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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 and lifestyle stores, including concessions and outlet stores, located primarily in the United States, Canada, Europe and Japan, as well as e-commerce. 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, beauty, eyewear, leather goods, jewelry, watches, coats, men’s suits, swimwear, furs and ties, as well as through geographic licenses.
The interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The consolidated financial statements as of June 27, 2015, and for the three months ended June 27, 2015 and June 28, 2014, are unaudited. In addition, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The interim financial statements reflect all normal and recurring adjustments, which are, in the opinion of management, necessary for a fair presentation in conformity with U.S. GAAP. The interim financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended March 28, 2015, as filed with the Securities and Exchange Commission on May 27, 2015, 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 months ended June 27, 2015 and June 28, 2014, are based on 13-week periods.
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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.
Reclassifications
Certain reclassifications have been made to the prior periods’ financial information in order to conform to the current period’s presentation.
Seasonality
The Company experiences certain effects of seasonality with respect to its wholesale and retail segments. The Company’s wholesale segment generally experiences its greatest sales in our third and fourth fiscal quarters while its first fiscal quarter experiences the lowest sales. The Company’s retail segment generally experiences greater sales during our third fiscal quarter as a result of Holiday season sales. In the aggregate, the Company’s first fiscal quarter typically experiences significantly less sales volume relative to the other three quarters and its third fiscal quarter generally has higher sales volume relative to other three quarters. However, given the Company’s recent growth, the effects of any seasonality are further muted by incremental sales related to its new retail stores, wholesale doors and shop-in-shops.
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. Certain of these contracts are designated as hedges for accounting purposes, while others remain undesignated. All of the Company’s derivative instruments are recorded in the Company’s consolidated balance sheets at fair value on a gross basis, regardless of their hedge designation.
The Company designates certain contracts related to the purchase of inventory that qualify for hedge accounting as cash flow hedges. Formal hedge documentation is prepared for all derivative instruments designated as hedges, including description of the hedged item and the hedging instrument, the risk being hedged, and the manner in which hedge effectiveness will be assessed prospectively and retrospectively. The effective portion of changes in the fair value for contracts designated as cash flow hedges is recorded in equity as a component of accumulated other comprehensive income (loss) until the hedged item effects earnings. When the inventory related to forecasted inventory purchases that are being hedged is sold to a third party, the gains or losses deferred in accumulated other comprehensive income (loss) are recognized within cost of goods sold. The Company uses regression analysis to assess effectiveness of derivative instruments that are designated as hedges, which compares the change in the fair value of the derivative instrument to the change in the related hedged item. Effectiveness is assessed on a quarterly basis and any portion of the designated hedge contracts deemed ineffective is recorded to foreign currency gain (loss). If the hedge is no longer expected to be highly effective in the future, future changes in the fair value are recognized in earnings. For those contracts that are not designated as hedges, changes in the fair value are recorded to foreign currency gain (loss) in the Company’s consolidated statements of operations. The Company classifies cash flows relating to its derivative instruments consistently with the classification of the hedged item, within cash from operating activities.
The Company is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. In order to mitigate counterparty credit risk, the Company only enters into contracts with carefully selected financial institutions based upon their credit ratings and certain other financial factors, adhering to established limits for credit exposure. The aforementioned forward contracts generally have a term of no more than 12 months. The period of these contracts is directly related to the foreign transaction they are intended to hedge.
Net Income per Share
The Company’s basic net income per ordinary share is calculated by dividing net income by the weighted average number of ordinary shares outstanding during the period. Diluted net income per ordinary share reflects the potential dilution that would occur if share option grants or any other potentially dilutive instruments, including restricted shares and units (“RSUs”), were exercised or converted into ordinary shares. These potentially dilutive securities are included in diluted shares to the extent they are dilutive under the treasury stock method for the applicable periods. Performance-based RSUs are included in diluted shares if the related performance conditions are considered satisfied as of the end of the reporting period and to the extent they are dilutive under the treasury stock method.
The components of the calculation of basic net income per ordinary share and diluted net income per ordinary share are as follows (in thousands except share and per share data):
Fiscal Years Ended | ||||||||
June 27, | June 28, | |||||||
2015 | 2014 | |||||||
Numerator: |
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Net income |
$ | 174,355 | $ | 187,716 | ||||
Denominator: |
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Basic weighted average shares |
196,977,021 | 203,749,572 | ||||||
Weighted average dilutive share equivalents: |
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Share options and restricted shares/units |
3,077,473 | 3,426,671 | ||||||
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Diluted weighted average shares |
200,054,494 | 207,176,243 | ||||||
Basic net income per share |
$ | 0.89 | $ | 0.92 | ||||
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Diluted net income per share |
$ | 0.87 | $ | 0.91 | ||||
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Share equivalents of 1,811,380 shares and 39,546 shares for the three months ended June 27, 2015 and June 28, 2014, respectively, 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 has concluded that, with the exception of the below, there are no new pronouncements that are currently expected to have a material impact on results of operations, financial condition, or cash flows.
In June 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period,” ASU 2014-12 requires that a performance target under stock-based compensation arrangements that could be achieved after the service period is treated as a performance condition and not reflected in the grant-date fair value of the award. Rather, the related compensation cost should be recognized when it becomes probable that the performance targets will be achieved. ASU 2014-12 is effective beginning with the Company’s fiscal year 2017, with early adoption and retrospective application permitted. The Company does not expect that ASU 2014-12 will have a significant impact on its consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers,” which provides new guidance for revenues recognized from contracts with customers, and will replace the existing revenue recognition guidance. ASU No. 2014-09 requires that revenue is recognized at an amount the company is entitled to upon transferring control of goods or services to customers, as opposed to when risks and rewards transfer to a customer. In July 2015, the FASB approved a one-year deferral of the effective date for this standard and to make it effective for the interim reporting periods within the annual reporting period beginning after December 15, 2017, or beginning with the Company’s fiscal year 2019. This standard may be applied retrospectively to all prior periods presented, or retrospectively with a cumulative adjustment to retained earnings in the year of adoption. The Company is currently evaluating the adoption method and 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):
June 27, | March 28, | |||||||
2015 | 2015 | |||||||
Trade receivables: |
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Credit risk assumed by factors/insured |
$ | 261,934 | $ | 374,150 | ||||
Credit risk retained by Company |
62,504 | 67,530 | ||||||
Receivables due from licensees |
13,228 | 11,763 | ||||||
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337,666 | 453,443 | |||||||
Less allowances: |
(85,164 | ) | (90,024 | ) | ||||
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$ | 252,502 | $ | 363,419 | |||||
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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 by 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 $1.0 million and $0.7 million, at June 27, 2015 and March 28, 2015, respectively.
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4. Property and Equipment, net
Property and equipment, net consist of (in thousands):
June 27, 2015 |
March 28, 2015 |
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Leasehold improvements |
$ | 331,531 | $ | 294,225 | ||||
In-store shops |
202,977 | 189,308 | ||||||
Furniture and fixtures |
174,438 | 160,178 | ||||||
Computer equipment and software |
121,043 | 104,372 | ||||||
Equipment |
75,034 | 73,609 | ||||||
Land |
15,099 | — | ||||||
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920,122 | 821,692 | |||||||
Less: accumulated depreciation and amortization |
(369,760 | ) | (337,755 | ) | ||||
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550,362 | 483,937 | |||||||
Construction-in-progress |
73,832 | 78,997 | ||||||
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$ | 624,194 | $ | 562,934 | |||||
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Depreciation and amortization of property and equipment for the three-month periods ended June 27, 2015 and June 28, 2014 was $39.7 million and $27.4 million, respectively.
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5. Current Assets and Current Liabilities
Prepaid expenses and other current assets consist of the following (in thousands):
June 27, 2015 |
March 28, 2015 |
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Prepaid taxes |
$ | 65,475 | $ | 60,637 | ||||
Unrealized gains on forward foreign exchange contracts |
8,928 | 25,004 | ||||||
Leasehold incentive receivable |
8,573 | 12,289 | ||||||
Prepaid rent |
13,868 | 11,681 | ||||||
Other |
21,301 | 17,832 | ||||||
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$ | 118,145 | $ | 127,443 | |||||
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Accrued expenses and other current liabilities consist of the following (in thousands):
June 27, 2015 |
March 28, 2015 |
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Other taxes payable |
$ | 23,210 | $ | 20,202 | ||||
Accrued rent |
22,750 | 27,058 | ||||||
Advance royalties |
7,382 | 5,081 | ||||||
Accrued litigation |
6,254 | 5,539 | ||||||
Accrued advertising |
6,035 | 5,653 | ||||||
Professional services |
4,372 | 7,347 | ||||||
Accrued samples |
469 | 816 | ||||||
Unrealized loss on forward foreign exchange contracts |
157 | 600 | ||||||
Other |
24,278 | 22,850 | ||||||
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$ | 94,907 | $ | 95,146 | |||||
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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 June 27, 2015, 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 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 June 27, 2015 and March 28, 2015, there were no borrowings outstanding under the 2013 Credit Facility. At June 27, 2015, stand-by letters of credit of $10.9 million were outstanding. The amount available for future borrowings under the agreement was $189.1 million as of June 27, 2015.
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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 the three-level valuation hierarchy for disclosure of fair value measurements. The determination of the applicable level within the hierarchy of a particular asset or liability depends on the inputs used in the valuation as of the measurement date, notably the extent to which the inputs are market-based (observable) or internally derived (unobservable). Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs are inputs based on a company’s own assumptions about market participant assumptions developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs as follows:
Level 1 – Valuations based on quoted prices in active markets for identical assets or liabilities that a company has the ability to access at the measurement date.
Level 2 – Valuations based on quoted inputs other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly through corroboration with observable market data.
Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
At June 27, 2015 and March 28, 2015, the fair values of the Company’s foreign currency forward contracts, the Company’s only derivative instruments, were determined using broker quotations, which were calculations derived from observable market information: the applicable currency rates at the balance sheet date and those forward rates particular to the contract at inception. The Company makes no adjustments to these broker obtained quotes or prices, but assesses the credit risk of the counterparty and would adjust the provided valuations for counterparty credit risk when appropriate. The fair values of the forward contracts are included in prepaid expenses and other current assets, and in accrued expenses and other current liabilities in the consolidated balance sheets, depending on whether they represent assets or (liabilities) to the Company, as detailed in Note 9. All contracts are measured and recorded at fair value on a recurring basis and are categorized in Level 2 of the fair value hierarchy, as shown in the following table (in thousands):
Fair value at June 27, 2015, using: | Fair value at March 28, 2015, using: | |||||||||||||||||||||||
Quoted prices in active markets for identical assets (Level 1) |
Significant other observable inputs (Level 2) |
Significant unobservable inputs (Level 3) |
Quoted prices in active markets for identical assets (Level 1) |
Significant other observable inputs (Level 2) |
Significant unobservable inputs (Level 3) |
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Foreign currency forward contracts- Euro |
$ | — | $ | 8,546 | $ | — | $ | — | $ | 23,590 | $ | — | ||||||||||||
Foreign currency forward contracts- Canadian Dollar |
— | 382 | — | — | 1,404 | — | ||||||||||||||||||
Foreign currency forward contracts- U.S. Dollar |
— | (157 | ) | — | — | (590 | ) | — | ||||||||||||||||
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Total |
$ | — | $ | 8,771 | $ | — | $ | — | $ | 24,404 | $ | — | ||||||||||||
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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 2013 Credit Facility, if outstanding, are recorded at carrying value, which resembles fair value due to the short-term nature of the revolving 2013 Credit Facility.
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9. 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 certain forecasted inventory purchases by using foreign currency forward exchange contracts. The Company only enters into derivative instruments with highly credit-rated counterparties. The Company’s derivative financial instruments are not currently subject to master netting arrangements. The Company does not enter into derivative contracts for trading or speculative purposes.
The following table details the fair value of the Company’s derivative contracts, which are recorded on a gross basis in the consolidated balance sheets as of June 27, 2015 and March 28, 2015 (in thousands):
Fair Values | ||||||||||||||||||||||||
Notional Amounts | Current Assets (1) | Current Liabilities (2) | ||||||||||||||||||||||
June 27, 2015 |
March 28, 2015 |
June 27, 2015 |
March 28, 2015 |
June 27, 2015 |
March 28, 2015 |
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Designated forward currency exchange contracts |
$ | 295,785 | $ | 226,090 | $ | 8,546 | $ | 23,590 | $ | 137 | $ | 522 | ||||||||||||
Undesignated forward currency exchange contracts |
12,264 | 25,788 | 382 | 1,414 | 20 | 78 | ||||||||||||||||||
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Total |
$ | 308,049 | $ | 251,878 | $ | 8,928 | $ | 25,004 | $ | 157 | $ | 600 | ||||||||||||
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(1) |
Recorded within prepaid expenses and other current assets in the Company’s audited consolidated balance sheets. |
(2) |
Recorded within accrued expenses and other current liabilities in the Company’s audited consolidated balance sheets. |
Changes in the fair value of the effective portion of the Company’s forward foreign currency exchange contracts that are designated as accounting hedges are recorded in equity as a component of accumulated other comprehensive income, and are reclassified from accumulated other comprehensive income into earnings when the items underlying the hedged transactions are recognized into earnings, as a component of cost of sales within the Company’s consolidated statements of operations. The following table summarizes the impact of the effective portion of gains and losses of the forward contracts designated as hedges for the three-month periods ended June 27, 2015 and June 28, 2014 (in thousands):
Three Months Ended | ||||||||||||||||
June 27, 2015 | June 28, 2014 | |||||||||||||||
Pre-Tax Loss Recognized in OCI (Effective Portion) |
Pre-Tax Loss Reclassified from Accumulated OCI into Earnings (Effective Portion) |
Pre-Tax Gain Recognized in OCI (Effective Portion) |
Pre-Tax Loss Reclassified from Accumulated OCI into Earnings (Effective Portion) |
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Forward currency exchange contracts |
(11,706 | ) | (48 | ) | $ | 539 | $ | (1,134 | ) |
Amounts related to ineffectiveness were not material during all periods presented. The Company expects that substantially all of the amounts currently recorded in accumulated other comprehensive loss will 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.
During the three-month periods ended June 27, 2015 and June 28, 2014, the Company recognized $1.0 million and $0.8 million, respectively, in losses related to the change in the fair value of undesignated forward currency exchange contracts within foreign currency gains (losses) in the Company’s consolidated statement of operations.
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11. Accumulated Other Comprehensive Income
The following table details changes in the components of accumulated other comprehensive income, net of taxes for the three-month periods ended June 27, 2015 and June 28, 2014, respectively (in thousands):
Foreign Currency Translation Income (Loss) |
Net Gains (Losses) on Derivatives (1) |
Total Accumulated Other Comprehensive Income (Loss) |
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Balance at March 29, 2014 |
$ | (4,775 | ) | $ | (1,598 | ) | $ | (6,373 | ) | |||
Other comprehensive income before reclassifications |
3,067 | 468 | 3,535 | |||||||||
Less: amounts reclassified from AOCI to earnings (2) |
— | (996 | ) | (996 | ) | |||||||
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Other comprehensive income net of tax |
3,067 | 1,464 | 4,531 | |||||||||
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Balance at June 28, 2014 |
$ | (1,708 | ) | $ | (134 | ) | $ | (1,842 | ) | |||
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Balance at March 28, 2015 |
$ | (96,068 | ) | $ | 29,264 | (66,804 | ) | |||||
Other comprehensive income (loss) before reclassifications |
9,814 | (10,642 | ) | (828 | ) | |||||||
Less: amounts reclassified from AOCI to earnings (2) |
— | (8 | ) | (8 | ) | |||||||
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Other comprehensive income (loss) net of tax |
9,814 | (10,634 | ) | (820 | ) | |||||||
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Balance at June 27, 2015 |
$ | (86,254 | ) | $ | 18,630 | $ | (67,624 | ) | ||||
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(1) |
Accumulative other comprehensive income balance related to net gains on derivative financial instruments as of June 27, 2015 and March 28, 2015 is net of tax provisions of $2.3 million and $3.3 million, respectively. Other comprehensive loss before reclassification related to derivative financial instruments for the three months ended June 27, 2015 is net of a tax benefit of $1.0 million. Tax effects related to all other amounts were not material. |
(2) |
Reclassified amounts relate to the Company’s forward foreign currency exchange contracts for inventory purchases and are recorded within Cost of goods sold in the Company’s consolidated statements of operations. The related tax effects recorded within income tax expense in the Company’s consolidated statements of operations were not material. |
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13. 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. The Company’s Retail segment includes sales through the Company owned stores, including “Collection,” “Lifestyle” including “concessions,” and outlet stores located throughout North America, Europe, and Japan, as well as the Company’s e-commerce sales. 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 beauty, and eyewear. The Wholesale segment includes sales primarily to major department stores and specialty shops throughout North America, Europe and Asia. 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. We also have wholesale arrangements pursuant to which we sell products to certain of our licensees, including our licensees in Asia (which were previously reported within our North American wholesale operations). 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 geographic regions such as the Middle East, Eastern Europe, Latin America and the Caribbean, throughout all of Asia (excluding Japan), as well as Australia. 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 | ||||||||
June 27, 2015 |
June 28, 2014 |
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Revenue: |
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Net sales: Retail |
$ | 523,300 | $ | 480,242 | ||||
Wholesale |
423,959 | 406,795 | ||||||
Licensing |
38,716 | 32,117 | ||||||
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Total revenue |
$ | 985,975 | $ | 919,154 | ||||
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Income from operations: |
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Retail |
$ | 120,874 | $ | 142,689 | ||||
Wholesale |
106,310 | 117,652 | ||||||
Licensing |
21,439 | 16,430 | ||||||
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Income from operations |
$ | 248,623 | $ | 276,771 | ||||
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Depreciation and amortization expense for each segment are as follows (in thousands):
Three Months Ended | ||||||||
June 27, 2015 |
June 28, 2014 |
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Depreciation and amortization: |
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Retail |
$ | 25,091 | $ | 17,965 | ||||
Wholesale |
16,102 | 10,775 | ||||||
Licensing |
360 | 258 | ||||||
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Total depreciation and amortization |
$ | 41,553 | $ | 28,998 | ||||
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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 | ||||||||
June 27, 2015 |
June 28, 2014 |
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Revenues: |
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North America (U.S. and Canada)(1) |
$ | 727,295 | $ | 718,889 | ||||
Europe |
216,813 | 185,497 | ||||||
Other regions |
41,867 | 14,768 | ||||||
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Total revenues |
$ | 985,975 | $ | 919,154 | ||||
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As of | ||||||||
June 27, 2015 |
March 28, 2015 |
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Long-lived assets: |
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North America (U.S. and Canada)(1) |
$ | 468,355 | $ | 443,816 | ||||
Europe |
208,348 | 169,243 | ||||||
Other regions |
16,390 | 11,416 | ||||||
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Total Long-lived assets |
$ | 693,093 | $ | 624,475 | ||||
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(1) |
Net revenues earned in the U.S. during the three months ended June 27, 2015 and June 28, 2014 were $684.8 million and $674.3 million, respectively. Long-lived assets located in the U.S. as of June 27, 2015 and March 28, 2015 were $441.9 million and $418.8 million, respectively. |
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15. Subsequent Events
The Company has historically accounted for its investment in its Latin American joint venture, MK (Panama) Holdings, S.A. and subsidiaries (“MK Panama”), under the equity method of accounting. In July 2015, the Company made a capital contribution to the joint venture, obtaining a controlling interest in MK Panama. As such, the Company will consolidate MK Panama into its operations beginning with the second quarter of Fiscal 2016. The Company is currently in the process of finalizing the new ownership structure and accounting.
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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.
Reclassifications
Certain reclassifications have been made to the prior periods’ financial information in order to conform to the current period’s presentation.
Seasonality
The Company experiences certain effects of seasonality with respect to its wholesale and retail segments. The Company’s wholesale segment generally experiences its greatest sales in our third and fourth fiscal quarters while its first fiscal quarter experiences the lowest sales. The Company’s retail segment generally experiences greater sales during our third fiscal quarter as a result of Holiday season sales. In the aggregate, the Company’s first fiscal quarter typically experiences significantly less sales volume relative to the other three quarters and its third fiscal quarter generally has higher sales volume relative to other three quarters. However, given the Company’s recent growth, the effects of any seasonality are further muted by incremental sales related to its new retail stores, wholesale doors and shop-in-shops.
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. Certain of these contracts are designated as hedges for accounting purposes, while others remain undesignated. All of the Company’s derivative instruments are recorded in the Company’s consolidated balance sheets at fair value on a gross basis, regardless of their hedge designation.
The Company designates certain contracts related to the purchase of inventory that qualify for hedge accounting as cash flow hedges. Formal hedge documentation is prepared for all derivative instruments designated as hedges, including description of the hedged item and the hedging instrument, the risk being hedged, and the manner in which hedge effectiveness will be assessed prospectively and retrospectively. The effective portion of changes in the fair value for contracts designated as cash flow hedges is recorded in equity as a component of accumulated other comprehensive income (loss) until the hedged item effects earnings. When the inventory related to forecasted inventory purchases that are being hedged is sold to a third party, the gains or losses deferred in accumulated other comprehensive income (loss) are recognized within cost of goods sold. The Company uses regression analysis to assess effectiveness of derivative instruments that are designated as hedges, which compares the change in the fair value of the derivative instrument to the change in the related hedged item. Effectiveness is assessed on a quarterly basis and any portion of the designated hedge contracts deemed ineffective is recorded to foreign currency gain (loss). If the hedge is no longer expected to be highly effective in the future, future changes in the fair value are recognized in earnings. For those contracts that are not designated as hedges, changes in the fair value are recorded to foreign currency gain (loss) in the Company’s consolidated statements of operations. The Company classifies cash flows relating to its derivative instruments consistently with the classification of the hedged item, within cash from operating activities.
The Company is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. In order to mitigate counterparty credit risk, the Company only enters into contracts with carefully selected financial institutions based upon their credit ratings and certain other financial factors, adhering to established limits for credit exposure. The aforementioned forward contracts generally have a term of no more than 12 months. The period of these contracts is directly related to the foreign transaction they are intended to hedge.
Net Income per Share
The Company’s basic net income per ordinary share is calculated by dividing net income by the weighted average number of ordinary shares outstanding during the period. Diluted net income per ordinary share reflects the potential dilution that would occur if share option grants or any other potentially dilutive instruments, including restricted shares and units (“RSUs”), were exercised or converted into ordinary shares. These potentially dilutive securities are included in diluted shares to the extent they are dilutive under the treasury stock method for the applicable periods. Performance-based RSUs are included in diluted shares if the related performance conditions are considered satisfied as of the end of the reporting period and to the extent they are dilutive under the treasury stock method.
Recent Accounting Pronouncements — The Company has considered all new accounting pronouncements and has concluded that, with the exception of the below, there are no new pronouncements that are currently expected to have a material impact on results of operations, financial condition, or cash flows.
In June 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period,” ASU 2014-12 requires that a performance target under stock-based compensation arrangements that could be achieved after the service period is treated as a performance condition and not reflected in the grant-date fair value of the award. Rather, the related compensation cost should be recognized when it becomes probable that the performance targets will be achieved. ASU 2014-12 is effective beginning with the Company’s fiscal year 2017, with early adoption and retrospective application permitted. The Company does not expect that ASU 2014-12 will have a significant impact on its consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers,” which provides new guidance for revenues recognized from contracts with customers, and will replace the existing revenue recognition guidance. ASU No. 2014-09 requires that revenue is recognized at an amount the company is entitled to upon transferring control of goods or services to customers, as opposed to when risks and rewards transfer to a customer. In July 2015, the FASB approved a one-year deferral of the effective date for this standard and to make it effective for the interim reporting periods within the annual reporting period beginning after December 15, 2017, or beginning with the Company’s fiscal year 2019. This standard may be applied retrospectively to all prior periods presented, or retrospectively with a cumulative adjustment to retained earnings in the year of adoption. The Company is currently evaluating the adoption method and the impact that ASU 2014-09 will have on its consolidated financial statements and related disclosures.
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 by 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 $1.0 million and $0.7 million, at June 27, 2015 and March 28, 2015, respectively.
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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 | ||||||||
June 27, | June 28, | |||||||
2015 | 2014 | |||||||
Numerator: |
||||||||
Net income |
$ | 174,355 | $ | 187,716 | ||||
Denominator: |
||||||||
Basic weighted average shares |
196,977,021 | 203,749,572 | ||||||
Weighted average dilutive share equivalents: |
||||||||
Share options and restricted shares/units |
3,077,473 | 3,426,671 | ||||||
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|
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Diluted weighted average shares |
200,054,494 | 207,176,243 | ||||||
Basic net income per share |
$ | 0.89 | $ | 0.92 | ||||
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Diluted net income per share |
$ | 0.87 | $ | 0.91 | ||||
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Receivables, net consist of (in thousands):
June 27, | March 28, | |||||||
2015 | 2015 | |||||||
Trade receivables: |
||||||||
Credit risk assumed by factors/insured |
$ | 261,934 | $ | 374,150 | ||||
Credit risk retained by Company |
62,504 | 67,530 | ||||||
Receivables due from licensees |
13,228 | 11,763 | ||||||
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|||||
337,666 | 453,443 | |||||||
Less allowances: |
(85,164 | ) | (90,024 | ) | ||||
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|
|||||
$ | 252,502 | $ | 363,419 | |||||
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Property and equipment, net consist of (in thousands):
June 27, 2015 |
March 28, 2015 |
|||||||
Leasehold improvements |
$ | 331,531 | $ | 294,225 | ||||
In-store shops |
202,977 | 189,308 | ||||||
Furniture and fixtures |
174,438 | 160,178 | ||||||
Computer equipment and software |
121,043 | 104,372 | ||||||
Equipment |
75,034 | 73,609 | ||||||
Land |
15,099 | — | ||||||
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|
|||||
920,122 | 821,692 | |||||||
Less: accumulated depreciation and amortization |
(369,760 | ) | (337,755 | ) | ||||
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|
|||||
550,362 | 483,937 | |||||||
Construction-in-progress |
73,832 | 78,997 | ||||||
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|
|||||
$ | 624,194 | $ | 562,934 | |||||
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Prepaid expenses and other current assets consist of the following (in thousands):
June 27, 2015 |
March 28, 2015 |
|||||||
Prepaid taxes |
$ | 65,475 | $ | 60,637 | ||||
Unrealized gains on forward foreign exchange contracts |
8,928 | 25,004 | ||||||
Leasehold incentive receivable |
8,573 | 12,289 | ||||||
Prepaid rent |
13,868 | 11,681 | ||||||
Other |
21,301 | 17,832 | ||||||
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|||||
$ | 118,145 | $ | 127,443 | |||||
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Accrued expenses and other current liabilities consist of the following (in thousands):
June 27, 2015 |
March 28, 2015 |
|||||||
Other taxes payable |
$ | 23,210 | $ | 20,202 | ||||
Accrued rent |
22,750 | 27,058 | ||||||
Advance royalties |
7,382 | 5,081 | ||||||
Accrued litigation |
6,254 | 5,539 | ||||||
Accrued advertising |
6,035 | 5,653 | ||||||
Professional services |
4,372 | 7,347 | ||||||
Accrued samples |
469 | 816 | ||||||
Unrealized loss on forward foreign exchange contracts |
157 | 600 | ||||||
Other |
24,278 | 22,850 | ||||||
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$ | 94,907 | $ | 95,146 | |||||
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All contracts are measured and recorded at fair value on a recurring basis and are categorized in Level 2 of the fair value hierarchy, as shown in the following table (in thousands):
Fair value at June 27, 2015, using: | Fair value at March 28, 2015, using: | |||||||||||||||||||||||
Quoted prices in active markets for identical assets (Level 1) |
Significant other observable inputs (Level 2) |
Significant unobservable inputs (Level 3) |
Quoted prices in active markets for identical assets (Level 1) |
Significant other observable inputs (Level 2) |
Significant unobservable inputs (Level 3) |
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Foreign currency forward contracts- Euro |
$ | — | $ | 8,546 | $ | — | $ | — | $ | 23,590 | $ | — | ||||||||||||
Foreign currency forward contracts- Canadian Dollar |
— | 382 | — | — | 1,404 | — | ||||||||||||||||||
Foreign currency forward contracts- U.S. Dollar |
— | (157 | ) | — | — | (590 | ) | — | ||||||||||||||||
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Total |
$ | — | $ | 8,771 | $ | — | $ | — | $ | 24,404 | $ | — | ||||||||||||
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The following table details the fair value of the Company’s derivative contracts, which are recorded on a gross basis in the consolidated balance sheets as of June 27, 2015 and March 28, 2015 (in thousands):
Fair Values | ||||||||||||||||||||||||
Notional Amounts | Current Assets (1) | Current Liabilities (2) | ||||||||||||||||||||||
June 27, 2015 |
March 28, 2015 |
June 27, 2015 |
March 28, 2015 |
June 27, 2015 |
March 28, 2015 |
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Designated forward currency exchange contracts |
$ | 295,785 | $ | 226,090 | $ | 8,546 | $ | 23,590 | $ | 137 | $ | 522 | ||||||||||||
Undesignated forward currency exchange contracts |
12,264 | 25,788 | 382 | 1,414 | 20 | 78 | ||||||||||||||||||
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Total |
$ | 308,049 | $ | 251,878 | $ | 8,928 | $ | 25,004 | $ | 157 | $ | 600 | ||||||||||||
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(1) |
Recorded within prepaid expenses and other current assets in the Company’s audited consolidated balance sheets. |
(2) |
Recorded within accrued expenses and other current liabilities in the Company’s audited consolidated balance sheets. |
The following table summarizes the impact of the effective portion of gains and losses of the forward contracts designated as hedges for the three-month periods ended June 27, 2015 and June 28, 2014 (in thousands):
Three Months Ended | ||||||||||||||||
June 27, 2015 | June 28, 2014 | |||||||||||||||
Pre-Tax Loss Recognized in OCI (Effective Portion) |
Pre-Tax Loss Reclassified from Accumulated OCI into Earnings (Effective Portion) |
Pre-Tax Gain Recognized in OCI (Effective Portion) |
Pre-Tax Loss Reclassified from Accumulated OCI into Earnings (Effective Portion) |
|||||||||||||
Forward currency exchange contracts |
(11,706 | ) | (48 | ) | $ | 539 | $ | (1,134 | ) |
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The following table details changes in the components of accumulated other comprehensive income, net of taxes for the three-month periods ended June 27, 2015 and June 28, 2014, respectively (in thousands):
Foreign Currency Translation Income (Loss) |
Net Gains (Losses) on Derivatives (1) |
Total Accumulated Other Comprehensive Income (Loss) |
||||||||||
Balance at March 29, 2014 |
$ | (4,775 | ) | $ | (1,598 | ) | $ | (6,373 | ) | |||
Other comprehensive income before reclassifications |
3,067 | 468 | 3,535 | |||||||||
Less: amounts reclassified from AOCI to earnings (2) |
— | (996 | ) | (996 | ) | |||||||
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|
|
|||||||
Other comprehensive income net of tax |
3,067 | 1,464 | 4,531 | |||||||||
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|||||||
Balance at June 28, 2014 |
$ | (1,708 | ) | $ | (134 | ) | $ | (1,842 | ) | |||
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Balance at March 28, 2015 |
$ | (96,068 | ) | $ | 29,264 | (66,804 | ) | |||||
Other comprehensive income (loss) before reclassifications |
9,814 | (10,642 | ) | (828 | ) | |||||||
Less: amounts reclassified from AOCI to earnings (2) |
— | (8 | ) | (8 | ) | |||||||
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Other comprehensive income (loss) net of tax |
9,814 | (10,634 | ) | (820 | ) | |||||||
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|||||||
Balance at June 27, 2015 |
$ | (86,254 | ) | $ | 18,630 | $ | (67,624 | ) | ||||
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(1) |
Accumulative other comprehensive income balance related to net gains on derivative financial instruments as of June 27, 2015 and March 28, 2015 is net of tax provisions of $2.3 million and $3.3 million, respectively. Other comprehensive loss before reclassification related to derivative financial instruments for the three months ended June 27, 2015 is net of a tax benefit of $1.0 million. Tax effects related to all other amounts were not material. |
(2) |
Reclassified amounts relate to the Company’s forward foreign currency exchange contracts for inventory purchases and are recorded within Cost of goods sold in the Company’s consolidated statements of operations. The related tax effects recorded within income tax expense in the Company’s consolidated statements of operations were not material. |
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The following table presents the key performance information of the Company’s reportable segments (in thousands):
Three Months Ended | ||||||||
June 27, 2015 |
June 28, 2014 |
|||||||
Revenue: |
||||||||
Net sales: Retail |
$ | 523,300 | $ | 480,242 | ||||
Wholesale |
423,959 | 406,795 | ||||||
Licensing |
38,716 | 32,117 | ||||||
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Total revenue |
$ | 985,975 | $ | 919,154 | ||||
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Income from operations: |
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Retail |
$ | 120,874 | $ | 142,689 | ||||
Wholesale |
106,310 | 117,652 | ||||||
Licensing |
21,439 | 16,430 | ||||||
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Income from operations |
$ | 248,623 | $ | 276,771 | ||||
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Depreciation and amortization expense for each segment are as follows (in thousands):
Three Months Ended | ||||||||
June 27, 2015 |
June 28, 2014 |
|||||||
Depreciation and amortization: |
||||||||
Retail |
$ | 25,091 | $ | 17,965 | ||||
Wholesale |
16,102 | 10,775 | ||||||
Licensing |
360 | 258 | ||||||
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Total depreciation and amortization |
$ | 41,553 | $ | 28,998 | ||||
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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 | ||||||||
June 27, 2015 |
June 28, 2014 |
|||||||
Revenues: |
||||||||
North America (U.S. and Canada)(1) |
$ | 727,295 | $ | 718,889 | ||||
Europe |
216,813 | 185,497 | ||||||
Other regions |
41,867 | 14,768 | ||||||
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|
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Total revenues |
$ | 985,975 | $ | 919,154 | ||||
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|
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(1) |
Net revenues earned in the U.S. during the three months ended June 27, 2015 and June 28, 2014 were $684.8 million and $674.3 million, respectively. Long-lived assets located in the U.S. as of June 27, 2015 and March 28, 2015 were $441.9 million and $418.8 million, respectively. |
As of | ||||||||
June 27, 2015 |
March 28, 2015 |
|||||||
Long-lived assets: |
||||||||
North America (U.S. and Canada)(1) |
$ | 468,355 | $ | 443,816 | ||||
Europe |
208,348 | 169,243 | ||||||
Other regions |
16,390 | 11,416 | ||||||
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|
|
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Total Long-lived assets |
$ | 693,093 | $ | 624,475 | ||||
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|
|
(1) |
Net revenues earned in the U.S. during the three months ended June 27, 2015 and June 28, 2014 were $684.8 million and $674.3 million, respectively. Long-lived assets located in the U.S. as of June 27, 2015 and March 28, 2015 were $441.9 million and $418.8 million, respectively. |
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