Capri Holdings Ltd. (CPRI, Financial) sells women’s and men’s accessories, footwear, watches, jewelry, eyewear and a full line of fragrance products under three main brands: Versace, Jimmy Choo and Michael Kors.
The company's largest and original brand, Michael Kors, offers handbags, footwear and apparel through more than 800 company-owned stores, third-party retailers and e-commerce stores worldwide. Milan-based Versace is known for its ready-to-wear luxury fashion items and Jimmy Choo is best known for women’s luxury footwear.
Capri shares took a massive hit early last year because of the global lockdown, but have since then recovered along with the strong rebound in earnings.
Earnings recap
Capri Holdings reported better-than-expected second-quarter fiscal 2022 results on Nov. 3, beating Wall Street analyst estimates for both revenue and earnings. The company reported revenue of $1.3 billion, a 17% increase compared to the corresponding quarter last year. The adjusted gross profit was $879 million and the adjusted gross margin was 67.6%, which expanded 440 basis points versus the prior year. The adjusted net income came to $235 million, or $1.53 per share, compared to $137 million, or 90 cents per share, in the year-ago quarter. Segment-wise, revenue expanded the most in the Versace segment by 45% year over year, followed by a 12% increase in Jimmy Choo and an 11% increase in Michael Kors. The operating margin was the highest in the Michael Kors segment at 25%, followed by 19.5% for Versace and 0.7% for Jimmy Choo.
The company’s long-term debt declined 8.5% sequentially in the last quarter as Capri Holdings repaid approximately $200 million of debt, which suggests the company is focused on reducing the debt burden to improve shareholder returns in the long run. Capri Holdings repurchased approximately 1.8 million ordinary shares for around $100 million in open market transactions in the quarter, and these buybacks will improve shareholder returns further in the long term if the company successfully reduces its debt burden and grow earnings.
Moving in the right direction
As the fashion and apparel industry is rebounding with the relaxation of mobility restrictions and a gradual return to active social lifestyles, Capri Holdings is intending to maximize this opportunity to grow sales across its major brands. Plans for the future include expanding the products and categories, restructuring the store base and designing innovative fashion products across brand banners. While exploring growth opportunities in the apparel sector, the company will also focus on boosting the accessory business, including leather goods and handbags.
Capri Holdings plans to restructure Michael Kors stores, closing underperforming stores in North America and opening new stores in Asia. Further, omnichannel capabilities will be leveraged to accelerate revenue growth while deepening consumer engagement through improved communication. The company estimates capital investments of approximately $200 million per year, which will be mainly utilized for expanding and renovating the store network, boosting digital technology capabilities and creating common corporate platforms.
The outlook for the company and industry
In the next fiscal year, the company now expects revenue of approximately $5.4 billion - compared to its previous guidance for $5.3 billion - and an expansion in operating margin to approximately 18%. The company also raised its earnings guidance to $5.30 per share from its prior projection of $4.50, indicating that Capri is moving in the right direction to create shareholder wealth in the long run.
According to Mckinsey, luxury fashion sales in 2022 will be driven by both China and the United States, while sales in Europe will remain lackluster. Capri Holdings has a noteworthy presence in both the United States and key markets in Asia, so it would be reasonable to expect the company to have a strong fiscal year in 2022.
Ongoing health-related challenges will have a direct impact on the global retail environment, and the industry has been affected by supply chain bottlenecks along with increased transportation costs. The extended factory closures in Vietnam will also cause short-term difficulties for Capri Holdings, but long-term-oriented investors should look beyond these temporary obstacles to identify what the future holds for the company in a normalized world.
Takeaway
From a substantial drop in sales in the first quarter of 2020, Capri Holdings has recovered well to get back into another phase of revenue and earnings growth. The expected revival of the global fashion industry will help the company carry this momentum into 2022 as well, and its shares seem cheaply valued in the market at a forward earnings multiple of 11.81 in comparison to the consumer discretionary sector average of 14.39.
