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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.
The interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The consolidated financial statements as of September 27, 2014, and for the three and six months ended September 27, 2014 and September 28, 2013, are unaudited. In addition, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. The interim financial statements reflect all normal and recurring adjustments, which are, in the opinion of management, necessary for a fair presentation in conformity with GAAP. The interim financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended March 29, 2014, as filed with the Securities and Exchange Commission on May 28, 2014, in the Company’s Annual Report on Form 10-K. The results of operations for the interim periods should not be considered indicative of results to be expected for the full fiscal year.
The Company utilizes a 52 to 53 week fiscal year ending on the Saturday closest to March 31. As such, the term “Fiscal Year” or “Fiscal” refers to the 52-week or 53-week period, ending on that day. The results for the three and six months ended September 27, 2014 and September 28, 2013, are based on a 13-week and 26-week period, respectively.
During September 2014, the Company completed a secondary offering of 11,629,627 ordinary shares at a price of $76.75 per share. Similar to the Company’s previous offerings, 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 second quarter of Fiscal 2015. As a result of the secondary offering, Sportswear Holdings Limited (the Company’s former parent) no longer has any ownership interest in the Company.
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2. 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.
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, computer hardware and software are depreciated over three to five years, and in-store shops are amortized over three to four years. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated remaining useful lives of the related assets or remaining lease term. The Company includes all 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.
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 on the Company’s consolidated balance sheets at fair value, regardless of if they are designated or undesignated as hedges.
The Company designates the majority of these forward currency contracts as hedges for hedge accounting purposes which are related to the purchase of inventory. Accordingly, the effective portion of changes in the fair value for contracts entered into during the six months ended September 27, 2014, designated as hedges, are recorded in equity as a component of accumulated other comprehensive income, 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 that are entered into that are not designated as hedges, changes in the fair value, as of each balance sheet date and upon maturity, are recorded in other income, within the Company’s consolidated statements of operations. During the six months ended September 27, 2014, a gain of approximately $0.2 million related to the change in fair value of these contracts was recorded in other income. In addition, the net unrealized gain related to contracts designated as hedges for $10.6 million, was charged to equity as a component of accumulated other comprehensive income during the six months ended September 27, 2014. For the six months ended September 27, 2014, amounts related to the ineffectiveness of these contracts were de minimis. The following table details the fair value of these contracts as of September 27, 2014, and March 29, 2014 (in thousands):
September 27, 2014 |
March 29, 2014 |
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Prepaid expenses and other current assets |
$ | 10,604 | $ | 12 | ||||
Accrued expenses and other current liabilities |
$ | (385 | ) | $ | (1,875 | ) |
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 September 27, 2014 was approximately $194.0 million, which was comprised predominately of those designated as hedges.
Net Income Per Share
The Company’s basic net income per share excludes the dilutive effect of share options and units, as well as 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.
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):
Three Months Ended | Six Months Ended | |||||||||||||||
September 27, 2014 |
September 28, 2013 |
September 27, 2014 |
September 28, 2013 |
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Numerator: |
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Net Income |
$ | 206,990 | $ | 145,808 | $ | 394,706 | $ | 270,804 | ||||||||
Denominator: |
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Basic weighted average ordinary shares |
204,464,952 | 202,560,870 | 204,107,262 | 202,686,313 | ||||||||||||
Weighted average dilutive share equivalents: |
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Share options and restricted shares/units |
2,967,298 | 2,593,822 | 3,196,985 | 2,860,878 | ||||||||||||
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Diluted weighted average ordinary shares |
207,432,250 | 205,154,692 | 207,304,247 | 205,547,191 | ||||||||||||
Basic net income per ordinary share |
$ | 1.01 | $ | 0.72 | $ | 1.93 | $ | 1.34 | ||||||||
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Diluted net income per ordinary share |
$ | 1.00 | $ | 0.71 | $ | 1.90 | $ | 1.32 | ||||||||
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Share equivalents for the three and six months ended September 27, 2014 for 231,893 shares and 135,720 shares, respectively, have been excluded from the above calculation as they were anti-dilutive. Share equivalents for the three and six months ended September 28, 2013 for 86,516 shares and 75,116 shares, respectively, have been excluded from the above calculation as they were anti-dilutive.
Recent Accounting Pronouncements—The Company has considered all new accounting pronouncements and, and with the exception of the 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.
In May, 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers, which amends how an entity is currently required to recognize revenue from contracts with its customers. The ASU will replace the existing revenue recognition guidance in GAAP when it becomes effective for entities in January 2017. Early application is not permitted. The Company is currently evaluating the impact that ASU 2014-09 will have on its consolidated financial statements and related disclosures.
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3. Receivables, net
Receivables, net consist of (in thousands):
September 27, 2014 |
March 29, 2014 |
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Trade receivables: |
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Credit risk assumed by factors/insured |
$ | 326,284 | $ | 261,900 | ||||
Credit risk retained by Company |
65,023 | 109,094 | ||||||
Receivables due from licensees |
30,436 | 11,302 | ||||||
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421,743 | 382,296 | |||||||
Less allowances: |
(74,921 | ) | (68,241 | ) | ||||
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$ | 346,822 | $ | 314,055 | |||||
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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 September 27, 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 $1.1 million and $1.5 million, at September 27, 2014 and March 29, 2014, respectively.
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4. Property and Equipment, net
Property and equipment, net consist of (in thousands):
September 27, 2014 |
March 29, 2014 |
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Furniture and fixtures |
$ | 136,046 | $ | 108,757 | ||||
Equipment |
51,619 | 31,683 | ||||||
Computer equipment and software |
75,851 | 50,646 | ||||||
In-store shops |
147,112 | 123,637 | ||||||
Leasehold improvements |
249,951 | 216,451 | ||||||
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660,579 | 531,174 | |||||||
Less: accumulated depreciation and amortization |
(283,087 | ) | (234,381 | ) | ||||
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377,492 | 296,793 | |||||||
Construction-in-progress |
76,344 | 53,885 | ||||||
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$ | 453,836 | $ | 350,678 | |||||
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Depreciation and amortization of property and equipment for the three and six months ended September 27, 2014, was $32.2 million and $59.6 million, respectively, and for the three and six months ended September 28, 2013, was $17.5 million and $33.1 million, respectively.
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5. Intangible Assets and Goodwill
The following table discloses the carrying values of intangible assets and goodwill (in thousands):
September 27, 2014 | March 29, 2014 | |||||||||||||||||||||||
Gross Carrying Amount |
Accumulated Amortization |
Net | Gross Carrying Amount |
Accumulated Amortization |
Net | |||||||||||||||||||
Trademarks |
$ | 23,000 | $ | 13,419 | $ | 9,581 | $ | 23,000 | $ | 12,845 | $ | 10,155 | ||||||||||||
Lease Rights |
50,135 | 6,438 | 43,697 | 41,748 | 3,869 | 37,879 | ||||||||||||||||||
Goodwill |
14,005 | — | 14,005 | 14,005 | — | 14,005 | ||||||||||||||||||
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$ | 87,140 | $ | 19,857 | $ | 67,283 | $ | 78,753 | $ | 16,714 | $ | 62,039 | |||||||||||||
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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 $1.9 million and $3.5 million, respectively, for the three and six months ended September 27, 2014, and $0.5 million and $1.0 million, respectively, for the three and six months ended September 28, 2013.
Goodwill is not amortized but will be evaluated for impairment in the last quarter of Fiscal 2015, or whenever impairment indicators exist. 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):
Remainder of Fiscal 2015 |
$ | 3,946 | ||
Fiscal 2016 |
8,357 | |||
Fiscal 2017 |
8,355 | |||
Fiscal 2018 |
8,321 | |||
Fiscal 2019 |
7,368 | |||
Thereafter |
16,931 | |||
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$ | 53,278 | |||
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6. Credit Facilities
Senior Unsecured Revolving Credit Facility
On February 8, 2013, the Company 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 September 27, 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 at 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. 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 September 27, 2014, there were no amounts outstanding under the 2013 Credit Facility, and there were no amounts borrowed during the six months ended September 27, 2014. The amount available for future borrowings under this agreement was $188.4 million at September 27, 2014. At September 27, 2014, there were stand-by letters of credit of $11.6 million.
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7. Commitments and Contingencies
In the ordinary course of business, the Company is party to various legal proceedings and claims. Although the outcome of such items cannot be determined with certainty, the Company’s management does not believe that the outcome of all pending legal proceedings in the aggregate will have a material adverse effect on its cash flow, results of operations or financial position.
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8. 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 for these purposes 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 2 Summary of Significant Accounting Policies- Derivative Financial Instruments, for further detail regarding hedge accounting treatment as it relates to gains and losses). At September 27, 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 September 27, 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) |
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Foreign currency forward contracts- Euro to U.S. Dollar |
$ | 10,404 | $ | — | $ | 10,404 | $ | — | ||||||||
Foreign currency forward contracts- Canadian Dollar to U.S. Dollar |
200 | — | 200 | — | ||||||||||||
Foreign currency forward contracts- U.S. Dollar to Euro |
(385 | ) | — | (385 | ) | — | ||||||||||
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Total |
$ | 10,219 | $ | — | $ | 10,219 | $ | — | ||||||||
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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.
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9. Other Comprehensive Income- Hedging Instruments
The Company designates certain forward currency exchange contracts as hedges for hedge accounting purposes (see Note 2, 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 gains and losses of the forward contracts designated as hedges for the three and six months ended September 27, 2014 (in thousands):
Three Months Ended September 27, 2014 | Six Months Ended Septeber 27, 2014 | |||||||||||||||
Pre-Tax Gain Recognized in OCI (Effective Portion) |
(Loss) Reclassified from Accumulated OCI into Earnings (Effective Portion) |
Pre-Tax Gain Recognized in OCI (Effective Portion) |
(Loss) Reclassified from Accumulated OCI into Earnings (Effective Portion) |
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Forward currency exchange contracts |
$ | 10,222 | $ | (249 | ) | $ | 11,895 | $ | (1,383 | ) |
The following table summarizes the impact of the effective portion of gains and losses of the forward contracts designated as hedges for the three and six months ended September 28, 2013:
Three Months Ended September 28, 2013 | Six Months Ended Septeber 28, 2013 | |||||||||||||||
Pre-Tax (Loss) Recognized in OCI (Effective Portion) |
Gain Reclassified from Accumulated OCI into Earnings (Effective Portion) |
Pre-Tax (Loss) Recognized in OCI (Effective Portion) |
Gain Reclassified from Accumulated OCI into Earnings (Effective Portion) |
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Forward currency exchange contracts |
$ | (2,892 | ) | $ | 227 | $ | (3,513 | ) | $ | 555 |
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11. 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, jewelry, 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 the South Pacific, the Middle East, Eastern Europe, Latin America and the Caribbean, as well as throughout all of Asia. 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):
Three Months Ended | Six Months Ended | |||||||||||||||
September 27, 2014 |
September 28, 2013 |
September 27, 2014 |
September 28, 2013 |
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Revenue: |
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Net sales: Retail |
$ | 495,579 | $ | 355,573 | $ | 975,821 | $ | 681,245 | ||||||||
Wholesale |
514,090 | 351,871 | 920,885 | 642,447 | ||||||||||||
Licensing |
46,936 | 32,859 | 79,053 | 57,470 | ||||||||||||
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Total revenue |
$ | 1,056,605 | $ | 740,303 | $ | 1,975,759 | $ | 1,381,162 | ||||||||
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Income from operations: |
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Retail |
$ | 127,334 | $ | 103,133 | $ | 270,023 | $ | 206,247 | ||||||||
Wholesale |
156,672 | 98,531 | 274,324 | 179,577 | ||||||||||||
Licensing |
21,552 | 19,796 | 37,982 | 33,198 | ||||||||||||
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Income from operations |
$ | 305,558 | $ | 221,460 | $ | 582,329 | $ | 419,022 | ||||||||
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Depreciation and amortization expense for each segment are as follows (in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||
September 27, 2014 |
September 28, 2013 |
September 27, 2014 |
September 28, 2013 |
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Depreciation and amortization: |
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Retail |
$ | 22,022 | $ | 10,716 | $ | 39,987 | $ | 20,433 | ||||||||
Wholesale |
11,723 | 7,223 | 22,498 | 13,374 | ||||||||||||
Licensing |
319 | 118 | 577 | 225 | ||||||||||||
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Total depreciation and amortization |
$ | 34,064 | $ | 18,057 | $ | 63,062 | $ | 34,032 | ||||||||
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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):
Three Months Ended | Six Months Ended | |||||||||||||||
September 27, 2014 |
September 28, 2013 |
September 27, 2014 |
September 28, 2013 |
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Revenue: |
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North America (U.S. and Canada) |
$ | 802,226 | $ | 618,277 | $ | 1,521,115 | $ | 1,169,831 | ||||||||
Europe |
237,924 | 114,049 | 423,421 | 195,528 | ||||||||||||
Other regions |
16,455 | 7,977 | 31,223 | 15,803 | ||||||||||||
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Total revenue |
$ | 1,056,605 | $ | 740,303 | $ | 1,975,759 | $ | 1,381,162 | ||||||||
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As of | ||||||||
September 27, 2014 |
March 29, 2014 |
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Long-lived assets: |
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North America (U.S. and Canada) |
$ | 357,329 | $ | 283,162 | ||||
Europe |
141,419 | 108,074 | ||||||
Other regions |
8,366 | 7,476 | ||||||
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Total Long-lived assets: |
$ | 507,114 | $ | 398,712 | ||||
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12. Other income
Other income consists of the following (in thousands):
Three Months Ended | Six Months Ended | |||||||
September 27, 2014 |
September 27, 2014 |
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Income earned on joint venture |
$ | (108 | ) | $ | (311 | ) | ||
Income related to anti-counterfeit program |
(898 | ) | (1,038 | ) | ||||
Net unrealized gains on foreign currency forward contracts |
(1,045 | ) | (197 | ) | ||||
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Total Other income |
$ | (2,051 | ) | $ | (1,546 | ) | ||
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There were no amounts related to Other income during the three and six months ended September 28, 2013.
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14. Subsequent Events
On October 24, 2014, the Company purchased an aircraft from a former board member (who resigned on September 10, 2014) in the amount of $16.5 million. The purchase price was the fair market value of the aircraft at the purchase date and was no less favorable to the Company than it would have received in an arm’s-length transaction. The aircraft was purchased for purposes of business travel for the Company’s executives, and was recorded as a fixed asset in the Company’s consolidated balance sheets.
On October 30, 2014, the Company’s Board of Directors authorized a $1.0 billion share repurchase program. The program allows for the repurchasing of the Company’s ordinary shares either in the open market or through privately negotiated transactions. The program authorizes repurchases for a two year period and may be suspended or discontinued at any time. Share repurchasing will be subject to market conditions, applicable legal requirements, as well as trading restrictions under the Company’s insider trading policy, and other relevant factors. The Company will account for any repurchased shares as treasury shares.
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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.
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, computer hardware and software are depreciated over three to five years, and in-store shops are amortized over three to four years. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated remaining useful lives of the related assets or remaining lease term. The Company includes all 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.
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 on the Company’s consolidated balance sheets at fair value, regardless of if they are designated or undesignated as hedges.
The Company designates the majority of these forward currency contracts as hedges for hedge accounting purposes which are related to the purchase of inventory. Accordingly, the effective portion of changes in the fair value for contracts entered into during the six months ended September 27, 2014, designated as hedges, are recorded in equity as a component of accumulated other comprehensive income, 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 that are entered into that are not designated as hedges, changes in the fair value, as of each balance sheet date and upon maturity, are recorded in other income, within the Company’s consolidated statements of operations. During the six months ended September 27, 2014, a gain of approximately $0.2 million related to the change in fair value of these contracts was recorded in other income. In addition, the net unrealized gain related to contracts designated as hedges for $10.6 million, was charged to equity as a component of accumulated other comprehensive income during the six months ended September 27, 2014. For the six months ended September 27, 2014, amounts related to the ineffectiveness of these contracts were de minimis. The following table details the fair value of these contracts as of September 27, 2014, and March 29, 2014 (in thousands):
September 27, 2014 |
March 29, 2014 |
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Prepaid expenses and other current assets |
$ | 10,604 | $ | 12 | ||||
Accrued expenses and other current liabilities |
$ | (385 | ) | $ | (1,875 | ) |
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 September 27, 2014 was approximately $194.0 million, which was comprised predominately of those designated as hedges.
Net Income Per Share
The Company’s basic net income per share excludes the dilutive effect of share options and units, as well as 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.
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):
Three Months Ended | Six Months Ended | |||||||||||||||
September 27, 2014 |
September 28, 2013 |
September 27, 2014 |
September 28, 2013 |
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Numerator: |
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Net Income |
$ | 206,990 | $ | 145,808 | $ | 394,706 | $ | 270,804 | ||||||||
Denominator: |
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Basic weighted average ordinary shares |
204,464,952 | 202,560,870 | 204,107,262 | 202,686,313 | ||||||||||||
Weighted average dilutive share equivalents: |
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Share options and restricted shares/units |
2,967,298 | 2,593,822 | 3,196,985 | 2,860,878 | ||||||||||||
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Diluted weighted average ordinary shares |
207,432,250 | 205,154,692 | 207,304,247 | 205,547,191 | ||||||||||||
Basic net income per ordinary share |
$ | 1.01 | $ | 0.72 | $ | 1.93 | $ | 1.34 | ||||||||
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Diluted net income per ordinary share |
$ | 1.00 | $ | 0.71 | $ | 1.90 | $ | 1.32 | ||||||||
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Share equivalents for the three and six months ended September 27, 2014 for 231,893 shares and 135,720 shares, respectively, have been excluded from the above calculation as they were anti-dilutive. Share equivalents for the three and six months ended September 28, 2013 for 86,516 shares and 75,116 shares, respectively, have been excluded from the above calculation as they were anti-dilutive.
Recent Accounting Pronouncements—The Company has considered all new accounting pronouncements and, and with the exception of the 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.
In May, 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers, which amends how an entity is currently required to recognize revenue from contracts with its customers. The ASU will replace the existing revenue recognition guidance in GAAP when it becomes effective for entities in January 2017. Early application is not permitted. The Company is currently evaluating the impact that ASU 2014-09 will have on its consolidated financial statements and related disclosures.
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The following table details the fair value of these contracts as of September 27, 2014, and March 29, 2014 (in thousands):
September 27, 2014 |
March 29, 2014 |
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Prepaid expenses and other current assets |
$ | 10,604 | $ | 12 | ||||
Accrued expenses and other current liabilities |
$ | (385 | ) | $ | (1,875 | ) |
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):
Three Months Ended | Six Months Ended | |||||||||||||||
September 27, 2014 |
September 28, 2013 |
September 27, 2014 |
September 28, 2013 |
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Numerator: |
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Net Income |
$ | 206,990 | $ | 145,808 | $ | 394,706 | $ | 270,804 | ||||||||
Denominator: |
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Basic weighted average ordinary shares |
204,464,952 | 202,560,870 | 204,107,262 | 202,686,313 | ||||||||||||
Weighted average dilutive share equivalents: |
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Share options and restricted shares/units |
2,967,298 | 2,593,822 | 3,196,985 | 2,860,878 | ||||||||||||
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Diluted weighted average ordinary shares |
207,432,250 | 205,154,692 | 207,304,247 | 205,547,191 | ||||||||||||
Basic net income per ordinary share |
$ | 1.01 | $ | 0.72 | $ | 1.93 | $ | 1.34 | ||||||||
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Diluted net income per ordinary share |
$ | 1.00 | $ | 0.71 | $ | 1.90 | $ | 1.32 | ||||||||
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Receivables, net consist of (in thousands):
September 27, 2014 |
March 29, 2014 |
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Trade receivables: |
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Credit risk assumed by factors/insured |
$ | 326,284 | $ | 261,900 | ||||
Credit risk retained by Company |
65,023 | 109,094 | ||||||
Receivables due from licensees |
30,436 | 11,302 | ||||||
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421,743 | 382,296 | |||||||
Less allowances: |
(74,921 | ) | (68,241 | ) | ||||
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$ | 346,822 | $ | 314,055 | |||||
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Property and equipment, net consist of (in thousands):
September 27, 2014 |
March 29, 2014 |
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Furniture and fixtures |
$ | 136,046 | $ | 108,757 | ||||
Equipment |
51,619 | 31,683 | ||||||
Computer equipment and software |
75,851 | 50,646 | ||||||
In-store shops |
147,112 | 123,637 | ||||||
Leasehold improvements |
249,951 | 216,451 | ||||||
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660,579 | 531,174 | |||||||
Less: accumulated depreciation and amortization |
(283,087 | ) | (234,381 | ) | ||||
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377,492 | 296,793 | |||||||
Construction-in-progress |
76,344 | 53,885 | ||||||
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$ | 453,836 | $ | 350,678 | |||||
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The following table discloses the carrying values of intangible assets and goodwill (in thousands):
September 27, 2014 | March 29, 2014 | |||||||||||||||||||||||
Gross Carrying Amount |
Accumulated Amortization |
Net | Gross Carrying Amount |
Accumulated Amortization |
Net | |||||||||||||||||||
Trademarks |
$ | 23,000 | $ | 13,419 | $ | 9,581 | $ | 23,000 | $ | 12,845 | $ | 10,155 | ||||||||||||
Lease Rights |
50,135 | 6,438 | 43,697 | 41,748 | 3,869 | 37,879 | ||||||||||||||||||
Goodwill |
14,005 | — | 14,005 | 14,005 | — | 14,005 | ||||||||||||||||||
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$ | 87,140 | $ | 19,857 | $ | 67,283 | $ | 78,753 | $ | 16,714 | $ | 62,039 | |||||||||||||
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Estimated amortization expense for each of the next five years is as follows (in thousands):
Remainder of Fiscal 2015 |
$ | 3,946 | ||
Fiscal 2016 |
8,357 | |||
Fiscal 2017 |
8,355 | |||
Fiscal 2018 |
8,321 | |||
Fiscal 2019 |
7,368 | |||
Thereafter |
16,931 | |||
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$ | 53,278 | |||
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All contracts are categorized in Level 2 of the fair value hierarchy as shown in the following table:
Fair value at September 27, 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) |
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Foreign currency forward contracts- Euro to U.S. Dollar |
$ | 10,404 | $ | — | $ | 10,404 | $ | — | ||||||||
Foreign currency forward contracts- Canadian Dollar to U.S. Dollar |
200 | — | 200 | — | ||||||||||||
Foreign currency forward contracts- U.S. Dollar to Euro |
(385 | ) | — | (385 | ) | — | ||||||||||
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Total |
$ | 10,219 | $ | — | $ | 10,219 | $ | — | ||||||||
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The following table summarizes the impact of the effective portion of gains and losses of the forward contracts designated as hedges for the three and six months ended September 27, 2014 (in thousands):
Three Months Ended September 27, 2014 | Six Months Ended Septeber 27, 2014 | |||||||||||||||
Pre-Tax Gain Recognized in OCI (Effective Portion) |
(Loss) Reclassified from Accumulated OCI into Earnings (Effective Portion) |
Pre-Tax Gain Recognized in OCI (Effective Portion) |
(Loss) Reclassified from Accumulated OCI into Earnings (Effective Portion) |
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Forward currency exchange contracts |
$ | 10,222 | $ | (249 | ) | $ | 11,895 | $ | (1,383 | ) |
The following table summarizes the impact of the effective portion of gains and losses of the forward contracts designated as hedges for the three and six months ended September 28, 2013:
Three Months Ended September 28, 2013 | Six Months Ended Septeber 28, 2013 | |||||||||||||||
Pre-Tax (Loss) Recognized in OCI (Effective Portion) |
Gain Reclassified from Accumulated OCI into Earnings (Effective Portion) |
Pre-Tax (Loss) Recognized in OCI (Effective Portion) |
Gain Reclassified from Accumulated OCI into Earnings (Effective Portion) |
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Forward currency exchange contracts |
$ | (2,892 | ) | $ | 227 | $ | (3,513 | ) | $ | 555 |
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The following table presents the key performance information of the Company’s reportable segments (in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||
September 27, 2014 |
September 28, 2013 |
September 27, 2014 |
September 28, 2013 |
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Revenue: |
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Net sales: Retail |
$ | 495,579 | $ | 355,573 | $ | 975,821 | $ | 681,245 | ||||||||
Wholesale |
514,090 | 351,871 | 920,885 | 642,447 | ||||||||||||
Licensing |
46,936 | 32,859 | 79,053 | 57,470 | ||||||||||||
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Total revenue |
$ | 1,056,605 | $ | 740,303 | $ | 1,975,759 | $ | 1,381,162 | ||||||||
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Income from operations: |
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Retail |
$ | 127,334 | $ | 103,133 | $ | 270,023 | $ | 206,247 | ||||||||
Wholesale |
156,672 | 98,531 | 274,324 | 179,577 | ||||||||||||
Licensing |
21,552 | 19,796 | 37,982 | 33,198 | ||||||||||||
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Income from operations |
$ | 305,558 | $ | 221,460 | $ | 582,329 | $ | 419,022 | ||||||||
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Depreciation and amortization expense for each segment are as follows (in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||
September 27, 2014 |
September 28, 2013 |
September 27, 2014 |
September 28, 2013 |
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Depreciation and amortization: |
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Retail |
$ | 22,022 | $ | 10,716 | $ | 39,987 | $ | 20,433 | ||||||||
Wholesale |
11,723 | 7,223 | 22,498 | 13,374 | ||||||||||||
Licensing |
319 | 118 | 577 | 225 | ||||||||||||
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Total depreciation and amortization |
$ | 34,064 | $ | 18,057 | $ | 63,062 | $ | 34,032 | ||||||||
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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):
Three Months Ended | Six Months Ended | |||||||||||||||
September 27, 2014 |
September 28, 2013 |
September 27, 2014 |
September 28, 2013 |
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Revenue: |
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North America (U.S. and Canada) |
$ | 802,226 | $ | 618,277 | $ | 1,521,115 | $ | 1,169,831 | ||||||||
Europe |
237,924 | 114,049 | 423,421 | 195,528 | ||||||||||||
Other regions |
16,455 | 7,977 | 31,223 | 15,803 | ||||||||||||
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Total revenue |
$ | 1,056,605 | $ | 740,303 | $ | 1,975,759 | $ | 1,381,162 | ||||||||
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As of | ||||||||
September 27, 2014 |
March 29, 2014 |
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Long-lived assets: |
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North America (U.S. and Canada) |
$ | 357,329 | $ | 283,162 | ||||
Europe |
141,419 | 108,074 | ||||||
Other regions |
8,366 | 7,476 | ||||||
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Total Long-lived assets: |
$ | 507,114 | $ | 398,712 | ||||
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Other income consists of the following (in thousands):
Three Months Ended | Six Months Ended | |||||||
September 27, 2014 |
September 27, 2014 |
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Income earned on joint venture |
$ | (108 | ) | $ | (311 | ) | ||
Income related to anti-counterfeit program |
(898 | ) | (1,038 | ) | ||||
Net unrealized gains on foreign currency forward contracts |
(1,045 | ) | (197 | ) | ||||
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Total Other income |
$ | (2,051 | ) | $ | (1,546 | ) | ||
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