction from any court of competent jurisdiction enjoining and restraining any
breach or violation of any or all of the covenants and agreements contained in Section 9 of this Agreement by Executive and/or
his employees, associates, partners or agents, or entities controlled by one or more of them, either directly or indirectly, and that
such right to injunction shall be cumulative and in addition to whatever other rights or remedies the Company Parties and their
respective parents, subsidiaries or affiliates may possess.
11.
Indemnification. To the extent permitted by law and the Company Parties by-laws or other governing
documents, the Company Parties will indemnify Executive with respect to any claims made against him as an officer, director or
employee of the Company Parties or any subsidiary of either of the Company Parties, except for acts taken in bad faith or in breach
of his duty of loyalty to the Company Parties or such subsidiary. During the Term and for as long thereafter as is practicable,
Executive shall be covered under a directors and officers liability insurance policy with coverage limits in amounts no less than
that which the Company Parites currently maintain as of the date of this Agreement.
12.
Taxes. All payments to be made to and on behalf of Executive under this Agreement will be subject
to required withholding of federal, state and local income and employment taxes, and to related record reporting requirements,
including, with respect to the retainer and meeting payments referred to in the last sentence of Section 3, applicable U.K. statutory
reductions.
13.
Executive’s Representations; No Delegation. Executive hereby represents and warrants that he is not
precluded, by any agreement to which he is a party or to which he is subject, from executing and delivering this Agreement, and
that this Agreement and his performance of the duties and responsibilities set forth herein does not violate any such agreement.
Executive shall indemnify and hold harmless the Company Parties and their respective parents, subsidiaries and affiliates and their
respective officers, directors, employees, agents and advisors for any liabilities, losses and costs (including reasonable attorney’s
fees) arising from any breach or alleged breach of the foregoing representation and warranty. Executive shall not delegate his
employment obligations under this Agreement to any other person.
Governing Law. This Agreement shall be governed by and construed in accordance with the laws of
the State of New York applicable to agreements made and to be performed in that state, without regard to its conflict of laws
provisions.
14.
15.
Entire Agreement; Amendment. This Agreement supersedes all prior agreements between the parties
with respect to its subject matter (except for any long-term incentive awards agreements entered into between MKHL and
Executive), is intended (with the documents referred to herein) as a complete and exclusive statement of the terms of the agreement
between the parties with respect thereto and may be amended only by a writing signed by all parties hereto.
16.
Notices. Any notice or other communication made or given in connection with this Agreement shall
be in writing and shall be deemed to have been duly given when delivered by hand, by facsimile transmission, by a nationally
recognized overnight delivery service or mailed by registered mail, return receipt requested, to a party at his or its address set forth
below or at such other address as a party may specify by notice to the others:
If to MKHL:
33 Kingsway
London WC2B 6UF
United Kingdom
Attention: Corporate Secretary
If to the Company:
11 West 42nd Street
New York, NY 10036
Fax: 646-354-4901
Attention: General Counsel
If to Executive:
At the home address on file with the Company
Fax: 516-365-6872
or to such other addresses as either party hereto may from time to time specify to the other. Any notice given as aforesaid shall
be deemed received upon actual delivery.
17.
Assignment. Except as otherwise provided in this Section 17 and Section 1(d), this Agreement shall
inure to the benefit of and be binding upon the parties hereto and their respective heirs, representatives, successors and assigns.
This Agreement shall not be assignable by Executive and shall be assignable by the Company Parties, in whole or in part, only
(i) to MKHL or any of its subsidiaries and (ii) subject to compliance with Section 1(d).
18.
Severability. The invalidity of any one or more of the words, phrases, sentences, clauses or sections
contained in this Agreement shall not affect the enforceability of the remaining portions of this Agreement, or any part thereof,
all of which are inserted conditionally on their being valid in law, and, in the event that any one or more of the words, phrases,
sentences, clauses or sections contained in this Agreement shall be declared invalid, this Agreement shall be construed as if such
invalid word or words, phrase or phrases, sentence or sentences, clause or clauses, or section or sections had not been inserted.
19. Waiver. The failure of any party to insist upon strict adherence to any term or condition of this Agreement
on any occasion shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that
term or any other term of this Agreement. Any waiver must be in writing.
and shall not affect in any way the meaning or interpretation of this Agreement.
20.
Section Headings. The section headings contained in this Agreement are for reference purpose only
considered an original, but all of which together shall constitute the same instrument.
21.
Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be
22.
Arbitration. Any dispute or claim between the parties hereto arising out of, or in connection with, this
Agreement and/or Executive’s employment shall become a matter for arbitration; provided, however, that Executive acknowledges
and agrees that in the event of any alleged violation of Section 9 hereof, the Company Parties and any of their respective parents,
subsidiaries and affiliates shall be entitled to obtain from any court in the State of New York, temporary, preliminary or permanent
injunctive relief as well as damages, which rights shall be in addition to any other rights or remedies to which it may be entitled.
The arbitration shall take place in New York City and shall be before a neutral arbitrator in accordance with the Commercial Rules
of the American Arbitration Association; provided, however, that to the extent such arbitration involves any allegation(s) of a
violation of any law, rule or regulation which prohibits discrimination in employment, the arbitrator shall apply the National Rules
for the Resolution of Employment Disputes (as modified) of the American Arbitration Association then existing in determining
the damages, if any, to be awarded and the allocation of costs and attorneys fees between or among the parties. The decision or
award of the arbitrator shall be final and binding upon the parties hereto. The parties shall abide by all awards recorded in such
arbitration proceedings, and all such awards may be entered and executed upon in any court having jurisdiction over the party
against whom or which enforcement of such award is sought.
[Remainder of page intentionally left blank]
IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of March 28, 2018.
MICHAEL KORS HOLDINGS LIMITED
By: /s/ Pascale Meyran
Name: Pascale Meyran
Title: Senior Vice President, Chief Human
Resources Officer
MICHAEL KORS (USA), INC.
By: /s/ Pascale Meyran
Name: Pascale Meyran
Title: Senior Vice President, Chief Human
Resources Officer
JOHN D. IDOL
/s/ John D. Idol
LIST OF SUBSIDIARIES OF MICHAEL KORS HOLDINGS LIMITED
Exhibit 21.1
Entity Name
Michael Kors (UK) Holdings Limited
Michael Kors (UK) Limited
Michael Kors (USA) Holdings, Inc.
Michael Kors (USA), Inc.
Michael Kors Retail, Inc.
Michael Kors Stores (California), Inc.
Michael Kors, L.L.C.
Michael Kors Stores, L.L.C.
Michael Kors Aviation, L.L.C.
Michael Kors Virginia, LLC
Michael Kors (Canada) Co.
Michael Kors (Canada) Holdings Ltd.
Michael Kors (Switzerland) GmbH
Michael Kors (Switzerland) Holdings GmbH
Michael Kors (Switzerland) International GmbH
Michael Kors (Switzerland) Retail GmbH
Michael Kors (UK) Intermediate Ltd.
Michael Kors Japan K.K.
Michael Kors Limited
MK (Shanghai) Commercial Trading Company Limited
Michael Kors Belgium BVBA
Michael Kors (Bucharest Store) S.R.L.
Michael Kors (France) SAS
Michael Kors (Germany) GmbH
Michael Kors Spain, S.L.
Michael Kors Italy S.R.L. Con Socio Unico
Michael Kors (Austria) GmbH
Michael Kors (Netherlands) B.V.
Michael Kors (Poland) Sp. z o.o.
Michael Kors (Europe) B.V.
Michael Kors (Czech Republic) s.r.o.
Michael Kors (Luxembourg) Retail S.à r.l.
Michael Kors (Portugal) Lda.
Michael Kors (Ireland) Limited
Michael Kors (Sweden) AB
Michael Kors (Mexico) S. de R.L. de C.V.
Michael Kors (Denmark) ApS
Michael Kors (Norway) AS
Michael Kors (Hungary) Kft.
Michael Kors Korea Yuhan Hoesa
Michael Kors (Finland) Oy
Michael Kors (Latvia) SIA
UAB Michael Kors (Lithuania)
MK (Panama) Holdings, S.A.
Michael Kors (HK) Limited
Michael Kors Trading (Shanghai) Company Limited
JAG Acquisitions (UK) Limited
MKJC Limited
Jurisdiction of Formation
United Kingdom
United Kingdom
Delaware
Delaware
Delaware
Delaware
Delaware
New York
Delaware
Virginia
Nova Scotia
Nova Scotia
Switzerland
Switzerland
Switzerland
Switzerland
United Kingdom
Japan
Hong Kong
China
Belgium
Romania
France
Germany
Spain
Italy
Austria
Netherlands
Poland
Netherlands
Czech Republic
Luxembourg
Portugal
Ireland
Sweden
Mexico
Denmark
Norway
Hungary
Korea
Finland
Latvia
Lithuania
Panama
Hong Kong
China
United Kingdom
British Virgin Islands
Entity Name
Jimmy Choo Group Limited
Jimmy Choo (Holdings) Limited
Choo EUR Finance Limited
Choo USD Finance Limited
Choo Luxury Group Limited
Choo Luxury Holdings Limited
Choo Luxury Finance Limited
J. Choo (Jersey) Limited
J. Choo Limited
JC Industry S.r.l
Jimmy Choo Korea Limited
JC Gulf Trading LLC
J Choo USA Inc.
J Choo Florida Inc.
J. Choo Canada Inc.
J. Choo (OS) Limited
J Choo Germany GmbH
Itachoo S.r.l.
Jimmy Choo Florence S.r.l.
Franchoo SAS
Jimmy Choo Spain S.L.
J Choo (Switzerland) AG
J. Choo (Belgium) BVBA
J. Choo Netherlands B.V.
J. Choo Czech s.r.o
J. Choo Russia JV Limited
J. Choo RUS LLC
J. Choo (Austria) GmbH
J. Choo Supply SA
J. Choo Hong Kong JV Limited
Jimmy Choo Hong Kong Limited
J.Choo Japan JV Ltd.
Jimmy Choo Tokyo K.K.
J. Choo (Asia) Limited
Jimmy Choo (Shanghai) Trading Co., Ltd
J. Choo Singapore JV Limited
Jimmy Choo (Singapore) Pte. Ltd.
Jimmy Choo (Malaysia) Sdn. Bhd.
JC Services ME DMCC
J. Choo Sweden AB
Jurisdiction of Formation
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Italy
Korea
UAE
Delaware
Delaware
British Columbia
United Kingdom
Germany
Italy
Italy
France
Spain
Switzerland
Belgium
Netherlands
Czech Republic
United Kingdom
Russia
Austria
Switzerland
United Kingdom
Hong Kong
United Kingdom
Japan
Hong Kong
China
United Kingdom
Singapore
Malaysia
DMCC (UAE free zone)
Sweden
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-178486) pertaining to the
Amended and Restated Omnibus Incentive Plan of Michael Kors Holdings Limited of our reports dated May 30, 2018 with respect
to the consolidated financial statements and the effectiveness of internal control over financial reporting of Michael Kors Holdings
Limited, included in this Annual Report (Form 10-K) for the year ended March 31, 2018.
Exhibit 23.2
/s/ ERNST & YOUNG LLP
New York, New York
May 30, 2018
Exhibit 31.1
CERTIFICATIONS
I, John D. Idol, certify that:
1.
I have reviewed this Form 10-K of Michael Kors Holdings Limited;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for,
the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent function):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant’s internal control over financial reporting.
Date: May 30, 2018
By:
/s/ John D. Idol
John D. Idol
Chief Executive Officer
Exhibit 31.2
CERTIFICATIONS
I, Thomas J. Edwards, Jr., certify that:
1.
I have reviewed this Form 10-K of Michael Kors Holdings Limited;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for,
the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report
is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent function):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: May 30, 2018
By:
/s/ Thomas J. Edwards, Jr.
Thomas J. Edwards, Jr
Chief Financial Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this annual report on Form 10-K of Michael Kors Holdings Limited (the “Company”) for the year ended
March 31, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John D. Idol, Chief
Executive Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(i) The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934,
as amended; and
(ii) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of Michael Kors Holdings Limited.
Date: May 30, 2018
/S/ John D. Idol
John D. Idol
Chief Executive Officer
(Principal Executive Officer)
The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of this Report.
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this annual report on Form 10-K of Michael Kors Holdings Limited (the “Company”) for the year ended
March 31, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Thomas J. Edwards,
Jr., Chief Financial Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:
(i) The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934,
as amended; and
(ii) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of Michael Kors Holdings Limited.
Date: May 30, 2018
/S/ Thomas J. Edwards, Jr.
Thomas J. Edwards, Jr.
Chief Financial Officer
(Principal Financial Officer)
The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of this Report.
2 0 47 2 _ S P 1 8 _ P P_ A N N U A L R E P O R T_ 1 0 K _W R A P_V 6 FA L L
T R I M S I Z E : 1 7 " W X 1 0 . 8 7 " H
I N S I D E C O V E R : P R I N T S 4 C O L O R
2 0 47 2 _ S P 1 8 _ P P_ A N N U A L R E P O R T_ 1 0 K _W R A P_V 6 T R I M S I Z E : 1 7 " W X 1 0 . 8 7 " H
C O V E R :
P M S 4 6 7
PA P E R S T O C K : O P U S S A P P I / M AT T E (C O AT E D) / 8 0 L B C O V E R
S P I N E W I DT H I N C L U D E D A N D A C C O U N T S F O R . 2 5 " O F T H E W I DT H
P R I N T E R M AY A D J U S T M E C H A N C A L TO F I T P R O D U C T I O N N E E D S