MICHAEL KORS HOLDINGS LTD, 10-K filed on 5/28/2014
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Mar. 29, 2014
May 21, 2014
Sep. 28, 2013
Document Information [Line Items]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Mar. 29, 2014 
 
 
Document Fiscal Year Focus
2013 
 
 
Document Fiscal Period Focus
FY 
 
 
Trading Symbol
KORS 
 
 
Entity Registrant Name
MICHAEL KORS HOLDINGS LTD 
 
 
Entity Central Index Key
0001530721 
 
 
Current Fiscal Year End Date
--03-29 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Common Stock, Shares Outstanding
 
204,293,091 
 
Entity Public Float
 
 
$ 13,788,608,588 
CONSOLIDATED BALANCE SHEETS (USD $)
In Thousands, unless otherwise specified
Mar. 29, 2014
Mar. 30, 2013
Current assets
 
 
Cash and cash equivalents
$ 955,145 
$ 472,511 
Receivables, net
314,055 
206,454 
Inventories
426,938 
266,894 
Deferred tax assets
30,539 
8,480 
Prepaid expenses and other current assets
50,492 
34,850 
Total current assets
1,777,169 
989,189 
Property and equipment, net
350,678 
242,113 
Intangible assets, net
48,034 
20,980 
Goodwill
14,005 
14,005 
Deferred tax assets
3,662 
4,389 
Other assets
23,425 
18,889 
Total assets
2,216,973 
1,289,565 
Current liabilities
 
 
Accounts payable
131,953 
82,977 
Accrued payroll and payroll related expenses
54,703 
38,642 
Accrued income taxes
47,385 
9,074 
Accrued expenses and other current liabilities
74,329 
33,555 
Total current liabilities
308,370 
164,248 
Deferred rent
76,785 
56,986 
Deferred tax liabilities
5,887 
13,163 
Other long-term liabilities
19,800 
7,922 
Total liabilities
410,842 
242,319 
Commitments and contingencies
   
   
Shareholders' equity
 
 
Ordinary shares, no par value; 650,000,000 shares authorized, and 204,291,345 shares issued and outstanding at March 29, 2014, and 201,454,408 shares issued and outstanding at March 30, 2013
   
   
Treasury shares, at cost (29,765 shares at March 29, 2014)
(2,447)
 
Additional paid-in capital
527,213 
424,454 
Accumulated other comprehensive loss
(6,373)
(3,461)
Retained earnings
1,287,738 
626,253 
Total shareholders' equity
1,806,131 
1,047,246 
Total liabilities and shareholders' equity
$ 2,216,973 
$ 1,289,565 
CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
Mar. 29, 2014
Mar. 30, 2013
Ordinary shares, par value
   
   
Ordinary shares, shares authorized
650,000,000 
650,000,000 
Ordinary shares, shares issued
204,291,345 
201,454,408 
Ordinary shares, shares outstanding
204,291,345 
201,454,408 
Treasury shares, at cost
29,765 
 
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (USD $)
In Thousands, except Share data, unless otherwise specified
12 Months Ended
Mar. 29, 2014
Mar. 30, 2013
Mar. 31, 2012
Net sales
$ 3,170,522 
$ 2,094,757 
$ 1,237,100 
Licensing revenue
140,321 
86,975 
65,154 
Total revenue
3,310,843 
2,181,732 
1,302,254 
Cost of goods sold
1,294,773 
875,166 
549,158 
Gross profit
2,016,070 
1,306,566 
753,096 
Selling, general and administrative expenses
926,913 
621,536 
464,568 
Depreciation and amortization
79,654 
54,291 
37,554 
Impairment of long-lived assets
1,332 
725 
3,292 
Total operating expenses
1,007,899 
676,552 
505,414 
Income from operations
1,008,171 
630,014 
247,682 
Interest expense, net
393 
1,524 
1,495 
Foreign currency loss (gain)
131 
1,363 
(2,629)
Income before provision for income taxes
1,007,647 
627,127 
248,816 
Provision for income taxes
346,162 
229,525 
101,452 
Net income
661,485 
397,602 
147,364 
Net income applicable to preference shareholders
 
 
21,227 
Net income available for ordinary shareholders
661,485 
397,602 
126,137 
Weighted average ordinary shares outstanding:
 
 
 
Basic
202,582,945 
196,615,054 
158,258,126 
Diluted
205,638,107 
201,540,144 
189,299,197 
Net income per ordinary share:
 
 
 
Basic
$ 3.27 
$ 2.02 
$ 0.80 
Diluted
$ 3.22 
$ 1.97 
$ 0.78 
Statements of Comprehensive Income:
 
 
 
Net income
661,485 
397,602 
147,364 
Foreign currency translation adjustments
(34)
(4,006)
(4,768)
Net realized and unrealized (losses) gains on derivatives
(2,878)
1,280 
 
Comprehensive income
$ 658,573 
$ 394,876 
$ 142,596 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (USD $)
In Thousands, except Share data
Total
USD ($)
Convertible Preference Shares
Ordinary Shares
Additional Paid-in Capital
USD ($)
Treasury Shares
USD ($)
Accumulated Other Comprehensive Gain (Loss)
USD ($)
Retained Earnings
USD ($)
Beginning Balance at Apr. 02, 2011
$ 125,320 
 
 
$ 40,000 
 
$ 4,033 
$ 81,287 
Beginning Balance (in shares) at Apr. 02, 2011
 
10,163,920 
140,554,377 
 
 
 
 
Net income
147,364 
 
 
 
 
 
147,364 
Foreign currency translation adjustment
(4,768)
 
 
 
 
(4,768)
 
Total comprehensive income
142,596 
 
 
 
 
 
 
Issuance of shares in exchange for note (in shares)
 
475,796 
6,579,656 
 
 
 
 
Issuance of shares in exchange for note
101,650 
 
 
101,650 
 
 
 
Elimination of contingent redemption on ordinary shares
6,706 
 
 
6,706 
 
 
 
Issuance of convertible preference shares (in shares)
 
217,137 
 
 
 
 
 
Issuance of convertible preference shares
9,550 
 
 
9,550 
 
 
 
Issuance of restricted shares
 
 
820,074 
 
 
 
 
Exercise of employee share options (in shares)
 
 
3,521,258 
 
 
 
 
Exercise of employee share options
9,672 
 
 
9,672 
 
 
 
Equity compensation expense
27,020 
 
 
27,020 
 
 
 
Tax benefits on exercise of share options
32,281 
 
 
32,281 
 
 
 
Contributed capital-services provided by former parent
1,442 
 
 
1,442 
 
 
 
Conversion of convertible preference shares
 
(10,856,853)
41,256,025 
 
 
 
 
Ending Balance at Mar. 31, 2012
456,237 
 
 
228,321 
 
(735)
228,651 
Ending Balance (in shares) at Mar. 31, 2012
 
 
192,731,390 
 
 
 
 
Net income
397,602 
 
 
 
 
 
397,602 
Foreign currency translation adjustment
(4,006)
 
 
 
 
(4,006)
 
Net unrealized gain (loss) on derivatives (net of taxes of $0.4 million in March 29, 2014 and $0.1 million in March 30, 2013)
1,280 
 
 
 
 
1,280 
 
Total comprehensive income
394,876 
 
 
 
 
 
 
Issuance of restricted shares
 
 
18,541 
 
 
 
 
Exercise of employee share options (in shares)
 
 
8,704,477 
 
 
 
 
Exercise of employee share options
30,435 
 
 
30,435 
 
 
 
Equity compensation expense
20,932 
 
 
20,932 
 
 
 
Tax benefits on exercise of share options
144,508 
 
 
144,508 
 
 
 
Contributed capital-services provided by former parent
258 
 
 
258 
 
 
 
Ending Balance at Mar. 30, 2013
1,047,246 
 
 
424,454 
 
(3,461)
626,253 
Ending Balance (in shares) at Mar. 30, 2013
 
 
201,454,408 
 
 
 
 
Net income
661,485 
 
 
 
 
 
661,485 
Foreign currency translation adjustment
(34)
 
 
 
 
(34)
 
Net unrealized gain (loss) on derivatives (net of taxes of $0.4 million in March 29, 2014 and $0.1 million in March 30, 2013)
(2,878)
 
 
 
 
(2,878)
 
Total comprehensive income
658,573 
 
 
 
 
 
 
Issuance of restricted shares
 
 
250,654 
 
 
 
 
Exercise of employee share options (in shares)
2,586,283 
 
2,586,283 
 
 
 
 
Exercise of employee share options
18,988 
 
 
18,988 
 
 
 
Equity compensation expense
29,078 
 
 
29,078 
 
 
 
Tax benefits on exercise of share options
54,693 
 
 
54,693 
 
 
 
Purchase of Treasury Shares
 
 
(29,765)
 
 
 
 
Purchase of Treasury Shares
(2,447)
 
 
 
(2,447)
 
 
Ending Balance at Mar. 29, 2014
$ 1,806,131 
 
 
$ 527,213 
$ (2,447)
$ (6,373)
$ 1,287,738 
Ending Balance (in shares) at Mar. 29, 2014
 
 
204,261,580 
 
 
 
 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Parenthetical) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Mar. 29, 2014
Mar. 30, 2013
Net unrealized gain on derivatives, taxes
$ 0.4 
$ 0.1 
CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Mar. 29, 2014
Mar. 30, 2013
Mar. 31, 2012
Cash flows from operating activities
 
 
 
Net income
$ 661,485 
$ 397,602 
$ 147,364 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
79,654 
54,291 
37,554 
Impairment and write-off of property and equipment
1,332 
725 
3,292 
Loss on disposal of fixed assets
3,758 
229 
 
Unrealized foreign exchange loss (gain)
131 
1,363 
(2,629)
Income earned on joint venture
(354)
 
 
Amortization of deferred financing costs
746 
703 
498 
Amortization of deferred rent
6,333 
3,245 
4,214 
Deferred income taxes
(29,905)
3,222 
(7,729)
Equity compensation expense
29,078 
20,932 
27,020 
Tax benefits on exercise of share options
(54,693)
(144,508)
(32,281)
Non-cash charges for services provided by former parent
 
258 
1,442 
Change in assets and liabilities:
 
 
 
Receivables, net
(105,648)
(80,581)
(48,399)
Inventories
(158,243)
(81,108)
(71,151)
Prepaid expenses and other current assets
(5,222)
(3,866)
(12,647)
Other assets
(4,274)
(2,284)
Accounts payable
49,034 
16,299 
14,888 
Accrued expenses and other current liabilities
133,208 
152,630 
46,419 
Other long-term liabilities
25,359 
14,894 
9,719 
Net cash provided by operating activities
631,779 
356,336 
115,290 
Cash flows from investing activities
 
 
 
Capital expenditures
(184,738)
(121,321)
(88,187)
Equity method investments
(1,960)
(3,232)
 
Loans receivable-joint venture
 
(6,000)
 
Purchase of intangible assets
(28,822)
(8,546)
 
Net cash used in investing activities
(215,520)
(139,099)
(88,187)
Cash flows from financing activities
 
 
 
Repayments of borrowings under revolving credit agreement
(21,120)
(38,954)
(100,855)
Borrowings under revolving credit agreement
21,120 
16,280 
110,764 
Proceeds from private placement
 
 
9,550 
Exercise of employee share options
18,988 
30,435 
9,672 
Purchase of Treasury Shares
(2,447)
 
 
Tax benefits on exercise of share options
54,693 
144,508 
32,281 
Payment of deferred financing costs
(176)
(1,708)
(2,773)
Net cash provided by financing activities
71,058 
150,561 
58,639 
Effect of exchange rate changes on cash and cash equivalents
(4,683)
(1,641)
(453)
Net increase in cash and cash equivalents
482,634 
366,157 
85,289 
Beginning of period
472,511 
106,354 
21,065 
End of period
955,145 
472,511 
106,354 
Supplemental disclosures of cash flow information
 
 
 
Cash paid for interest
699 
484 
1,266 
Cash paid for income taxes
280,667 
70,500 
84,389 
Supplemental disclosure of noncash investing and financing activities
 
 
 
Accrued capital expenditures
$ 16,324 
$ 12,289 
$ 6,869 
Business and Basis of Presentation
Business and Basis of Presentation

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 apparel and accessories and men’s apparel bearing the Michael Kors tradename and related trademarks “MICHAEL KORS,” “MICHAEL MICHAEL KORS,” and various other related trademarks and logos. The Company’s business consists of retail, wholesale and licensing segments. Retail operations consist of collection stores, lifestyle stores, including concessions and outlet stores located primarily in the United States, Canada, Europe and Japan. Wholesale revenues are principally derived from major department and specialty stores located throughout the United States, Canada and Europe. The Company licenses its trademarks on products such as fragrances, cosmetics, eyewear, leather goods, jewelry, watches, coats, men’s suits, swimwear, furs and ties.

For all periods presented, all ordinary share and per share amounts in these consolidated financial statements and the notes hereto have been adjusted retroactively to reflect the effects of a 3.8-to-1 share split, which was completed on November 30, 2011, as well as the effects of the July 2011 reorganization discussed in Note 2 below, as if such reorganization and share split had occurred at the beginning of the periods presented.

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States and include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

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 29, 2014, March 30, 2013, and March 31, 2012 (“Fiscal 2014,” “Fiscal 2013” and “Fiscal 2012,” respectively) consist of 52 weeks.

Reorganization and Initial Public Offering
Reorganization and Initial Public Offering

2. Reorganization and Initial Public Offering

Prior to July 2011, the Company was owned 85% by SHL-Kors Limited, a BVI corporation, and 15% by Mr. Kors. SHL-Kors Limited was owned 100% by SHL Fashion Limited.

In July 2011, the Company underwent a corporate reorganization whereby the Company completed a merger with its former parent, SHL-Kors Limited, which merged with and into the Company, with the Company as the surviving corporation (the “First Merger”). Subsequent to the completion of the First Merger, SHL Fashion Limited, the former parent company of SHL-Kors Limited, merged with and into the Company (the “Second Merger”), with the Company as the surviving corporation. Upon completion of the Second Merger, the previous shareholders of SHL Fashion Limited (which include Sportswear Holdings Limited and the Company’s chief executive officer, John Idol), and Mr. Kors became direct shareholders in the Company. Immediately prior to the Second Merger, the Company issued 475,796 preference shares and 6,579,656 ordinary shares to SHL Fashion Limited in consideration for the extinguishment of the Company’s $101.7 million note payable to SHL Fashion Limited. This exchange was based on the fair value of the Company at the time of exchange. In the Second Merger, Mr. Kors and the shareholders of SHL Fashion Limited received 147,134,033 newly issued ordinary shares and 10,639,716 newly issued convertible preference shares of the Company in proportion to their ownership interests held prior to the Second Merger. The Company considered this transaction to be the acquisition of the non-controlling interest in the Company held by Mr. Kors, and, accordingly, the Company accounted for this transaction as an equity transaction.

Following the reorganization, in a private placement in July 2011, a group of investors purchased (i) all 10,639,716 convertible preference shares issued in the reorganization from the previous SHL Fashion Limited shareholders and Mr. Kors for $490 million, and (ii) 217,137 newly issued convertible preference shares from the Company for $10.0 million, of which $9.5 million in proceeds, net of placement fees of $0.5 million, were received by the Company. As a result of the aforementioned transactions, the capital structure of the Company increased from 4,351 issued and outstanding ordinary shares to 147,134,033 issued and outstanding ordinary shares (650,000,000 authorized) and 10,856,853 authorized, issued and outstanding convertible preference shares.

In addition to the above, immediately prior to the reorganization, the redemption feature related to the contingently redeemable ordinary shares was eliminated, thereby, resulting in the reclassification of $6.7 million from temporary equity, which was classified as “contingently redeemable ordinary shares” in the Company’s consolidated balance sheets, to permanent equity as additional paid-in capital (see Note 17).

 

On December 20, 2011, the Company completed an initial public offering (“IPO”), which resulted in the sale of 54,280,000 shares at a price of $20 per share, all of which were sold by selling shareholders. The Company did not receive any of the proceeds related to the sale of these shares. On December 20, 2011, in connection with the consummation of the IPO, 10,856,853 convertible preference shares were converted into 41,256,025 ordinary shares at a ratio of 3.8-to-1 resulting in no preference shares issued and outstanding at March 31, 2012.

During March 2012, the Company completed a secondary offering of 25,000,000 ordinary shares at a price of $47.00 per share. Subsequent to this offering and in connection with it, the underwriters exercised their additional share purchase option during April 2012, where an additional 3,750,000 shares were offered at $47.00 per share. Similar to the IPO the Company did not receive any of the proceeds related to the sale of these shares and incurred approximately $0.7 million in fees related to the secondary offering which were charged to selling, general and administrative expenses during the fourth quarter of Fiscal 2012. As a result of the secondary offering, Sportswear Holdings Limited ownership decreased to 25.0% of the Company’s ordinary shares whereby the Company ceased to be a “controlled company” under New York Stock Exchange listing rules.

During September 2012, the Company completed a secondary offering of 23,000,000 ordinary shares at a price of $53.00 per share. Subsequent to this offering, and in connection with it, the underwriters exercised their additional share purchase option during October 2012, where an additional 3,450,000 shares were offered at $53.00 per share. Similar to the prior public offerings the Company did not receive any of the proceeds related to the sale of these shares and incurred approximately $0.9 million in fees related to the secondary offering, which were charged to selling, general and administrative expenses.

During February 2013, the Company completed a secondary offering of 25,000,000 ordinary shares at a price of $61.50 per share. Similar to the prior public offerings the Company did not receive any of the proceeds related to the sale of these shares and incurred approximately $0.8 million in fees related to the secondary offering, which were charged to selling, general and administrative expenses.

Summary of Significant Accounting Policies
Summary of Significant Accounting Policies

3. Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to use judgment and make estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The level of uncertainty in estimates and assumptions increases with the length of time until the underlying transactions are completed. The most significant assumptions and estimates involved in preparing the financial statements include allowances for customer deductions, sales returns, sales discounts and doubtful accounts, estimates of 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.

Revenue Recognition

The Company recognizes retail store revenues upon sale of its products to retail consumers, net of estimated returns. Wholesale revenue is recognized net of estimates for sales returns, discounts and allowances, after merchandise is shipped and title and risk of loss is 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, trade discounts, markdowns, allowances and operational chargebacks, as well as for certain cooperative selling expenses.

 

The following table details the activity and balances of the Company’s sales reserves for the fiscal years ended March 29, 2014, March 30, 2013, and March 31, 2012 (in thousands):

 

Retail

   Balance
  Beginning  
of Year
     Amounts
  Charged to  
Revenue
       Write-offs  
Against
Reserves
    Balance
at
  Year End  
 

Return Reserves:

          

Year ended March 29, 2014

   $ 3,146       $ 45,632       $ (46,458   $ 2,320   

Year ended March 30, 2013

   $ 1,659       $ 35,448       $ (33,961   $ 3,146   

Year ended March 31, 2012

   $   2,313       $   23,580       $ (24,234   $   1,659   

 

Wholesale

   Balance
  Beginning  
of Year
     Amounts
  Charged to  
Revenue
       Write-offs  
Against
Reserves
    Balance
at
  Year End  
 

Total Sales Reserves:

          

Year ended March 29, 2014

   $ 43,009       $ 203,465       $ (180,553   $ 65,921   

Year ended March 30, 2013

   $ 30,381       $ 135,450       $ (122,822   $ 43,009   

Year ended March 31, 2012

   $ 25,180       $ 114,577       $ (109,376   $ 30,381   

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 specific licensing agreements is recognized as 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.

Advertising

Advertising costs are charged to expense when incurred and are reflected in general and administrative expenses. For the years ended March 29, 2014, March 30, 2013, and March 31, 2012, advertising expense was $65.7 million, $41.9 million and $31.4 million, 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 2014, Fiscal 2013, and Fiscal 2012, were $7.3 million, $5.1 million and $4.3 million, respectively.

Shipping and Handling

Shipping and handling costs amounting to $78.6 million, $29.1 million and $19.7 million for Fiscal 2014, Fiscal 2013, and Fiscal 2012, respectively, are included in selling, general and administrative expenses in the statements of operations.

Cash and Cash Equivalents

All highly liquid investments with original maturities of three months or less are considered to be cash equivalents.

Inventories

Inventories consist of finished goods and are stated at the lower of cost or market 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, Holland, Canada, Japan and Hong Kong. The Company adjusts its inventory to reflect situations in which the cost of inventory is not expected to be fully recovered. These adjustments are estimates, which could vary significantly from actual results if future economic conditions, customer demand or competition differ from expectations. For the periods presented, there were no significant adjustments related to unsalable inventory.

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 provided 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, and computer hardware and software are depreciated over three to five years. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated remaining useful lives of the related assets or remaining lease term. The Company includes all its amortization and depreciation 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.

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 years.

Maintenance and repairs are charged to expense in the year incurred. Cost and related accumulated depreciation for property and equipment are removed from the accounts upon their sale or disposition and the resulting gain or loss is reflected in the results of operations.

Internal-use Software

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 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, identification and testing of alternatives, are expensed as incurred.

Intangible Assets

Intangible assets consist of trademarks and lease rights and are stated at cost less accumulated amortization. Trademarks are amortized over twenty years and lease rights are amortized over the term of the related lease agreements on a straight-line basis.

Impairment of Long-lived Assets

The Company evaluates its long-lived assets, including fixed assets and intangible assets with finite useful lives, for impairment whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable. 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

On an annual basis, the Company evaluates goodwill for impairment during the Company’s fourth quarter of its fiscal year or whenever impairment indicators exist. Judgments regarding the existence of impairment indicators are based on market conditions and operational performance of the business. Future events could cause the Company to conclude that impairment indicators exist, and, therefore, that goodwill may be impaired. To the extent that the fair value associated with the goodwill is less than its carrying amount, the Company writes down the carrying amount of the goodwill to its fair value.

Prior to Fiscal 2012 the Company assessed goodwill for impairment by calculating the fair value of the Company’s reporting units to which goodwill has been allocated using the discounted cash flow method along with the market multiples method. During Fiscal 2012, the Company adopted a new accounting pronouncement related to goodwill impairment analysis, which allows entities to initially perform a qualitative analysis (“step zero”) of the fair value of its reporting units to determine whether it is necessary to undertake a quantitative (“two step”) goodwill analysis. In the fourth quarter of Fiscal 2014, the Company continued to follow this guidance with respect to its annual impairment analysis for goodwill, and concluded that the carrying amounts of all reporting units were significantly exceeded by their respective fair values, and thus performing any further analysis (e.g. two step) was unnecessary.

The Company will continue to perform the aforementioned qualitative analysis (step zero) in future fiscal years as its first step in goodwill impairment assessment. Should the results of this assessment result in either an ambiguous or unfavorable conclusion the Company will perform additional quantitative testing consistent with the fair value approach mentioned above. The valuation methods used in the fair value approach, 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 carrying amount of a reporting unit exceeds its fair value, the Company would compare the implied fair value of the reporting unit goodwill with its carrying value. To compute the implied fair value, the Company would assign the fair value of the reporting unit to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination. The excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. If the carrying value of the reporting unit goodwill exceeded the implied fair value of the reporting unit goodwill, the Company would record an impairment loss to write down such goodwill to its implied fair value. The valuation of goodwill is affected by, among other things, the Company’s business plan for the future and estimated results of future operations.

Joint Venture Investments

The Company accounts for investments in joint ventures as equity investments and records them in other assets in the Company’s consolidated balance sheets. During Fiscal 2013, the Company made a non-recourse loan to the Company’s sole joint venture (which resides in Latin America), for approximately $6.0 million, which accrues at a 5% annual rate. The purpose of the loan was to provide working capital for the joint venture’s operations. The $6.0 million loan is repayable at the time of the expiration of the joint venture agreement, along with accrued interest payable at the expiration date. The loan, along with accrued interest, are recorded in other assets in the Company’s consolidated balance sheets.

Share-based Compensation

The Company grants share-based awards to certain employees and directors of the Company. Awards are measured at the grant date based on the fair value as calculated using the Black-Scholes option pricing model, for share options, or the closing market price at the grant date for restricted shares and units. These fair values are recognized as expense over the requisite service period, based on attainment of certain vesting requirements for performance grants, or the passage of time for those grants which have time-based vesting requirements. Determining the fair value of share-based awards at the grant date requires considerable judgment, including estimating expected volatility, expected term and risk-free rate.

The Company’s expected volatility is based on the average volatility rates of similar actively traded companies over the past 4.5-9.5 years, which is the Company’s range of estimated expected holding periods. The expected holding period for options which vest based on performance requirements are based on the period to expiration which is generally 9-10 years, which directly correlates to the Company’s service period requirement for such options. Generally, the expected holding period for time-based vesting options (no performance requirements) are calculated using the simplified method which uses the vesting term of the options, generally 4 years, and the contractual term of 7 years, resulting in a holding period of 4.5-4.75 years. The simplified method was chosen as a means to determine the Company’s estimated holding period as prior to December 2011, the Company was privately held and as such there is insufficient historical option exercise experience. The risk-free rate is derived from the zero-coupon U.S. Treasury Strips yield curve, the period of which relates to the grant’s estimated holding period. If factors change and the Company employs different assumptions, the fair value of future awards and resulting share-based compensation expense may differ significantly from what the Company has estimated in the past.

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 have been translated using period-end exchange rates, and revenues and expenses have been translated using average exchange rates over the reporting period. The adjustments resulting from translation have been recorded separately in shareholders’ equity as a component of accumulated other comprehensive loss. Foreign currency transaction 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 the consolidated statements of operations.

Derivative Financial Instruments

The Company uses forward 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 these transactions. The Company employs these forward currency contracts to hedge the Company’s cash flows, as they relate to foreign currency transactions, of which certain of these contracts are designated as hedges for accounting purposes, while others are undesignated hedges for hedge accounting purposes. These derivative instruments are recorded in the Company’s consolidated balance sheets at fair value, regardless of if they are designated or undesignated as hedges.

Prior to the Company’s third fiscal 2013 quarter ended December 29, 2012, the Company did not designate these instruments as hedges for hedge accounting purposes. During the third Fiscal 2013 quarter, the Company elected to designate contracts entered into during and subsequent to that quarter as hedges for hedge accounting purposes, for contracts related to the purchase of inventory. Accordingly, the effective portion of changes in the fair value for contracts entered into during Fiscal 2014, are recorded in equity as a component of accumulated other comprehensive loss, and to cost of sales for any portion of those contracts deemed ineffective. The Company will continue to record changes in the fair value of hedge designated contracts in this manner until their maturity, where the unrealized gain or loss will be recognized into earnings in that period. For those contracts entered into, currently and in the future, that are not, and will not be designated as hedges, changes in the fair value, as of each balance sheet date and upon maturity, are recorded in cost of sales or operating expenses, within the Company’s consolidated statements of operations, as applicable to the transactions for which the forward exchange contracts were intended to hedge. During Fiscal 2014, a net realized loss related to the change in fair value of those contracts not designated as hedges, were de minimis. In addition, the net unrealized loss related to those contracts designated as hedges during Fiscal 2014 of $2.9 million, was charged to equity as a component of accumulated other comprehensive loss. During Fiscal 2014, amounts related to the ineffectiveness of these contracts were de minimis. The company expects that substantially all the amounts currently residing in accumulated other comprehensive loss to be reclassified into earnings during the next twelve months, based upon the timing of inventory purchases and turns. These amounts are subject to fluctuations in the applicable currency exchange rates.

The following table details the fair value of these contracts as of March 29, 2014, and March 30, 2013 (in thousands):

 

     March 29,
2014
    March 30,
2013
 

Prepaid expenses and other current assets

   $ 12      $ 1,367   

Accrued expenses and other current liabilities

   $ (1,875   $ (71

The Company is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. In attempts to mitigate counterparty credit risk, the Company 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. The notional amount of these contracts outstanding at March 29, 2014 was approximately $155.1 million, which was comprised predominately of those designated as hedges.

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.

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. 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. Accordingly, rent expense charged to operations differs from rent paid, resulting in the Company recording deferred rent, which is classified as a long-term liability in the Company’s consolidated balance sheets. The recognition of rent expense for a given operating lease commences on the earlier of the lease commencement date or the date of possession of the property. 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.

 

Deferred Financing Costs

The Company defers costs directly associated with acquiring third party financing. These deferred costs are amortized on a straight-line basis, which approximates the effective interest method, as interest expense over the term of the related indebtedness. As of March 29, 2014, deferred financing costs were $2.9 million, net of accumulated amortization of $2.8 million, and as of March 30, 2013, deferred financing costs were $3.4 million, net of accumulated amortization of $2.0 million. Deferred financing costs are included in other assets on the consolidated balance sheets.

Net Income Per Share

The Company reported earnings per share in conformity with the two-class method for calculating and presenting earnings per share for fiscal years prior to Fiscal 2013, due to the existence of both ordinary and convertible preference securities in those periods. Under the two-class method, basic net income per ordinary share is computed by dividing the net income available to ordinary shareholders by the weighted-average number of ordinary shares outstanding during the period. Net income available to shareholders is determined by allocating undistributed earnings between holders of ordinary and convertible preference shares, based on the participation rights of the preference shares. Diluted net income per share is computed by dividing the net income available to both ordinary and preference shareholders by the weighted-average number of dilutive shares outstanding during the period.

The Company’s basic net income per share excludes the dilutive effect of share options and unvested restricted shares. It is based upon the weighted average number of ordinary shares outstanding during the period divided into net income.

Diluted net income per share reflects the potential dilution that would occur if share option grants or any other dilutive equity instruments were exercised or converted into ordinary shares. These equity instruments are included as potential dilutive securities to the extent they are dilutive under the treasury stock method for the applicable periods.

For the purposes of basic and diluted net income per share, as a result of the reorganization and exchange during July 2011, weighted average shares outstanding for fiscal year 2012 reflect the exchange of ordinary shares for the newly issued ordinary and convertible preference shares as described in Note 2, as if such reorganization and exchange had occurred at the beginning of that fiscal year. In addition, as a result of the 3.8-to-1 share split, which was completed on November 30, 2011, weighted average shares outstanding for Fiscal 2012 reflect the split as if it had occurred at the beginning of that fiscal year.

The components of the calculation of basic net income per ordinary share and diluted net income per ordinary share are as follows (in thousands except share and per share data):

 

     Fiscal Years Ended  
     March 29,
2014
     March 30,
2013
     March 31,
2012
 

Numerator:

        

Net Income

   $ 661,485       $ 397,602       $ 147,364   

Net income applicable to preference shareholders

     —          —          21,227  
  

 

 

    

 

 

    

 

 

 
   $ 661,485       $ 397,602       $ 126,137   
  

 

 

    

 

 

    

 

 

 

Denominator:

        

Basic weighted average ordinary shares

     202,582,945        196,615,054        158,258,126  

Weighted average dilutive share equivalents:

        

Share options and restricted shares/units

     3,055,162        4,925,090        2,628,650  

Convertible preference shares

     —          —          28,412,421  
  

 

 

    

 

 

    

 

 

 

Diluted weighted average ordinary shares

     205,638,107        201,540,144        189,299,197  

Basic net income per ordinary share

   $ 3.27       $ 2.02       $ 0.80   
  

 

 

    

 

 

    

 

 

 

Diluted net income per ordinary share

   $ 3.22       $ 1.97       $ 0.78   
  

 

 

    

 

 

    

 

 

 

Share equivalents for 44,256 shares, 7,341 shares, and 343,787 shares, for fiscal years ending March 29, 2014, March 30, 2013, and March 31, 2012, have been excluded from the above calculation due to their anti-dilutive effect.

 

Recent Accounting Pronouncements—The Company has considered all new accounting pronouncements and, other than the new pronouncement described below, has concluded that there are no new pronouncements that have a material impact on results of operations, financial condition, or cash flows, based on current information.

During the fiscal quarter ended June 29, 2013, the Company adopted the provisions of Accounting Standard Update 2013-02 “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (“ASU 2013-02”) which the Financial Accounting Standards Board (“FASB”) issued in February 2013. ASU 2013-02 requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. The ASU is effective for annual periods and interim periods within those periods beginning after December 15, 2012.

Receivables
Receivables

4. Receivables

Receivables consist of (in thousands):

 

     March 29,
2014
    March 30,
2013
 

Trade receivables:

    

Credit risk assumed by factors/insured

   $ 261,900      $ 199,677   

Credit risk retained by Company

     109,094        45,588   

Receivables due from licensees

     11,302        7,344   
  

 

 

   

 

 

 
     382,296        252,609   

Less allowances:

     (68,241     (46,155
  

 

 

   

 

 

 
   $ 314,055      $ 206,454   
  

 

 

   

 

 

 

The Company has historically assigned a substantial portion of its trade receivables to factors in the United States and Europe whereby the factors assumed credit risk with respect to such receivables assigned. Under the factor agreements, factors bear the risk of loss from the financial inability of the customer to pay the trade receivable when due, up to such amounts as accepted by the factor; but not the risk of non-payment of such trade receivable for any other reason. Beginning in July 2012, the Company assumed responsibility for a large portion of previously factored accounts receivable balances the majority of which were insured at March 29, 2014. The Company provides an allowance for such non-payment risk at the time of sale, which is recorded as an offset to revenue.

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. Markdowns are based on retail 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 net sales.

The allowance for doubtful accounts is determined through analysis of periodic aging of receivables for which credit risk is not assumed by the factors, or which are not covered under insurance, and assessments of collectability based on an evaluation of historic and anticipated trends, the financial conditions 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. Allowances for doubtful accounts were $1.5 million and $1.1 million, at March 29, 2014 and March 30, 2013, respectively.

Concentration of Credit Risk, Major Customers and Suppliers
Concentration of Credit Risk, Major Customers and Suppliers

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. With respect to certain of its receivables, the Company mitigates its credit risk through the assignment of receivables to a factor, as well as obtaining insurance coverage for a portion of non-factored receivables (as demonstrated in the above table in “Credit risk assumed by factors”). For the years ended March 29, 2014, March 30, 2013, and March 31, 2012, net sales related to one customer, within the Company’s wholesale segment, accounted for approximately 14.4%, 14%, and 13%, respectively, of total revenue. The accounts receivable related to this customer were fully factored or substantially insured for all three fiscal years.

 

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 has relationships with various agents who source the Company’s finished goods with numerous contractors on the Company’s behalf. For the years ended March 29, 2014, March 30, 2013, and March 31, 2012, one agent sourced approximately 12.6%, 14.0%, and 17.0%, respectively, and one contractor accounted for approximately 30.4%, 31.8%, and 31.0%, respectively, of the Company’s finished goods purchases.

Property and Equipment, Net
Property and Equipment, Net

6. Property and Equipment, Net

Property and equipment, net, consists of (in thousands):

 

     March 29,
2014
    March 30,
2013
 

Furniture and fixtures

   $ 108,757      $ 76,336   

Equipment

     31,683        13,276   

Computer equipment and software

     50,646        29,429   

In-store shops

     123,637        78,809   

Leasehold improvements

     216,451        168,306   
  

 

 

   

 

 

 
     531,174        366,156   

Less: accumulated depreciation and amortization

     (234,381     (165,340
  

 

 

   

 

 

 
     296,793        200,816   

Construction-in-progress

     53,885        41,297   
  

 

 

   

 

 

 
   $ 350,678      $ 242,113   
  

 

 

   

 

 

 

Depreciation and amortization of property and equipment for the years ended March 29, 2014, March 30, 2013, and March 31, 2012, was $76.6 million, $52.7 million, and $36.0 million, respectively. During Fiscal 2014, Fiscal 2013 and Fiscal 2012, the Company recorded impairment charges of $1.3 million, $0.7 million, and $3.3 million, respectively, related to certain retail locations still in operation. The impairments related to three retail locations in Fiscal 2014, one in Fiscal 2013, and two in Fiscal 2012.

Intangible Assets and Goodwill
Intangible Assets and Goodwill

7. Intangible Assets and Goodwill

The following table discloses the carrying values of intangible assets and goodwill (in thousands):

 

     March 29, 2014      March 30, 2013  
     Gross
Carrying
Amount
     Accumulated
Amortization
     Net      Gross
Carrying
Amount
     Accumulated
Amortization
     Net  

Trademarks

   $ 23,000       $ 12,845       $ 10,155       $ 23,000       $ 11,693       $ 11,307   

Lease Rights

     41,748         3,869         37,879         11,548         1,875         9,673   

Goodwill

     14,005         —           14,005         14,005         —           14,005   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 78,753       $ 16,714       $ 62,039       $ 48,553       $ 13,568       $ 34,985   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The trademarks relate to the Company’s brand name and are amortized over twenty years. Lease rights are amortized over the respective terms of the underlying lease. Amortization expense was $3.1 million, $1.5 million, and $1.5 million, respectively, for each of the years ended March 29, 2014, March 30, 2013, and March 31, 2012.

Goodwill is not amortized but is evaluated annually for impairment in the last quarter or each fiscal year, or whenever impairment indicators exist. The Company evaluated goodwill during the fourth fiscal quarter of Fiscal 2014, and determined that there was no impairment. As of March 29, 2014, cumulative impairment related to goodwill totaled $5.4 million. There were no charges related to the impairment of goodwill in the periods presented.

 

Estimated amortization expense for each of the next five years is as follows (in thousands):

 

Fiscal 2015

   $ 6,606   

Fiscal 2016

     6,779   

Fiscal 2017

     6,774   

Fiscal 2018

     6,740   

Fiscal 2019

     6,646   

Thereafter

     14,489   
  

 

 

 
   $ 48,034   
  

 

 

 

There were no impairments to lease rights related to the retail locations which were impaired during Fiscal 2014, Fiscal 2013, and Fiscal 2012.

Accrued Expenses and Other Current Liabilities
Accrued Expenses and Other Current Liabilities

8. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of (in thousands):

 

     March 29,
2014
     March 30,
2013
 

Professional services

   $ 6,319       $ 4,041   

Advance royalty

     2,097         1,094   

Inventory purchases

     12,408         5,040   

Sales tax payable

     17,321         7,635   

Unrealized loss on foreign exchange contracts

     1,813         334   

Advertising

     4,810         3,013   

Accrued rent

     14,159         3,787   

Other

     15,402         8,611   
  

 

 

    

 

 

 
   $ 74,329       $ 33,555   
  

 

 

    

 

 

 
Credit Facilities
Credit Facilities

9. Credit Facilities

Secured Revolving Credit Facility

The Company had a revolving credit facility, with a maturity date of September 15, 2015, which it terminated during February 2013 (the “2011 Credit Facility”). The 2011 Credit Facility was originally entered into during Fiscal 2007 and was amended on September 15, 2011. Pursuant to such amendment, the Credit Facility provided up to $100.0 million of borrowings, and was originally set to expire on September 15, 2015. The agreement also provided for loans and letters of credit to the Company’s European subsidiaries of up to $35.0 million. All other terms and conditions under the 2011 Credit Facility remained consistent with the original agreement. The 2011 Credit Facility provided for aggregate credit available equal to the lesser of (i) $100.0 million, or (ii) the sum of specified percentages of eligible receivables and eligible inventory, as defined, plus $30.0 million. The terms of the 2011 Credit Facility required all amounts outstanding under the agreement to be collateralized by substantially all the Company’s assets throughout the duration of the agreement. The 2011 Credit Facility contained financial covenants which limited capital expenditures to $110.0 million for any one fiscal year plus additional amounts as permitted, and a minimum fixed charge coverage ratio of 2.0 to 1.0 (with the ratio being EBITDA plus consolidated rent expense to the sum of fixed charges plus consolidated rent expense), restricted and limited additional indebtedness, and restricted the incurrence of additional liens and cash dividends. During Fiscal 2013, and prior to its termination, the Company was in compliance with all of the covenants covered under the agreement.

Borrowings under the 2011 Credit Facility accrued interest at the rate per annum announced from time to time by the agent of 1.25% above the prevailing applicable prime rate, or at a per annum rate equal to 2.25% above the prevailing LIBOR rate. The weighted average interest rate for the revolving credit facility was 2.72% during Fiscal 2013. The Credit Facility required an annual facility fee of $0.1 million, and an annual commitment fee of 0.35% on the unused portion of the available credit under the Credit Facility, which was payable quarterly.

 

At March 30, 2013 there were no amounts outstanding or available related to this agreement. The largest amount borrowed from the 2011 Credit Facility during Fiscal 2013 was $31.7 million.

Senior Unsecured Revolving Credit Facility

On February 8, 2013, the Company terminated the provisions of its existing 2011 Credit Facility and entered into a senior unsecured credit facility (“2013 Credit Facility”). Pursuant to the agreement the 2013 Credit Facility provides for up to $200.0 million of borrowings, and expires on February 8, 2018. The agreement also provides for loans and letters of credit to the Company’s European subsidiaries of up to $100.0 million. The 2013 Credit Facility contains financial covenants such as requiring an adjusted leverage ratio of 3.5 to 1.0 (with the ratio being total consolidated indebtedness plus 8.0 times consolidated rent expense to EBITDA plus consolidated rent expense) and a fixed charge coverage ratio of 2.0 to 1.0 (with the ratio being EBITDA plus consolidated rent expense to the sum of fixed charges plus consolidated rent expense), restricts and limits additional indebtedness, and restricts the incurrence of additional liens and cash dividends. As of March 29, 2014, the Company was in compliance with all covenants related to this agreement.

Borrowings under the 2013 Credit Facility accrue interest at the rate per annum announced from time to time by the agent a rate based on the rates applicable for deposits in the London interbank market for U.S. dollars or the applicable currency in which the loans are made (the “Adjusted LIBOR”) plus an applicable margin. The applicable margin may range from 1.25% to 1.75%, and is based, or dependent upon, a particular threshold related to the adjusted leverage ratio calculated during the period of borrowing. For the Fiscal 2014, the weighted average interest rate for the revolving credit facility was 1.6%. The 2013 Credit Facility requires an annual facility fee of $0.1 million, and an annual commitment fee of 0.25% to 0.35% on the unused portion of the available credit under the facility.

As of March 29, 2014, there were no amounts outstanding under the 2013 Credit Facility, and the amount available for future borrowings was $188.5 million. During Fiscal 2014 the largest amount borrowed under this agreement was $6.6 million. At March 29, 2014, there were stand-by letters of credit of $11.5 million outstanding.

Commitments and Contingencies
Commitments and Contingencies

10. Commitments and Contingencies

Leases

The Company leases office space, retail stores and warehouse space under operating lease agreements that expire at various dates through November 2028. 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.

 

Rent expense for the Company’s operating leases for the fiscal years then ended consist of the following (in thousands):

 

     March 29,
2014
     March 30,
2013
     March 31,
2012
 

Minimum rentals

   $ 107,071       $ 74,708       $ 61,364   

Contingent rent

     56,299         29,871         11,209   
  

 

 

    

 

 

    

 

 

 

Total rent expense

   $ 163,370       $ 104,579       $ 72,573   
  

 

 

    

 

 

    

 

 

 

Future minimum lease payments under the terms of these noncancelable operating lease agreements are as follows (in thousands):

 

Fiscal year ending

  

2015

   $ 133,892   

2016

     133,191   

2017

     131,619   

2018

     128,228   

2019

     116,553   

Thereafter

     436,718   
  

 

 

 
   $ 1,080,201   
  

 

 

 

The Company has issued stand-by letters of credit to guarantee certain of its retail and corporate operating lease commitments, aggregating $11.5 million at March 29, 2014.

Long-term Employment Contract

The Company has an employment agreement with one of its officers that provides for continuous employment through the date of the officer’s death or permanent disability at a current salary of $2.5 million. In addition to salary, the agreement provides 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.

Fair Value of Financial Instruments
Fair Value of Financial Instruments

11. Fair Value of Financial Instruments

Financial assets and liabilities are measured at fair value using a valuation hierarchy for disclosure of fair value measurements. The determination of the applicable level within the hierarchy of a particular asset or liability depends on the inputs used in the valuation as of the measurement date, notably the extent to which the inputs are market-based (observable) or internally derived (unobservable). Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs are inputs based on a company’s own assumptions about market participant assumptions developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs as follows:

Level 1—Valuations based on quoted prices in active markets for identical assets or liabilities that a company has the ability to access at the measurement date.

Level 2—Valuations based on quoted inputs other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly through corroboration with observable market data.

Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

The Company has historically entered into forward exchange contracts to hedge the foreign currency exposure for certain inventory purchases from its manufacturers in Europe and Asia, as well as commitments for certain services. The forward contracts that are used in the program mature in twelve months or less, consistent with the related planned purchases or services. The Company attempts to hedge the majority of its total anticipated European and Asian purchase and service contracts. Realized gains and losses applicable to derivatives used for inventory purchases are recognized in cost of sales, and those applicable to other services are recognized in selling, general and administrative expenses (see Note 3 Summary of Significant Accounting Policies—Derivative Financial Instruments, for further detail regarding hedge accounting treatment as it relates to gains and losses). At March 29, 2014, the fair value of the Company’s foreign currency forward contracts, the Company’s only derivatives, were valued using broker quotations which were calculations derived from observable market information: the applicable currency forward 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 does assess the credit risk of the counterparty and would adjust the provided valuations for counterparty credit risk when appropriate. The fair value 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. All contracts are categorized in Level 2 of the fair value hierarchy as shown in the following table:

 

           Fair value at March 29, 2014, using:  
(In thousands)    Total     Quoted prices in
active markets for
identical assets

(Level 1)
     Significant other
observable inputs
(Level 2)
    Significant
unobservable
inputs
(Level 3)
 

Foreign currency forward contracts - Euro to U.S. Dollar

   $ (1,875   $ —         $ (1,875   $ —     

Foreign currency forward contracts - U.S. Dollar to Euro

     12        —           12        —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ (1,863   $ —         $ (1,863   $ —     
  

 

 

   

 

 

    

 

 

   

 

 

 

The Company’s cash and cash equivalents, accounts receivable and accounts payable, are recorded at carrying value, which approximates fair value. Borrowings under the Credit Facility are recorded at face value as the fair value of the Credit Facility is synonymous with its recorded value as it is a short-term debt facility due to its revolving nature.

Other Comprehensive Income- Hedging Instruments
Other Comprehensive Income- Hedging Instruments

12. Other Comprehensive Income- Hedging Instruments

The Company designates certain forward currency exchange contracts as hedges for hedge accounting purposes (see Note 3, Summary of Significant Accounting Policies—Derivative Financial Instruments). The Company employs forward currency contracts to hedge the Company’s exposures, as they relate to certain forecasted inventory purchases in foreign currencies, and as such are regarded as cash flow hedges up to such time the forecasted transaction occurs.

Changes in the fair value of the effective portion of these contracts are recorded in equity as a component of accumulated other comprehensive income, as of each balance sheet date, 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.

The following table summarizes the impact of the effective portion of the losses of the forward contracts designated as hedges for the fiscal year ended March 29, 2014 (in thousands):

 

     Fiscal Year Ended March 29, 2014  
     Pre-Tax
(Loss)
Recognized
in OCI
(Effective Portion)
    Loss
Reclassified from
Accumulated OCI
into Earnings
(Effective  Portion)
 

Forward currency exchange contracts

   $ (3,257   $ (540

Contracts designated as hedging for hedge accounting purposes during Fiscal 2013, as well as the related activity, were de minimis, as the Company had adopted the provisions of hedge accounting late in the fiscal 2013 year.

Share-Based Compensation
Share-Based Compensation

13. Share-Based Compensation

The Company issues equity grants to certain employees and directors of the Company at the discretion of the Company’s Compensation 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, the Michael Kors Holdings Limited Omnibus Incentive Plan (the “2012 Plan”). The 2008 Plan provided for the granting of share options only and was authorized to issue up to 23,980,823 ordinary shares. As of March 29, 2014, there are no shares available for the granting of equity awards under the 2008 Plan. The 2012 Plan allows for the granting 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 29, 2014, there were 11,897,658 ordinary shares available for the granting of equity awards under the 2012 Plan. Option grants issued from the 2008 Plan generally expire ten years from the date of the grant, and those issued under the 2012 Plan generally expire seven years from the date of the grant.

Share Options

Share options are generally exercisable at no less than the fair market value on the date of grant. The Company has issued two types of option grants, those that vest based on the attainment of a performance target and those that vest based on the passage of time. Performance based share options may vest based upon the attainment of one of two performance measures. One performance measure is an individual performance target, which is based upon certain performance targets unique to the individual grantee, and the other measure is a company-wide performance target, which is based on a cumulative minimum growth requirement in consolidated net equity. The individual performance target vests 20% of the total option grant each year the target is satisfied. The individual has ten years in which to achieve five individual performance vesting tranches. The company-wide performance target must be achieved over the ten-year term. Performance is measured at the end of the term, and any unvested options under the grant vest if the target is achieved. The Company-wide performance target is established at the time of the grant. The target metrics underlying individual performance vesting requirements are established for each recipient each year up until such time as the grant is fully vested. Options subject to time based vesting requirements become vested in four equal increments on each of the first, second, third and fourth anniversaries of the date on which such options were awarded.

The following table summarizes the share options activity during Fiscal 2014, and information about options outstanding at March 29, 2014:

 

     Number of
Options
    Weighted
Average
Exercise price
     Weighted
Average
Remaining
Contractual
Life (years)
     Aggregate
Intrinsic
Value
(in thousands)
 

Outstanding at March 30, 2013

     10,381,342      $ 9.21         

Granted

     623,098      $ 62.70         

Exercised

     (2,586,283   $ 7.36         

Canceled/forfeited

     (40,229   $ 24.35         
  

 

 

         

Outstanding at March 29, 2014

     8,377,928      $ 13.69         6.18       $ 662,388   
  

 

 

   

 

 

    

 

 

    

 

 

 

Vested or expected to vest at March 29, 2014

     8,210,369      $ 13.69         6.18      
  

 

 

   

 

 

    

 

 

    

 

 

 

Vested and exercisable at March 29, 2014

     2,295,526      $ 9.57         5.49       $ 190,945   
  

 

 

   

 

 

    

 

 

    

 

 

 

The total intrinsic value of options exercised during Fiscal 2014 was $163.2 million. The cash received from options exercised during Fiscal 2014, was $19.0 million. The total intrinsic value of options exercised during Fiscal 2013 was $415.1 million. The cash received from options exercised during Fiscal 2013, was $30.4 million.

The weighted average grant date fair value for options granted during Fiscal 2014, Fiscal 2013, and Fiscal 2012, was $24.95, $20.66, and $8.01, respectively. The following table represents assumptions used to estimate the fair value of options:

 

     Fiscal Year Ended  
     March 29,
2014
    March 30,
2013
    March 31,
2012
 

Expected dividend yield

     0.0     0.0     0.0

Volatility factor

     46.0     48.5     46.5

Weighted average risk-free interest rate

     1.0     0.6     1.8

Expected life of option

     4.75 years        4.75 years        7.8 years   

 

Restricted Shares and Restricted Share Units

The Company grants restricted shares and restricted share units at the fair market value at the date of the grant. Expense for restricted share grants is calculated based on the intrinsic value of the grant, which is the difference between the cost to the recipient and the fair market value of the underlying share (grants are generally issued at no cost to the recipient). Expense is recognized ratably over the vesting period which is generally three to four years from the date of the grant. Similar to share options, restricted share grants generally vest in four equal increments on each of the first, second, third and fourth anniversaries of the date on which such grants were awarded. With respect to restricted share units, there are two types: performance based vesting grants and time based vesting grants. Share units whose vesting is based on meeting certain performance criteria, vest in full three years from their anniversary date only if certain cumulative performance targets are met at the end of the three year period. Expense related to these grants is recognized ratably over the three year performance period subject to the probability of the attainment of the related performance targets. Share units that vest based on time generally vest in full either on the first or fourth anniversary of the date of the grant, and are expensed accordingly.

The following table summarizes restricted shares under the 2012 Plan as of March 29, 2014 and changes during the fiscal period then ended:

 

     Number of Unvested
Restricted Shares
    Weighted
Average Grant
Date Fair Value
 

Unvested at March 30, 2013

     617,468      $ 23.66   

Granted

     255,850      $ 62.89   

Vested

     (208,283   $ 23.32   

Canceled/forfeited

     (7,182   $ 39.60   
  

 

 

   

Unvested at March 29, 2014

     657,853      $ 38.38   
  

 

 

   

The total fair value of restricted shares vested was $17.6 million during Fiscal 2014, and $10.5 million during Fiscal 2013. There were no restricted shares that vested prior to Fiscal 2013. As of March 29, 2014, the remaining unrecognized share-based compensation expense for non-vested restricted share grants to be expensed in future periods is $20.4 million, and the related weighted-average period over which it is expected to be recognized is approximately 2.61 years.

The following table summarizes restricted share units under the 2012 Plan as of March 29, 2014 and changes during the fiscal period then ended:

 

     Number of Unvested
Restricted Units
    Weighted
Average Grant
Date Fair Value
 

Unvested at March 30, 2013

     27,763      $ 31.12   

Granted

     174,002      $ 62.64   

Vested

     (1,986   $ 58.10   

Canceled/forfeited

     —        $ —     
  

 

 

   

Unvested at March 29, 2014

     199,779      $ 58.31   
  

 

 

   

The total fair value of restricted share units vested during Fiscal 2014 was $0.2 million. The total fair value of restricted share units vested during Fiscal 2013 was $0.8 million. As of March 29, 2014, the remaining unrecognized share-based compensation expense for non-vested restricted share unit grants to be expensed in future periods is $7.6 million, and the related weighted-average period over which it is expected to be recognized is approximately 2.12 years.

Compensation expense attributable to share-based compensation for Fiscal 2014, Fiscal 2013, and Fiscal 2012 was approximately $29.1 million, $20.9 million, and $27.0 million, respectively. There were 2,295,526 and 6,082,402 vested and non-vested outstanding options, respectively, at March 29, 2014. There were 657,853 unvested restricted share grants and 199,779 unvested restricted share units at March 29, 2014. 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 since the inception of share option granting. The estimated value of future forfeitures for equity grants as of March 29, 2014 is approximately $0.8 million.

Taxes
Taxes

14. Taxes

MKHL is incorporated in the British Virgin Islands and is generally not subject to taxation. MKHL’s subsidiaries are subject to taxation in the United States 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 thousands):

 

     Fiscal Years Ended  
     March 29,
2014
     March 30,
2013
     March 31,
2012
 

United States

   $ 792,899       $ 538,607       $ 227,514   

Non-U.S.

     214,748         88,520         21,302   
  

 

 

    

 

 

    

 

 

 

Total income before provision for income taxes

   $ 1,007,647       $ 627,127       $ 248,816   
  

 

 

    

 

 

    

 

 

 

The provision for income taxes was as follows (in thousands):

 

     Fiscal Years Ended  
     March 29,
2014
    March 30,
2013
    March 31,
2012
 

Current

      

U.S. Federal

   $ 295,159      $ 179,014      $ 79,690   

U.S. State

     50,348        32,249        20,916   

Non-U.S.

     30,560        15,040        8,575   
  

 

 

   

 

 

   

 

 

 

Total current

     376,067        226,303        109,181   
  

 

 

   

 

 

   

 

 

 

Deferred

      

U.S. Federal

     (24,847     1,246        (4,128

U.S. State

     (3,594     2,088        (3,595

Non-U.S.

     (1,464     (112     (6
  

 

 

   

 

 

   

 

 

 

Total deferred

     (29,905     3,222        (7,729
  

 

 

   

 

 

   

 

 

 

Total provision for income taxes

   $ 346,162      $ 229,525      $ 101,452   
  

 

 

   

 

 

   

 

 

 

The following table summarizes the significant differences between the United States Federal statutory tax rate and the Company’s effective tax rate for financial statement purposes:

 

     Fiscal Years Ended  
     March 29,
2014
    March 30,
2013
    March 31,
2012
 

Federal tax at 35% statutory rate

     35.0     35.0     35.0

State and local income taxes, net of federal benefit

     2.3     3.6     4.8

Differences in tax effects on foreign income

     -3.9     -3.1     -1.3

Foreign tax credit

     -0.2     -0.2     -0.6

Liability for uncertain tax positions

     0.8     0.5     0.2

Effect of changes in valuation allowances on deferred tax assets

     -0.2     0.3     1.8

Other

     0.6     0.5     0.9
  

 

 

   

 

 

   

 

 

 
     34.4     36.6     40.8
  

 

 

   

 

 

   

 

 

 

 

Significant components of the Company’s deferred tax assets (liabilities) consist of the following (in thousands):

 

     March 29,
2014
    March 30,
2013
 

Deferred tax assets

    

Inventories

   $ 11,380      $ 8,469   

Payroll related accruals

     4,722        1,188   

Deferred rent

     24,281        16,209   

Deferred Revenue

     2,389        —     

Net operating loss carryforwards

     7,743        8,508   

Stock compensation

     14,117        8,909   

Sales allowances

     7,654        —     

Other

     9,589        2,331   
  

 

 

   

 

 

 
     81,875        45,614   

Valuation allowance

     (8,020     (8,746
  

 

 

   

 

 

 

Total deferred tax assets

     73,855        36,868   
  

 

 

   

 

 

 

Deferred tax liabilities

    

Goodwill and intangibles

     (24,324     (14,780

Depreciation

     (20,691     (20,927

Other

     (526     (1,455
  

 

 

   

 

 

 

Total deferred tax liabilities

     (45,541     (37,162
  

 

 

   

 

 

 

Net deferred tax (liability) assets

   $ 28,314      $ (294
  

 

 

   

 

 

 

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 were increased by approximately $0.9 million in Fiscal 2014, $1.6 million in Fiscal 2013, and $4.4 million in Fiscal 2012. As a result of the attainment and expectation of achieving profitable operations in certain countries comprising the Company’s European operations and certain state jurisdictions in the United States, for which deferred tax valuation allowances had been previously established, the Company released valuation allowances amounting to approximately $1.6 million in Fiscal 2014, $1.1 million in Fiscal 2013, and $0.2 million in Fiscal 2012.

The Company has non-U.S. net operating loss carryforwards of approximately $27.4 million that will begin to expire in 2017.

As of March 29, 2014, the Company has accrued a liability of approximately $19.0 million related to uncertain tax positions, which includes accrued interest, which is included in other long-term liabilities in the consolidated balance sheets.

 

The total amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was approximately $18.1 million at March 29, 2014, approximately $6.6 million at March 30, 2013, and approximately $1.8 million at March 31, 2012. A reconciliation of the beginning and ending amounts of unrecognized tax benefits, excluding accrued interest, for Fiscal 2014, Fiscal 2013, and Fiscal 2012, are presented below (in thousands):

 

     March 29,
2014
    March 30,
2013
    March 31,
2012
 

Unrecognized tax benefits beginning balance

   $ 6,628      $ 1,758      $ 939   

Additions related to prior period tax positions

     2,515        3,318        246   

Additions related to current period tax positions

     9,312        2,482        573   

Decreases from prior period positions

     (368     (930     —     
  

 

 

   

 

 

   

 

 

 

Unrecognized tax benefits ending balance

   $ 18,087      $ 6,628      $ 1,758   
  

 

 

   

 

 

   

 

 

 

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 for Fiscal 2014, Fiscal 2013, and Fiscal 2012 was approximately $0.9 million, $0.3 million, and $0.1 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 audits and/or the expiration of applicable statutes of limitations. The Company files income tax returns in the United States, 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 April 3, 2010.

The total amount of undistributed earnings of United States and other non-U.S. subsidiaries as of March 29, 2014 was approximately $1,317.0 million. With the exception of one of the Company’s non-U.S. subsidiaries, it is the Company’s intention to permanently reinvest undistributed earnings of the remainder of its United States and non-U.S. subsidiaries and thereby indefinitely postpone their remittance. Deferred taxes are not provided on undistributed earnings of those subsidiaries that are indefinitely reinvested, and as such, no provision has been made for withholding taxes or income taxes for those subsidiaries. For the non-U.S. subsidiary whose earnings the Company does not intend to permanently reinvest, a deferred tax liability related to its undistributed earnings has been established, reflecting the potential future income tax liability upon distribution.

For the remainder of the Company’s undistributed earnings not currently provided for, income taxes may become payable if undistributed earnings of those subsidiaries are paid as dividends, and as such, deferred liabilities would be recognized upon contemplation of the distribution of those earnings.

Retirement Plans
Retirement Plans

15. 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. For the years ended March 29, 2014, March 30, 2013, and March 31, 2012, the Company recognized expense of approximately $3.5 million. $2.2 million and $1.6 million, respectively, related to these retirement plans.

Segment Information
Segment Information

16. Segment Information

The Company operates its business through three operating segments—Retail, Wholesale and Licensing—which are based on its business activities and organization. The operating segments are segments of the Company for which separate financial information is available and for which operating results are evaluated regularly by executive management in deciding how to allocate resources, as well as in assessing performance. The primary key performance indicators are net sales or revenue (in the case of Licensing) 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. Sales of the Company’s products through Company owned stores for the Retail segment include “Collection,” “Lifestyle” including “concessions,” and outlet stores located throughout North America, Europe, and Japan. Products sold through the Retail segment include women’s apparel, accessories (which include handbags and small leather goods such as wallets), footwear and licensed products, such as watches, fragrances and eyewear. The Wholesale segment includes sales primarily to major department stores and specialty shops throughout North America and Europe. Products sold through the Wholesale segment include accessories (which include handbags and small leather goods such as wallets), footwear and women’s and men’s apparel. The Licensing segment includes royalties earned on licensed products and use of the Company’s trademarks, and rights granted to third parties for the right to sell the Company’s products in certain geographical regions such as South Korea, the Philippines, Singapore, Malaysia, Indonesia, Australia, the Middle East, Russia, Turkey, China, Hong Kong, Macau, Taiwan, Latin America and the Caribbean, and India. 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.

The Company has allocated $12.1 million and $1.9 million of its recorded goodwill to its Wholesale and Licensing segments, respectively. The Company does not have identifiable assets separated by segment. The following table presents the key performance information of the Company’s reportable segments (in thousands):

 

     Fiscal Years Ended  
     March 29,
2014
     March 30,
2013
     March 31,
2012
 

Revenue:

        

Net sales: Retail

   $ 1,593,005       $ 1,062,642       $ 626,940   

Wholesale

     1,577,517         1,032,115         610,160   

Licensing

     140,321         86,975         65,154   
  

 

 

    

 

 

    

 

 

 

Total revenue

   $ 3,310,843       $ 2,181,732       $ 1,302,254   
  

 

 

    

 

 

    

 

 

 

Income from operations:

        

Retail

   $ 467,248       $ 315,654       $ 121,851   

Wholesale

     459,774         269,323         85,000   

Licensing

     81,149         45,037         40,831   
  

 

 

    

 

 

    

 

 

 

Income from operations

   $ 1,008,171       $ 630,014       $ 247,682   
  

 

 

    

 

 

    

 

 

 

Depreciation and amortization expense for each segment are as follows (in thousands):

 

     Fiscal Years Ended  
     March 29,
2014
     March 30,
2013
     March 31,
2012
 

Depreciation:

        

Retail(1)

   $ 46,679       $ 35,388       $ 25,293   

Wholesale

     32,364         18,531         12,012   

Licensing

     611         372         249   
  

 

 

    

 

 

    

 

 

 

Total depreciation

   $ 79,654       $ 54,291       $ 37,554   
  

 

 

    

 

 

    

 

 

 

 

(1) Excluded in the above table are impairment charges related to the retail segment for $1.3 million, $0.7 million, and $3.3 million, during the fiscal years ended March 29, 2014, March 30, 2013, and March 31, 2012, respectively.

 

Total revenue (as recognized based on country of origin), and long-lived assets by geographic location of the consolidated Company are as follows (in thousands):

 

     Fiscal Years Ended  
     March 29,
2014
     March 30,
2013
     March 31,
2012
 

Net revenues:

        

North America (U.S. and Canada)

   $ 2,771,818       $ 1,938,635       $ 1,183,234   

Europe

     500,478         220,724         108,790   

Other regions

     38,547         22,373         10,230   
  

 

 

    

 

 

    

 

 

 

Total net revenues

   $ 3,310,843       $ 2,181,732       $ 1,302,254   
  

 

 

    

 

 

    

 

 

 

 

     As of  
     March 29,
2014
     March 30,
2013
 

Long-lived assets:

     

North America (U.S. and Canada)

   $ 283,162       $ 209,973   

Europe

     108,074         46,154   

Other regions

     7,476         6,966   
  

 

 

    

 

 

 

Total Long-lived assets:

   $ 398,712       $ 263,093   
  

 

 

    

 

 

 
Selected Quarterly Financial Information (Unaudited)
Selected Quarterly Financial Information (Unaudited)

18. Selected Quarterly Financial Information (Unaudited)

The following table summarizes the Fiscal 2014 and 2013 quarterly results (dollars in thousands):

 

     Fiscal Quarter Ended  
     June      September      December      March  

Year Ended March 29, 2014

           

Total Revenue

   $ 640,859       $ 740,303       $ 1,012,229       $ 917,452   

Gross profit

   $ 397,271       $ 449,875       $ 619,498       $ 549,426   

Income from operations

   $ 197,562       $ 221,460       $ 343,240       $ 245,909   

Net income

   $ 124,996       $ 145,808       $ 229,643       $ 161,038   

Weighted average ordinary shares outstanding:

           

Basic

     201,208,189         202,560,870         203,175,380         203,387,343   

Diluted

     204,336,124         205,154,692         206,088,062         206,973,550   

Year Ended March 30, 2013

           

Total Revenue

   $ 414,865       $ 532,935       $ 636,778       $ 597,154   

Gross profit

   $ 251,000       $ 315,900       $ 383,451       $ 356,215   

Income from operations

   $ 111,943       $ 157,928       $ 204,839       $ 155,304   

Net income

   $ 68,645       $ 97,828       $ 130,028       $ 101,101   

Weighted average ordinary shares outstanding:

           

Basic

     192,790,454         194,323,935         199,291,480         200,080,126   

Diluted

     199,391,127         200,192,291         202,817,811         203,785,123   
Summary of Significant Accounting Policies (Policies)

Use of Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to use judgment and make estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The level of uncertainty in estimates and assumptions increases with the length of time until the underlying transactions are completed. The most significant assumptions and estimates involved in preparing the financial statements include allowances for customer deductions, sales returns, sales discounts and doubtful accounts, estimates of 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.

Revenue Recognition

The Company recognizes retail store revenues upon sale of its products to retail consumers, net of estimated returns. Wholesale revenue is recognized net of estimates for sales returns, discounts and allowances, after merchandise is shipped and title and risk of loss is 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, trade discounts, markdowns, allowances and operational chargebacks, as well as for certain cooperative selling expenses.

 

The following table details the activity and balances of the Company’s sales reserves for the fiscal years ended March 29, 2014, March 30, 2013, and March 31, 2012 (in thousands):

 

Retail

   Balance
  Beginning  
of Year
     Amounts
  Charged to  
Revenue
       Write-offs  
Against
Reserves
    Balance
at
  Year End  
 

Return Reserves:

          

Year ended March 29, 2014

   $ 3,146       $ 45,632       $ (46,458   $ 2,320   

Year ended March 30, 2013

   $ 1,659       $ 35,448       $ (33,961   $ 3,146   

Year ended March 31, 2012

   $   2,313       $   23,580       $ (24,234   $   1,659   

 

Wholesale

   Balance
  Beginning  
of Year
     Amounts
  Charged to  
Revenue
       Write-offs  
Against
Reserves
    Balance
at
  Year End  
 

Total Sales Reserves:

          

Year ended March 29, 2014

   $ 43,009       $ 203,465       $ (180,553   $ 65,921   

Year ended March 30, 2013

   $ 30,381       $ 135,450       $ (122,822   $ 43,009   

Year ended March 31, 2012

   $ 25,180       $ 114,577       $ (109,376   $ 30,381   

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 specific licensing agreements is recognized as 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.

Advertising

Advertising costs are charged to expense when incurred and are reflected in general and administrative expenses. For the years ended March 29, 2014, March 30, 2013, and March 31, 2012, advertising expense was $65.7 million, $41.9 million and $31.4 million, 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 2014, Fiscal 2013, and Fiscal 2012, were $7.3 million, $5.1 million and $4.3 million, respectively.

Shipping and Handling

Shipping and handling costs amounting to $78.6 million, $29.1 million and $19.7 million for Fiscal 2014, Fiscal 2013, and Fiscal 2012, respectively, are included in selling, general and administrative expenses in the statements of operations.

Cash and Cash Equivalents

All highly liquid investments with original maturities of three months or less are considered to be cash equivalents.

Inventories

Inventories consist of finished goods and are stated at the lower of cost or market 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, Holland, Canada, Japan and Hong Kong. The Company adjusts its inventory to reflect situations in which the cost of inventory is not expected to be fully recovered. These adjustments are estimates, which could vary significantly from actual results if future economic conditions, customer demand or competition differ from expectations. For the periods presented, there were no significant adjustments related to unsalable inventory.

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 provided 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, and computer hardware and software are depreciated over three to five years. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated remaining useful lives of the related assets or remaining lease term. The Company includes all its amortization and depreciation 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.

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 years.

Maintenance and repairs are charged to expense in the year incurred. Cost and related accumulated depreciation for property and equipment are removed from the accounts upon their sale or disposition and the resulting gain or loss is reflected in the results of operations.

Internal-use Software

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 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, identification and testing of alternatives, are expensed as incurred.

Intangible Assets

Intangible assets consist of trademarks and lease rights and are stated at cost less accumulated amortization. Trademarks are amortized over twenty years and lease rights are amortized over the term of the related lease agreements on a straight-line basis.

Impairment of Long-lived Assets

The Company evaluates its long-lived assets, including fixed assets and intangible assets with finite useful lives, for impairment whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable. 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

On an annual basis, the Company evaluates goodwill for impairment during the Company’s fourth quarter of its fiscal year or whenever impairment indicators exist. Judgments regarding the existence of impairment indicators are based on market conditions and operational performance of the business. Future events could cause the Company to conclude that impairment indicators exist, and, therefore, that goodwill may be impaired. To the extent that the fair value associated with the goodwill is less than its carrying amount, the Company writes down the carrying amount of the goodwill to its fair value.

Prior to Fiscal 2012 the Company assessed goodwill for impairment by calculating the fair value of the Company’s reporting units to which goodwill has been allocated using the discounted cash flow method along with the market multiples method. During Fiscal 2012, the Company adopted a new accounting pronouncement related to goodwill impairment analysis, which allows entities to initially perform a qualitative analysis (“step zero”) of the fair value of its reporting units to determine whether it is necessary to undertake a quantitative (“two step”) goodwill analysis. In the fourth quarter of Fiscal 2014, the Company continued to follow this guidance with respect to its annual impairment analysis for goodwill, and concluded that the carrying amounts of all reporting units were significantly exceeded by their respective fair values, and thus performing any further analysis (e.g. two step) was unnecessary.

The Company will continue to perform the aforementioned qualitative analysis (step zero) in future fiscal years as its first step in goodwill impairment assessment. Should the results of this assessment result in either an ambiguous or unfavorable conclusion the Company will perform additional quantitative testing consistent with the fair value approach mentioned above. The valuation methods used in the fair value approach, 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 carrying amount of a reporting unit exceeds its fair value, the Company would compare the implied fair value of the reporting unit goodwill with its carrying value. To compute the implied fair value, the Company would assign the fair value of the reporting unit to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination. The excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. If the carrying value of the reporting unit goodwill exceeded the implied fair value of the reporting unit goodwill, the Company would record an impairment loss to write down such goodwill to its implied fair value. The valuation of goodwill is affected by, among other things, the Company’s business plan for the future and estimated results of future operations.

Joint Venture Investments

The Company accounts for investments in joint ventures as equity investments and records them in other assets in the Company’s consolidated balance sheets. During Fiscal 2013, the Company made a non-recourse loan to the Company’s sole joint venture (which resides in Latin America), for approximately $6.0 million, which accrues at a 5% annual rate. The purpose of the loan was to provide working capital for the joint venture’s operations. The $6.0 million loan is repayable at the time of the expiration of the joint venture agreement, along with accrued interest payable at the expiration date. The loan, along with accrued interest, are recorded in other assets in the Company’s consolidated balance sheets.

Share-based Compensation

The Company grants share-based awards to certain employees and directors of the Company. Awards are measured at the grant date based on the fair value as calculated using the Black-Scholes option pricing model, for share options, or the closing market price at the grant date for restricted shares and units. These fair values are recognized as expense over the requisite service period, based on attainment of certain vesting requirements for performance grants, or the passage of time for those grants which have time-based vesting requirements. Determining the fair value of share-based awards at the grant date requires considerable judgment, including estimating expected volatility, expected term and risk-free rate.

The Company’s expected volatility is based on the average volatility rates of similar actively traded companies over the past 4.5-9.5 years, which is the Company’s range of estimated expected holding periods. The expected holding period for options which vest based on performance requirements are based on the period to expiration which is generally 9-10 years, which directly correlates to the Company’s service period requirement for such options. Generally, the expected holding period for time-based vesting options (no performance requirements) are calculated using the simplified method which uses the vesting term of the options, generally 4 years, and the contractual term of 7 years, resulting in a holding period of 4.5-4.75 years. The simplified method was chosen as a means to determine the Company’s estimated holding period as prior to December 2011, the Company was privately held and as such there is insufficient historical option exercise experience. The risk-free rate is derived from the zero-coupon U.S. Treasury Strips yield curve, the period of which relates to the grant’s estimated holding period. If factors change and the Company employs different assumptions, the fair value of future awards and resulting share-based compensation expense may differ significantly from what the Company has estimated in the past.

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 have been translated using period-end exchange rates, and revenues and expenses have been translated using average exchange rates over the reporting period. The adjustments resulting from translation have been recorded separately in shareholders’ equity as a component of accumulated other comprehensive loss. Foreign currency transaction 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 the consolidated statements of operations.

Derivative Financial Instruments

The Company uses forward 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 these transactions. The Company employs these forward currency contracts to hedge the Company’s cash flows, as they relate to foreign currency transactions, of which certain of these contracts are designated as hedges for accounting purposes, while others are undesignated hedges for hedge accounting purposes. These derivative instruments are recorded in the Company’s consolidated balance sheets at fair value, regardless of if they are designated or undesignated as hedges.

Prior to the Company’s third fiscal 2013 quarter ended December 29, 2012, the Company did not designate these instruments as hedges for hedge accounting purposes. During the third Fiscal 2013 quarter, the Company elected to designate contracts entered into during and subsequent to that quarter as hedges for hedge accounting purposes, for contracts related to the purchase of inventory. Accordingly, the effective portion of changes in the fair value for contracts entered into during Fiscal 2014, are recorded in equity as a component of accumulated other comprehensive loss, and to cost of sales for any portion of those contracts deemed ineffective. The Company will continue to record changes in the fair value of hedge designated contracts in this manner until their maturity, where the unrealized gain or loss will be recognized into earnings in that period. For those contracts entered into, currently and in the future, that are not, and will not be designated as hedges, changes in the fair value, as of each balance sheet date and upon maturity, are recorded in cost of sales or operating expenses, within the Company’s consolidated statements of operations, as applicable to the transactions for which the forward exchange contracts were intended to hedge. During Fiscal 2014, a net realized loss related to the change in fair value of those contracts not designated as hedges, were de minimis. In addition, the net unrealized loss related to those contracts designated as hedges during Fiscal 2014 of $2.9 million, was charged to equity as a component of accumulated other comprehensive loss. During Fiscal 2014, amounts related to the ineffectiveness of these contracts were de minimis. The company expects that substantially all the amounts currently residing in accumulated other comprehensive loss to be reclassified into earnings during the next twelve months, based upon the timing of inventory purchases and turns. These amounts are subject to fluctuations in the applicable currency exchange rates.

The following table details the fair value of these contracts as of March 29, 2014, and March 30, 2013 (in thousands):

 

     March 29,
2014
    March 30,
2013
 

Prepaid expenses and other current assets

   $ 12      $ 1,367   

Accrued expenses and other current liabilities

   $ (1,875   $ (71

The Company is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. In attempts to mitigate counterparty credit risk, the Company 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. The notional amount of these contracts outstanding at March 29, 2014 was approximately $155.1 million, which was comprised predominately of those designated as hedges.

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.

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. 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. Accordingly, rent expense charged to operations differs from rent paid, resulting in the Company recording deferred rent, which is classified as a long-term liability in the Company’s consolidated balance sheets. The recognition of rent expense for a given operating lease commences on the earlier of the lease commencement date or the date of possession of the property. 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.

Deferred Financing Costs

The Company defers costs directly associated with acquiring third party financing. These deferred costs are amortized on a straight-line basis, which approximates the effective interest method, as interest expense over the term of the related indebtedness. As of March 29, 2014, deferred financing costs were $2.9 million, net of accumulated amortization of $2.8 million, and as of March 30, 2013, deferred financing costs were $3.4 million, net of accumulated amortization of $2.0 million. Deferred financing costs are included in other assets on the consolidated balance sheets.

Net Income Per Share

The Company reported earnings per share in conformity with the two-class method for calculating and presenting earnings per share for fiscal years prior to Fiscal 2013, due to the existence of both ordinary and convertible preference securities in those periods. Under the two-class method, basic net income per ordinary share is computed by dividing the net income available to ordinary shareholders by the weighted-average number of ordinary shares outstanding during the period. Net income available to shareholders is determined by allocating undistributed earnings between holders of ordinary and convertible preference shares, based on the participation rights of the preference shares. Diluted net income per share is computed by dividing the net income available to both ordinary and preference shareholders by the weighted-average number of dilutive shares outstanding during the period.

The Company’s basic net income per share excludes the dilutive effect of share options and unvested restricted shares. It is based upon the weighted average number of ordinary shares outstanding during the period divided into net income.

Diluted net income per share reflects the potential dilution that would occur if share option grants or any other dilutive equity instruments were exercised or converted into ordinary shares. These equity instruments are included as potential dilutive securities to the extent they are dilutive under the treasury stock method for the applicable periods.

For the purposes of basic and diluted net income per share, as a result of the reorganization and exchange during July 2011, weighted average shares outstanding for fiscal year 2012 reflect the exchange of ordinary shares for the newly issued ordinary and convertible preference shares as described in Note 2, as if such reorganization and exchange had occurred at the beginning of that fiscal year. In addition, as a result of the 3.8-to-1 share split, which was completed on November 30, 2011, weighted average shares outstanding for Fiscal 2012 reflect the split as if it had occurred at the beginning of that fiscal year.

The components of the calculation of basic net income per ordinary share and diluted net income per ordinary share are as follows (in thousands except share and per share data):

 

     Fiscal Years Ended  
     March 29,
2014
     March 30,
2013
     March 31,
2012
 

Numerator:

        

Net Income

   $ 661,485       $ 397,602       $ 147,364   

Net income applicable to preference shareholders

     —          —          21,227  
  

 

 

    

 

 

    

 

 

 
   $ 661,485       $ 397,602       $ 126,137   
  

 

 

    

 

 

    

 

 

 

Denominator:

        

Basic weighted average ordinary shares

     202,582,945        196,615,054        158,258,126  

Weighted average dilutive share equivalents:

        

Share options and restricted shares/units

     3,055,162        4,925,090        2,628,650  

Convertible preference shares

     —          —          28,412,421  
  

 

 

    

 

 

    

 

 

 

Diluted weighted average ordinary shares

     205,638,107        201,540,144        189,299,197  

Basic net income per ordinary share

   $ 3.27       $ 2.02       $ 0.80   
  

 

 

    

 

 

    

 

 

 

Diluted net income per ordinary share

   $ 3.22       $ 1.97       $ 0.78   
  

 

 

    

 

 

    

 

 

 

Share equivalents for 44,256 shares, 7,341 shares, and 343,787 shares, for fiscal years ending March 29, 2014, March 30, 2013, and March 31, 2012, have been excluded from the above calculation due to their anti-dilutive effect.

Recent Accounting Pronouncements—The Company has considered all new accounting pronouncements and, other than the new pronouncement described below, has concluded that there are no new pronouncements that have a material impact on results of operations, financial condition, or cash flows, based on current information.

During the fiscal quarter ended June 29, 2013, the Company adopted the provisions of Accounting Standard Update 2013-02 “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (“ASU 2013-02”) which the Financial Accounting Standards Board (“FASB”) issued in February 2013. ASU 2013-02 requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. The ASU is effective for annual periods and interim periods within those periods beginning after December 15, 2012.

Summary of Significant Accounting Policies (Tables)

The following table details the activity and balances of the Company’s sales reserves for the fiscal years ended March 29, 2014, March 30, 2013, and March 31, 2012 (in thousands):

 

Retail

   Balance
  Beginning  
of Year
     Amounts
  Charged to  
Revenue
       Write-offs  
Against
Reserves
    Balance
at
  Year End  
 

Return Reserves:

          

Year ended March 29, 2014

   $ 3,146       $ 45,632       $ (46,458   $ 2,320   

Year ended March 30, 2013

   $ 1,659       $ 35,448       $ (33,961   $ 3,146   

Year ended March 31, 2012

   $   2,313       $   23,580       $ (24,234   $   1,659   

 

Wholesale

   Balance
  Beginning  
of Year
     Amounts
  Charged to  
Revenue
       Write-offs  
Against
Reserves
    Balance
at
  Year End  
 

Total Sales Reserves:

          

Year ended March 29, 2014

   $ 43,009       $ 203,465       $ (180,553   $ 65,921   

Year ended March 30, 2013

   $ 30,381       $ 135,450       $ (122,822   $ 43,009   

Year ended March 31, 2012

   $ 25,180       $ 114,577       $ (109,376   $ 30,381   

The following table details the fair value of these contracts as of March 29, 2014, and March 30, 2013 (in thousands):

 

     March 29,
2014
    March 30,
2013
 

Prepaid expenses and other current assets

   $ 12      $ 1,367   

Accrued expenses and other current liabilities

   $ (1,875   $ (71

The components of the calculation of basic net income per ordinary share and diluted net income per ordinary share are as follows (in thousands except share and per share data):

 

     Fiscal Years Ended  
     March 29,
2014
     March 30,
2013
     March 31,
2012
 

Numerator:

        

Net Income

   $ 661,485       $ 397,602       $ 147,364   

Net income applicable to preference shareholders

     —          —          21,227  
  

 

 

    

 

 

    

 

 

 
   $ 661,485       $ 397,602       $ 126,137   
  

 

 

    

 

 

    

 

 

 

Denominator:

        

Basic weighted average ordinary shares

     202,582,945        196,615,054        158,258,126  

Weighted average dilutive share equivalents:

        

Share options and restricted shares/units

     3,055,162        4,925,090        2,628,650  

Convertible preference shares

     —          —          28,412,421  
  

 

 

    

 

 

    

 

 

 

Diluted weighted average ordinary shares

     205,638,107        201,540,144        189,299,197  

Basic net income per ordinary share

   $ 3.27       $ 2.02       $ 0.80   
  

 

 

    

 

 

    

 

 

 

Diluted net income per ordinary share

   $ 3.22       $ 1.97       $ 0.78   
  

 

 

    

 

 

    

 

 

 
Receivables (Tables)
Receivables, net

Receivables consist of (in thousands):

 

     March 29,
2014
    March 30,
2013
 

Trade receivables:

    

Credit risk assumed by factors/insured

   $ 261,900      $ 199,677   

Credit risk retained by Company

     109,094        45,588   

Receivables due from licensees

     11,302        7,344   
  

 

 

   

 

 

 
     382,296        252,609   

Less allowances:

     (68,241     (46,155
  

 

 

   

 

 

 
   $ 314,055      $ 206,454   
  

 

 

   

 

 

 
Property and Equipment, Net (Tables)
Property and Equipment, Net

Property and equipment, net, consists of (in thousands):

 

     March 29,
2014
    March 30,
2013
 

Furniture and fixtures

   $ 108,757      $ 76,336   

Equipment

     31,683        13,276   

Computer equipment and software

     50,646        29,429   

In-store shops

     123,637        78,809   

Leasehold improvements

     216,451        168,306   
  

 

 

   

 

 

 
     531,174        366,156   

Less: accumulated depreciation and amortization

     (234,381     (165,340
  

 

 

   

 

 

 
     296,793        200,816   

Construction-in-progress

     53,885        41,297   
  

 

 

   

 

 

 
   $ 350,678      $ 242,113   
  

 

 

   

 

 

 
Intangible Assets and Goodwill (Tables)

The following table discloses the carrying values of intangible assets and goodwill (in thousands):

 

     March 29, 2014      March 30, 2013  
     Gross
Carrying
Amount
     Accumulated
Amortization
     Net      Gross
Carrying
Amount
     Accumulated
Amortization
     Net  

Trademarks

   $ 23,000       $ 12,845       $ 10,155       $ 23,000       $ 11,693       $ 11,307   

Lease Rights

     41,748         3,869         37,879         11,548         1,875         9,673   

Goodwill

     14,005         —           14,005         14,005         —           14,005   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 78,753       $ 16,714       $ 62,039       $ 48,553       $ 13,568       $ 34,985   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Estimated amortization expense for each of the next five years is as follows (in thousands):

 

Fiscal 2015

   $ 6,606   

Fiscal 2016

     6,779   

Fiscal 2017

     6,774   

Fiscal 2018

     6,740   

Fiscal 2019

     6,646   

Thereafter

     14,489   
  

 

 

 
   $ 48,034   
  

 

 

 
Accrued Expenses and Other Current Liabilities (Tables)
Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of (in thousands):

 

     March 29,
2014
     March 30,
2013
 

Professional services

   $ 6,319       $ 4,041   

Advance royalty

     2,097         1,094   

Inventory purchases

     12,408         5,040   

Sales tax payable

     17,321         7,635   

Unrealized loss on foreign exchange contracts

     1,813         334   

Advertising

     4,810         3,013   

Accrued rent

     14,159         3,787   

Other

     15,402         8,611   
  

 

 

    

 

 

 
   $ 74,329       $ 33,555   
  

 

 

    

 

 

 
Commitments and Contingencies (Tables)

Rent expense for the Company’s operating leases for the fiscal years then ended consist of the following (in thousands):

 

     March 29,
2014
     March 30,
2013
     March 31,
2012
 

Minimum rentals

   $ 107,071       $ 74,708       $ 61,364   

Contingent rent

     56,299         29,871         11,209   
  

 

 

    

 

 

    

 

 

 

Total rent expense

   $ 163,370       $ 104,579       $ 72,573   
  

 

 

    

 

 

    

 

 

 

Future minimum lease payments under the terms of these noncancelable operating lease agreements are as follows (in thousands):

 

Fiscal year ending

  

2015

   $ 133,892   

2016

     133,191   

2017

     131,619   

2018

     128,228   

2019

     116,553   

Thereafter

     436,718   
  

 

 

 
   $ 1,080,201   
  

 

 

 
Fair Value of Financial Instruments (Tables)
Contracts Categorized in Level 2 of Fair Value Hierarchy

All contracts are categorized in Level 2 of the fair value hierarchy as shown in the following table:

 

           Fair value at March 29, 2014, using:  
(In thousands)    Total     Quoted prices in
active markets for
identical assets

(Level 1)
     Significant other
observable inputs
(Level 2)
    Significant
unobservable
inputs
(Level 3)
 

Foreign currency forward contracts - Euro to U.S. Dollar

   $ (1,875   $ —         $ (1,875   $ —     

Foreign currency forward contracts - U.S. Dollar to Euro

     12        —           12        —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ (1,863   $ —         $ (1,863   $ —     
  

 

 

   

 

 

    

 

 

   

 

 

 
Other Comprehensive Income- Hedging Instruments (Tables)
Impact of Effective Portion of Losses of Forward Contracts Designated as Hedges

The following table summarizes the impact of the effective portion of the losses of the forward contracts designated as hedges for the fiscal year ended March 29, 2014 (in thousands):

 

     Fiscal Year Ended March 29, 2014  
     Pre-Tax
(Loss)
Recognized
in OCI
(Effective Portion)
    Loss
Reclassified from
Accumulated OCI
into Earnings
(Effective  Portion)
 

Forward currency exchange contracts

   $ (3,257   $ (540
Share-Based Compensation (Tables)

The following table summarizes the share options activity during Fiscal 2014, and information about options outstanding at March 29, 2014:

 

     Number of
Options
    Weighted
Average
Exercise price
     Weighted
Average
Remaining
Contractual
Life (years)
     Aggregate
Intrinsic
Value
(in thousands)
 

Outstanding at March 30, 2013

     10,381,342      $ 9.21         

Granted

     623,098      $ 62.70         

Exercised

     (2,586,283   $ 7.36         

Canceled/forfeited

     (40,229   $ 24.35         
  

 

 

         

Outstanding at March 29, 2014

     8,377,928      $ 13.69         6.18       $ 662,388   
  

 

 

   

 

 

    

 

 

    

 

 

 

Vested or expected to vest at March 29, 2014

     8,210,369      $ 13.69         6.18      
  

 

 

   

 

 

    

 

 

    

 

 

 

Vested and exercisable at March 29, 2014

     2,295,526      $ 9.57         5.49       $ 190,945   
  

 

 

   

 

 

    

 

 

    

 

 

 

The following table represents assumptions used to estimate the fair value of options:

 

     Fiscal Year Ended  
     March 29,
2014
    March 30,
2013
    March 31,
2012
 

Expected dividend yield

     0.0     0.0     0.0

Volatility factor

     46.0     48.5     46.5

Weighted average risk-free interest rate

     1.0     0.6     1.8

Expected life of option

     4.75 years        4.75 years        7.8 years   

The following table summarizes restricted shares under the 2012 Plan as of March 29, 2014 and changes during the fiscal period then ended:

 

     Number of Unvested
Restricted Shares
    Weighted
Average Grant
Date Fair Value
 

Unvested at March 30, 2013

     617,468      $ 23.66   

Granted

     255,850      $ 62.89   

Vested

     (208,283   $ 23.32   

Canceled/forfeited

     (7,182   $ 39.60   
  

 

 

   

Unvested at March 29, 2014

     657,853      $ 38.38   
  

 

 

   

 

The following table summarizes restricted share units under the 2012 Plan as of March 29, 2014 and changes during the fiscal period then ended:

 

     Number of Unvested
Restricted Units
    Weighted
Average Grant
Date Fair Value
 

Unvested at March 30, 2013

     27,763      $ 31.12   

Granted

     174,002      $ 62.64   

Vested

     (1,986   $ 58.10   

Canceled/forfeited

     —        $ —     
  

 

 

   

Unvested at March 29, 2014

     199,779      $ 58.31   
  

 

 

   
Taxes (Tables)

Income before provision for income taxes consisted of the following (in thousands):

 

     Fiscal Years Ended  
     March 29,
2014
     March 30,
2013
     March 31,
2012
 

United States

   $ 792,899       $ 538,607       $ 227,514   

Non-U.S.

     214,748         88,520         21,302   
  

 

 

    

 

 

    

 

 

 

Total income before provision for income taxes

   $ 1,007,647       $ 627,127       $ 248,816   
  

 

 

    

 

 

    

 

 

 

The provision for income taxes was as follows (in thousands):

 

     Fiscal Years Ended  
     March 29,
2014
    March 30,
2013
    March 31,
2012
 

Current

      

U.S. Federal

   $ 295,159      $ 179,014      $ 79,690   

U.S. State

     50,348        32,249        20,916   

Non-U.S.

     30,560        15,040        8,575   
  

 

 

   

 

 

   

 

 

 

Total current

     376,067        226,303        109,181   
  

 

 

   

 

 

   

 

 

 

Deferred

      

U.S. Federal

     (24,847     1,246        (4,128

U.S. State

     (3,594     2,088        (3,595

Non-U.S.

     (1,464     (112     (6
  

 

 

   

 

 

   

 

 

 

Total deferred

     (29,905     3,222        (7,729
  

 

 

   

 

 

   

 

 

 

Total provision for income taxes

   $ 346,162      $ 229,525      $ 101,452   
  

 

 

   

 

 

   

 

 

 

The following table summarizes the significant differences between the United States Federal statutory tax rate and the Company’s effective tax rate for financial statement purposes:

 

     Fiscal Years Ended  
     March 29,
2014
    March 30,
2013
    March 31,
2012
 

Federal tax at 35% statutory rate

     35.0     35.0     35.0

State and local income taxes, net of federal benefit

     2.3     3.6     4.8

Differences in tax effects on foreign income

     -3.9     -3.1     -1.3

Foreign tax credit

     -0.2     -0.2     -0.6

Liability for uncertain tax positions

     0.8     0.5     0.2

Effect of changes in valuation allowances on deferred tax assets

     -0.2     0.3     1.8

Other

     0.6     0.5     0.9
  

 

 

   

 

 

   

 

 

 
     34.4     36.6     40.8
  

 

 

   

 

 

   

 

 

 

Significant components of the Company’s deferred tax assets (liabilities) consist of the following (in thousands):

 

     March 29,
2014
    March 30,
2013
 

Deferred tax assets

    

Inventories

   $ 11,380      $ 8,469   

Payroll related accruals

     4,722        1,188   

Deferred rent

     24,281        16,209   

Deferred Revenue

     2,389        —     

Net operating loss carryforwards

     7,743        8,508   

Stock compensation

     14,117        8,909   

Sales allowances

     7,654        —     

Other

     9,589        2,331   
  

 

 

   

 

 

 
     81,875        45,614   

Valuation allowance

     (8,020     (8,746
  

 

 

   

 

 

 

Total deferred tax assets

     73,855        36,868   
  

 

 

   

 

 

 

Deferred tax liabilities

    

Goodwill and intangibles

     (24,324     (14,780

Depreciation

     (20,691     (20,927

Other

     (526     (1,455
  

 

 

   

 

 

 

Total deferred tax liabilities

     (45,541     (37,162
  

 

 

   

 

 

 

Net deferred tax (liability) assets

   $ 28,314      $ (294
  

 

 

   

 

 

 

A reconciliation of the beginning and ending amounts of unrecognized tax benefits, excluding accrued interest, for Fiscal 2014, Fiscal 2013, and Fiscal 2012, are presented below (in thousands):

 

     March 29,
2014
    March 30,
2013
    March 31,
2012
 

Unrecognized tax benefits beginning balance

   $ 6,628      $ 1,758      $ 939   

Additions related to prior period tax positions

     2,515        3,318        246   

Additions related to current period tax positions

     9,312        2,482        573   

Decreases from prior period positions

     (368     (930     —     
  

 

 

   

 

 

   

 

 

 

Unrecognized tax benefits ending balance

   $ 18,087      $ 6,628      $ 1,758   
  

 

 

   

 

 

   

 

 

 
Segment Information (Tables)

The following table presents the key performance information of the Company’s reportable segments (in thousands):

 

     Fiscal Years Ended  
     March 29,
2014
     March 30,
2013
     March 31,
2012
 

Revenue:

        

Net sales: Retail

   $ 1,593,005       $ 1,062,642       $ 626,940   

Wholesale

     1,577,517         1,032,115         610,160   

Licensing

     140,321         86,975         65,154   
  

 

 

    

 

 

    

 

 

 

Total revenue

   $ 3,310,843       $ 2,181,732       $ 1,302,254   
  

 

 

    

 

 

    

 

 

 

Income from operations:

        

Retail

   $ 467,248       $ 315,654       $ 121,851   

Wholesale

     459,774         269,323         85,000   

Licensing

     81,149         45,037         40,831   
  

 

 

    

 

 

    

 

 

 

Income from operations

   $ 1,008,171       $ 630,014       $ 247,682   
  

 

 

    

 

 

    

 

 

 

Depreciation and amortization expense for each segment are as follows (in thousands):

 

     Fiscal Years Ended  
     March 29,
2014
     March 30,
2013
     March 31,
2012
 

Depreciation:

        

Retail(1)

   $ 46,679       $ 35,388       $ 25,293   

Wholesale

     32,364         18,531         12,012   

Licensing

     611         372         249   
  

 

 

    

 

 

    

 

 

 

Total depreciation

   $ 79,654       $ 54,291       $ 37,554   
  

 

 

    

 

 

    

 

 

 

 

(1) Excluded in the above table are impairment charges related to the retail segment for $1.3 million, $0.7 million, and $3.3 million, during the fiscal years ended March 29, 2014, March 30, 2013, and March 31, 2012, respectively.

Total revenue (as recognized based on country of origin), and long-lived assets by geographic location of the consolidated Company are as follows (in thousands):

 

     Fiscal Years Ended  
     March 29,
2014
     March 30,
2013
     March 31,
2012
 

Net revenues:

        

North America (U.S. and Canada)

   $ 2,771,818       $ 1,938,635       $ 1,183,234   

Europe

     500,478         220,724         108,790   

Other regions

     38,547         22,373         10,230   
  

 

 

    

 

 

    

 

 

 

Total net revenues

   $ 3,310,843       $ 2,181,732       $ 1,302,254   
  

 

 

    

 

 

    

 

 

 
     As of  
     March 29,
2014
     March 30,
2013
 

Long-lived assets:

     

North America (U.S. and Canada)

   $ 283,162       $ 209,973   

Europe

     108,074         46,154   

Other regions

     7,476         6,966   
  

 

 

    

 

 

 

Total Long-lived assets:

   $ 398,712       $ 263,093   
  

 

 

    

 

 

 
Selected Quarterly Financial Information (Unaudited) (Tables)
Summary of Quarterly Results

The following table summarizes the Fiscal 2014 and 2013 quarterly results (dollars in thousands):

 

     Fiscal Quarter Ended  
     June      September      December      March  

Year Ended March 29, 2014

           

Total Revenue

   $ 640,859       $ 740,303       $ 1,012,229       $ 917,452   

Gross profit

   $ 397,271       $ 449,875       $ 619,498       $ 549,426   

Income from operations

   $ 197,562       $ 221,460       $ 343,240       $ 245,909   

Net income

   $ 124,996       $ 145,808       $ 229,643       $ 161,038   

Weighted average ordinary shares outstanding:

           

Basic

     201,208,189         202,560,870         203,175,380         203,387,343   

Diluted

     204,336,124         205,154,692         206,088,062         206,973,550   

Year Ended March 30, 2013

           

Total Revenue

   $ 414,865       $ 532,935</