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Investors Are Cheering Capri’s Turnaround Progress, But Is the Company Relying Too Much on Michael Kors?

Capri Holdings Ltd. gave investors something to cheer about today when it posted third-quarter profits that blew past forecasts and predicted that it could outpace its pre-COVID growth levels in a matter of two years.

The upbeat posturing coupled with the better-than-expected earnings and gross margins — revenues were roughly in line or just short of analysts’ bets — sent the firm’s shares climbing. But even as Capri appears to be moving in the right direction, some market watchers are stopping short of green-lighting the stock.

“The results were fine for the company as a collective, but I wasn’t necessarily impressed — particularly for the Michael Kors brand,” said Jessica Ramirez, retail research analyst at Jane Hali & Associates. “[What’s more], the company’s overall e-commerce [growth of 65%] isn’t really a surprise — if you’re not doing well in e-commerce right now, then something is definitely wrong.”

Ramirez said the story told by Capri’s portfolio reads like two diverging tales: One sees innovation and full-price selling at the forefront (i.e. Versace and Jimmy Choo), and the other is a saga where promotions and markdowns continue to be leading characters (i.e. Michael Kors).

And, it can be tough to balance the long-term outcomes when Michael Kors still brings in about 70% of Capri’s overall revenues.

During the third quarter, revenues at Michael Kors fell 18.6% to $986 million, while sales at Versace were flat at $195 million and Jimmy Choo tumbled 26.7% to $121 million. (During a call with investors today, Capri CEO John Idol attributed some of Jimmy Choo’s decline to the absence of a 2020 holiday collection.)

“When you look to Michael Kors’ handbags [for instance] — the handbag market is definitely a weakness [on its own] and then Kors doesn’t have the best assortment [compared with] direct-to-consumer brands, which [are resonating],” Ramirez added, noting that Kors is still heavily present in weaker channels such as department stores, while Jimmy Choo and Versace are distributed on luxury e-commerce platforms — like Farfetch, Mytheresa and Net-a-Porter — that continue to have positive momentum.

For his part, JP Morgan analyst Matthew Boss remained neutral on Capri’s stock following the results but raised his price target for the stock to $45, from $43. Meanwhile, Camilo Lyon, managing director at BTIG, reiterated his buy rating for the shares, citing the robust Q3 EPS beat and strong margins at Kors and Versace, which helped offset softness at Choo.

For the three months ended Dec. 26, Capri logged adjusted profits of $250 million, or $1.65 per diluted share, compared with the prior year’s profits of $253 million, or $1.66 per diluted share. Wall Street had anticipated earnings of $1.01. Revenues fell 17.1% to $1.3 billion, versus market watchers’ bets of $1.33 billion. Overall, gross margin expanded 520 basis points.

“Consistent with our preview, gross margins were the upside surprise as we believe the company took an active stance on reducing the level of promotions during holiday,” wrote Lyon in a distribution note this afternoon. “Inventory — down 17.8% versus sales down 17% — was also well managed. Lastly, expenses were tightly controlled … Overall, we view these results as strong evidence that the company is on a path to recovery and expect the stock to outperform today.”

Over the past several months, the luxury conglomerate has taken several steps in a bid to preserve liquidity as the COVID-19 pandemic persists, including cutting back on operating expenses, reducing capital expenditures and suspending its share repurchase program.

While Capri did not provide an outlook for the 2021 fiscal year, Idol continued to signal optimism in the firm’s go-forward strategy.

“By fiscal 2023, we anticipate revenue and earnings per share will exceed pre-pandemic levels,” he said. “We remain confident that our three luxury houses position Capri Holdings to deliver multiple years of revenue and earnings growth as well as increase shareholder value.”

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