👛 Is Michael Kors Capri’s Savior?

Suitors in the fray for Peloton.

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👛 Capri Holdings: “Capri”ce In Michael Kors?

Capri Holdings Inc. (CPRI), the owner of high-end brands like Versace, Jimmy Choo, and Michael Kors, reported a strong earnings performance last week. The results and subsequent stock performance pushed shares close to their 52-week high, but does the devil lie in the details? (Tweet This)

Michael Kors And His Eponymous Brand!

Michael Kors dropped out of the Fashion Institute of Technology in New York and took up a job as a salesperson at a boutique named Lothar’s. He moved up the ranks there quickly, becoming the designer and the visual display head at the store.

Dawn Mello, fashion designer for the luxury store Bergdorf Goodman was impressed by Kors’ displays and designs and asked him to showcase his collection to the store’s customers. The Michael Kors women’s label was launched at Bergdorf Goodman in 1981. KORS Michael Kors was established as a licensee company in 1990.

Its licensing partner – Compagnia Internazionale Abbigliamento U.S.A. – stopped producing the lower-priced Kors licensed collection as it retrenched from the US market. That, in turn, led to Kors’ licensee company filing for bankruptcy. Kors went back to designing for other labels, and in 1997 became the first women’s ready-to-wear designer for Louis Vuitton-backed fashion house Celine.

Kors launched his Menswear line in 2002 under Michael Kors Holdings Ltd. Co., which is incorporated in the British Virgin Islands. He quit Celine a year later. The Canadian fashion investor Lawrence Stroll and Hong Kong-based Silas Chou invested $100M and partnered with Kors to relaunch MKH Ltd. This is the same duo that acquired Tommy Hilfiger in 1992 and shaped it into a top-10 US fashion brand.

Michael Kors went public in 2011, and by 2014, its valuation had soared to $20B. Chou exited his entire holding in Michael Kors in 2018, making a 10x return on his initial investment in 2003. MKH went about acquiring some leading lifestyle brands. Footwear brand Jimmy Choo for $1.2B in July 2017. Versace for $2.1B in September 2018. In January 2019, MKH Ltd. was renamed Capri Holdings.

Today, Michael Kors, which is Capri’s major revenue contributor, operates 820 retail stores, e-commerce sites, and 2.8K+ wholesale stores. Versace has 210 retail stores and 868 wholesale stores. Jimmy Choo operates 227 retail stores and 450 wholesale stores. All three segments also operate through product and geographic licensing arrangements.

Michael Kors To The Rescue

Capri Holdings’ Q3 numbers surpassed analyst estimates, with all three segments posting growth.

Key Highlights From Q3:

  • Revenue: $1.61B Vs $1.46B expected
  • EPS: $2.22 Vs $1.69 expected

Revenue for the quarter was back above pre-pandemic levels. For fiscal 2022, which will end in March, the company expects $5.56B in revenue (Vs. earlier projection of $5.4B). For fiscal 2023, the company estimates $6.1B in revenue (Vs. analyst expectation of $5.97B). EPS target is an all-time high of $6 (Vs. prior estimate of $5.3).

CEO John Idol, who has been at the helm since 2003, is stepping down this September. The company is looking to bump up the prices for its brands, especially Versace, and anticipates little consumer resistance. It’s banking on the inelastic price nature of these purchases.

At the end of the quarter, Capri’s inventory was down 24%, and global supply chain issues have pushed back delivery dates to 45-60 days. In an industry where fashion becomes obsolete every quarter or so, these delays are akin to a death knell. Michael Kors is the worst hit amongst Capri’s three brands. Due to rising costs, Capri’s gross margin is expected to drop by 400 basis points.

70% of Capri’s top line and almost the entire operating profit comes from Michael Kors. So when Michael Kors sneezes, the rest of Capri catches a cold! This is because Versace and Jimmy Choo are not yet contributing to profitability. When they might do so is as yet unclear.

Management is happy to be vague on these terms, and investors are willing to cut some slack. For instance, Versace’s $2B revenue target will come “sooner than anticipated.” Jimmy Choo’s $1B target is “clearly in sight.” For fiscal 2023, Capri expects Versace to report $1.3B in revenue while Jimmy Choo’s topline is pegged at $675M.

These high-profile acquisitions have strained the balance sheet, with the company’s liabilities at ~$5B as of Q3. Strong operating cash flows and a reduced Capex may lead to some debt repayment. The knee-jerk reaction to Capri’s results was a share price surge of 14%. But once the euphoria died down and concerns became apparent, the shares gave up almost half the gains, ending up 8% on Thursday.

Investors can’t seem to wait for the day Versace and Jimmy Choo join the party and take some pressure off of Michael Kors. Until then, Capri’s management will need to work doubly hard to make sure this all-important brand doesn’t catch a severe cold!

Market Reaction
CPRI ended at $65.15, up 1.01%.

Company Snapshot 📈

CPRI $65.15 +0.65 (1.01%)

Analyst Ratings (21 Analysts) BUY 76%  HOLD 19%  SELL 5%

Newsworthy 📰

Fray: Amazon is exploring an offer for Peloton; report says Nike also weighing bid (AMZN +13.54%)

Downturn: Ford to suspend or cut output at eight of its factories due to chip shortage (F -9.70%)

Counter: Kohl’s says takeover offers undervalue its business, initiates ‘poison pill’ (KSS +1.98%)

Later Today 🕒

  • Affiliated Managers Group Inc. Earnings (AMG)
  • Amgen Inc. (AMGN)
  • Chegg Inc. Earnings (CHGG)
  • Hasbro Inc. Earnings (HAS)
  • Kennametal Inc. Earnings (KMT)
  • Simon Property Group Inc. Earnings (SPG)
  • Take-Two Interactive Software Inc. Earnings (TTWO)
  • Tenet Healthcare Corp. Earnings (THC)
  • Tyson Foods Inc. Earnings (TSN)

Today’s Market Terminology: Oligopoly

An Oligopoly market is characterized by a small number of producers who often act together to control the supply of a particular good and its market price

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