Jamie McCarthy/Getty Images Entertainment
Investment Thesis
Capri Holdings (NYSE:CPRI) will see higher stock prices due to debt reduction, share buybacks, product diversification, and distribution channel improvements. CPRI can provide an excellent return from the covered call premium even if the stock does not move much.
Capri Holdings
Michael Kors, Versace, and Jimmy Choo are the brands of Capri Holdings, a marketer, distributor, and retailer of upscale accessories and apparel. Kors, Capri’s largest brand, offers handbags, footwear, and apparel through more than 800 company-owned stores, wholesale, and e-commerce. Versace (acquired in 2018) is known for its luxury fashion, while Jimmy Choo (acquired in 2017) is best known for women’s luxury footwear. John Idol has served as CEO since 2003.
Capri has iconic luxury brands that are industry leaders in design, style, and craftsmanship. They cover the full spectrum of fashion luxury categories, including products for men and women, wearable technology, watches, jewelry, eyewear, and a full line of fragrance products. Michael Kors generates 69% of sales, Versace accounts for 20%, and Jimmy Choo totals 11%.
www.capriholdings.com/corporate-overview/default.aspx
The Americas are 59% of total sales, followed by 25% from EMEA and 16% from Asia.
www.capriholdings.com/corporate-overview/default.aspx
This fiscal year will see a negative $350M impact from currency exchange headwinds. This negative impact will probably slowly recede over the next several years. The covid slowdown and inflation impacted them in 2020 and 2021, but EPS is bouncing back strongly to new all-time highs.
www.capriholdings.com/corporate-overview/default.aspx
69% of revenue comes from Retail, 27% from wholesale, and 4% from Licensing.
www.capriholdings.com/corporate-overview/default.aspx
CPRI has annual sales of $5.8B with 14.6K employees. They are 95.3% owned by institutions, with 5.8% short interest. Their return on equity is 38.6%, and they have a 15.0% return on invested capital. The free cash flow yield per share is 2.3%, and their buyback yield per share is 17.0%. Their Piotroski F-score is six, indicating strength. They have a price-to-book ratio of 3.2.
Q2 Quarterly Results & Full-Year Outlook
CPRI announced record Q2 earnings of their fiscal year 2023 in the November 9th press release. Revenue increased by 8.6% but was up 17.5% in constant currency. EPS was $1.79 and 16% above the $1.54 consensus. They reported Q2 revenue of $1.41B, barely above the consensus of $1.4B.
Mr. Idol continued, “Looking at the remainder of Fiscal 2023, we are now taking a more cautious view with our revenue outlook due to an increasingly uncertain macroeconomic environment, foreign currency headwinds, and the ongoing impact of COVID-related restrictions in China. At the same time, we are pleased to maintain Capri’s earnings per share guidance for the year, reflecting higher gross margin expectations, diligent expense management, and reduced share count as a result of our ongoing share repurchase program.”
CPRI forecasted its fiscal year 2023 EPS at $6.85, while the consensus was $6.76. They see FY23 revenue of approximately $5.7B versus a consensus of $5.83B.
The fiscal Year 2023 Outlook
For Capri Holdings, the Company expects the following:
- Total revenue of approximately $5.7 billion
- Gross margin expansion of 50 basis points
- Operating margin of approximately 18.3%
- Net interest expense of approximately $6 million
- Effective tax rate of approximately 10%
- Weighted average diluted shares outstanding of approximately 136 million
- Diluted earnings per share of approximately $6.85
- Ending inventory to be below the prior year
www.capriholdings.com/corporate-overview/default.aspx
From Bankrupt to Balance Sheet Improvement and Aggressive Share Buybacks
Michael Kors was founded in 1981 but struggled as a small, high-end fashion brand before going bankrupt in 1993. In 2003, an investment group called Sportswear Holdings acquired 85% of Michael Kors at a reported valuation of only $100 million. The new ownership greatly expanded distribution and lowered price points. They mimicked many of Coach’s handbag styles, offered at lower prices, and opened many stores near Coach locations.
CPRI spent $1.4 billion to purchase Jimmy Choo in 2017 and $2B for Versace in 2018. In my opinion, this was not the best use of cash since both new companies have lower operating margins and fashion risk. Michael Kors still has the best operating margin at 25.8%. Versace has a 20.1% operating margin, while Jimmy Choo lags behind the pack with only a 5.6% operating margin. CPRI says the two acquired brands can eventually provide 30% of total profits, but I think that could take up to a decade to accomplish and may never happen.
Total debt has declined since they reported $4.367B in 2020, followed by $3.446B in 2021 and $3.383 in Q2 of 2023. They have a net debt-to-EBITDA ratio of 2.6, which is reasonable, in my opinion. I generally avoid companies with more than a net debt-to-EBITDA ratio of 3.0.
During the second quarter, the Company repurchased approximately 7.1 million shares for roughly $350 million. Since the end of the second quarter, the Company repurchased another 2.3 million common shares for approximately $100 million. These 9.4M shares represent about 7% of total outstanding shares. Capri does not pay dividends but returns cash to investors through share repurchases.
On November 9, 2022, the Company announced a new share repurchase program of up to $1 billion of its outstanding ordinary shares over two years. This means CPRI could buy back an additional 15% or more of outstanding shares during the next two years, depending on the purchase price.
Product Diversification & Distribution Channel Improvements
Michael Kors is 69% of total sales and is expanding from the high-margin handbag market into other categories, such as footwear. Product diversification efforts also appear to be paying off with Jimmy Choo and Versace. Michael Kors is also increasing its more profitable direct-to-consumer sales and reducing dependence on the wholesale channel.
CPRI operates in a highly competitive, rapidly evolving luxury fashion industry, grappling with increased acceptance of the secondhand market. Who knew there would be an expanding market for used luxury fashion when owners became bored with their products?
The company should benefit as international travel returns and China’s covid lockdowns dissipate hopefully throughout 2023.
Good Technical Entry Point
The share price of CPRI jumped 14.6% from the $46.93 closing price on November 8th before earnings to a $53.80 closing price on November 25th. I’ve added the green Fibonacci lines, using the high and low of the past five years for CPRI. It’s interesting to note how the market pauses or bounces off these Fibonacci lines. They can be one clue as to where the stock price may be headed. CPRI is above the 61.8% Fibonacci retracement level but could go lower. However, I believe that CPRI will trade near the 76.4% Fibonacci level of $58.96 by May for the reasons in this article.
Schwab StreetSmart Edge
The three most accurate analysts have an average one-year price target of $65.00, indicating a 21% potential upside from the November 25th closing price of $53.50 if they are correct. Their ratings are all strong buys. Analysts are just one of my indicators, and they are not perfect, but they are usually in the ballpark with estimates or at least headed in the right direction. They often seem a bit optimistic, so I suspect prices may end up lower than their one-year targets to be on the safe side.
Trends in Earnings Per Share, P/E Ratio, and Operating Margin
The black line shows CPRI’s stock price for the past twelve years. Look at the chart of numbers below the graph to see that CPRI earnings were $3.63 in 2019, -$1.50 in 2020, -$0.40 in 2021, and $5.49 in their fiscal year 2022. They are projected to earn $6.85 in 2023.
The P/E ratio for CPRI is currently at 8, but the average ratio over the past ten years is 16. I don’t think the P/E will rally back to 16 anytime soon. If CPRI earns $6.85 in 2023, the stock could trade at $55.48 if the market assigns only an 8.1 P/E ratio.
FastGraphs.com
CPRI’s operating margin has declined from 30% in 2013. The current operating margin is still a healthy 17.4%. The acquisition of Jimmy Choo in 2017 and Versace in 2018 impacted them since they had lower operating margins. Also, Michael Kors’s growth has come from new U.S. stores and expanded distribution, which led to widespread discounting. This is causing at least some degradation of the brand value. Then came additional challenges from inflation and supply chain costs starting in 2020.
While Capri has now reduced the distribution of the label to limit discounting of its bags, it now faces challenges such as high shipping costs, inflation, unfavorable currency movement, and virus-related store disruptions in China.
Due to store closures and actions that Capri took, the number of wholesale doors that carry Michael Kors merchandise fell to 2,742 at the end of fiscal 2022 from 4,038 at the end of fiscal 2015. Meanwhile, sales have shifted to outlet stores, which increased to 301 from 153 over the same period.
CPRI sells high-end products to the at least somewhat wealthy who will still have money even in an economic downtrend. I believe some of their products have pricing power, and they can increase selected prices if they desire to, although it will be at the cost of volume.
StockRover.com
The stock price has not yet caught up with the increasing sales and EPS.
StockRover.com
Sell Covered Calls
My answer to uncertainty is to sell covered calls on CPRI six months out. CPRI closed at $53.30 on November 25th, and May’s $55.00 covered calls are at or near $6.70. One covered call requires 100 shares of stock to be purchased. The stock will be called away if it trades above $55.00 on May 19th. It may even be called away sooner if the price exceeds $55.00, but that’s fine since capital is returned sooner.
The investor can earn $670 from call premium and $170 from stock price appreciation. This totals $840 in estimated profit on a $5,330 investment, which is a 33.2% annualized return since the period is 173 days.
If the stock is below $53.30 on May 19th, investors will still make a profit on this trade down to the net stock price of $46.60. Selling covered calls reduce your risk.
Takeaway
CPRI will see higher stock prices due to debt reduction, share buybacks, product diversification, and distribution channel improvements. Even if CPRI’s stock price only moves from $53.30 to $55.00 by May 19th, a 33.2% potential annualized return is possible, including the covered call premium.
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Jamie McCarthy/Getty Images Entertainment
Investment Thesis
Capri Holdings (NYSE:CPRI) will see higher stock prices due to debt reduction, share buybacks, product diversification, and distribution channel improvements. CPRI can provide an excellent return from the covered call premium even if the stock does not move much.
Capri Holdings
Michael Kors, Versace, and Jimmy Choo are the brands of Capri Holdings, a marketer, distributor, and retailer of upscale accessories and apparel. Kors, Capri’s largest brand, offers handbags, footwear, and apparel through more than 800 company-owned stores, wholesale, and e-commerce. Versace (acquired in 2018) is known for its luxury fashion, while Jimmy Choo (acquired in 2017) is best known for women’s luxury footwear. John Idol has served as CEO since 2003.
Capri has iconic luxury brands that are industry leaders in design, style, and craftsmanship. They cover the full spectrum of fashion luxury categories, including products for men and women, wearable technology, watches, jewelry, eyewear, and a full line of fragrance products. Michael Kors generates 69% of sales, Versace accounts for 20%, and Jimmy Choo totals 11%.
www.capriholdings.com/corporate-overview/default.aspx
The Americas are 59% of total sales, followed by 25% from EMEA and 16% from Asia.
www.capriholdings.com/corporate-overview/default.aspx
This fiscal year will see a negative $350M impact from currency exchange headwinds. This negative impact will probably slowly recede over the next several years. The covid slowdown and inflation impacted them in 2020 and 2021, but EPS is bouncing back strongly to new all-time highs.
www.capriholdings.com/corporate-overview/default.aspx
69% of revenue comes from Retail, 27% from wholesale, and 4% from Licensing.
www.capriholdings.com/corporate-overview/default.aspx
CPRI has annual sales of $5.8B with 14.6K employees. They are 95.3% owned by institutions, with 5.8% short interest. Their return on equity is 38.6%, and they have a 15.0% return on invested capital. The free cash flow yield per share is 2.3%, and their buyback yield per share is 17.0%. Their Piotroski F-score is six, indicating strength. They have a price-to-book ratio of 3.2.
Q2 Quarterly Results & Full-Year Outlook
CPRI announced record Q2 earnings of their fiscal year 2023 in the November 9th press release. Revenue increased by 8.6% but was up 17.5% in constant currency. EPS was $1.79 and 16% above the $1.54 consensus. They reported Q2 revenue of $1.41B, barely above the consensus of $1.4B.
Mr. Idol continued, “Looking at the remainder of Fiscal 2023, we are now taking a more cautious view with our revenue outlook due to an increasingly uncertain macroeconomic environment, foreign currency headwinds, and the ongoing impact of COVID-related restrictions in China. At the same time, we are pleased to maintain Capri’s earnings per share guidance for the year, reflecting higher gross margin expectations, diligent expense management, and reduced share count as a result of our ongoing share repurchase program.”
CPRI forecasted its fiscal year 2023 EPS at $6.85, while the consensus was $6.76. They see FY23 revenue of approximately $5.7B versus a consensus of $5.83B.
The fiscal Year 2023 Outlook
For Capri Holdings, the Company expects the following:
- Total revenue of approximately $5.7 billion
- Gross margin expansion of 50 basis points
- Operating margin of approximately 18.3%
- Net interest expense of approximately $6 million
- Effective tax rate of approximately 10%
- Weighted average diluted shares outstanding of approximately 136 million
- Diluted earnings per share of approximately $6.85
- Ending inventory to be below the prior year
www.capriholdings.com/corporate-overview/default.aspx
From Bankrupt to Balance Sheet Improvement and Aggressive Share Buybacks
Michael Kors was founded in 1981 but struggled as a small, high-end fashion brand before going bankrupt in 1993. In 2003, an investment group called Sportswear Holdings acquired 85% of Michael Kors at a reported valuation of only $100 million. The new ownership greatly expanded distribution and lowered price points. They mimicked many of Coach’s handbag styles, offered at lower prices, and opened many stores near Coach locations.
CPRI spent $1.4 billion to purchase Jimmy Choo in 2017 and $2B for Versace in 2018. In my opinion, this was not the best use of cash since both new companies have lower operating margins and fashion risk. Michael Kors still has the best operating margin at 25.8%. Versace has a 20.1% operating margin, while Jimmy Choo lags behind the pack with only a 5.6% operating margin. CPRI says the two acquired brands can eventually provide 30% of total profits, but I think that could take up to a decade to accomplish and may never happen.
Total debt has declined since they reported $4.367B in 2020, followed by $3.446B in 2021 and $3.383 in Q2 of 2023. They have a net debt-to-EBITDA ratio of 2.6, which is reasonable, in my opinion. I generally avoid companies with more than a net debt-to-EBITDA ratio of 3.0.
During the second quarter, the Company repurchased approximately 7.1 million shares for roughly $350 million. Since the end of the second quarter, the Company repurchased another 2.3 million common shares for approximately $100 million. These 9.4M shares represent about 7% of total outstanding shares. Capri does not pay dividends but returns cash to investors through share repurchases.
On November 9, 2022, the Company announced a new share repurchase program of up to $1 billion of its outstanding ordinary shares over two years. This means CPRI could buy back an additional 15% or more of outstanding shares during the next two years, depending on the purchase price.
Product Diversification & Distribution Channel Improvements
Michael Kors is 69% of total sales and is expanding from the high-margin handbag market into other categories, such as footwear. Product diversification efforts also appear to be paying off with Jimmy Choo and Versace. Michael Kors is also increasing its more profitable direct-to-consumer sales and reducing dependence on the wholesale channel.
CPRI operates in a highly competitive, rapidly evolving luxury fashion industry, grappling with increased acceptance of the secondhand market. Who knew there would be an expanding market for used luxury fashion when owners became bored with their products?
The company should benefit as international travel returns and China’s covid lockdowns dissipate hopefully throughout 2023.
Good Technical Entry Point
The share price of CPRI jumped 14.6% from the $46.93 closing price on November 8th before earnings to a $53.80 closing price on November 25th. I’ve added the green Fibonacci lines, using the high and low of the past five years for CPRI. It’s interesting to note how the market pauses or bounces off these Fibonacci lines. They can be one clue as to where the stock price may be headed. CPRI is above the 61.8% Fibonacci retracement level but could go lower. However, I believe that CPRI will trade near the 76.4% Fibonacci level of $58.96 by May for the reasons in this article.
Schwab StreetSmart Edge
The three most accurate analysts have an average one-year price target of $65.00, indicating a 21% potential upside from the November 25th closing price of $53.50 if they are correct. Their ratings are all strong buys. Analysts are just one of my indicators, and they are not perfect, but they are usually in the ballpark with estimates or at least headed in the right direction. They often seem a bit optimistic, so I suspect prices may end up lower than their one-year targets to be on the safe side.
Trends in Earnings Per Share, P/E Ratio, and Operating Margin
The black line shows CPRI’s stock price for the past twelve years. Look at the chart of numbers below the graph to see that CPRI earnings were $3.63 in 2019, -$1.50 in 2020, -$0.40 in 2021, and $5.49 in their fiscal year 2022. They are projected to earn $6.85 in 2023.
The P/E ratio for CPRI is currently at 8, but the average ratio over the past ten years is 16. I don’t think the P/E will rally back to 16 anytime soon. If CPRI earns $6.85 in 2023, the stock could trade at $55.48 if the market assigns only an 8.1 P/E ratio.
FastGraphs.com
CPRI’s operating margin has declined from 30% in 2013. The current operating margin is still a healthy 17.4%. The acquisition of Jimmy Choo in 2017 and Versace in 2018 impacted them since they had lower operating margins. Also, Michael Kors’s growth has come from new U.S. stores and expanded distribution, which led to widespread discounting. This is causing at least some degradation of the brand value. Then came additional challenges from inflation and supply chain costs starting in 2020.
While Capri has now reduced the distribution of the label to limit discounting of its bags, it now faces challenges such as high shipping costs, inflation, unfavorable currency movement, and virus-related store disruptions in China.
Due to store closures and actions that Capri took, the number of wholesale doors that carry Michael Kors merchandise fell to 2,742 at the end of fiscal 2022 from 4,038 at the end of fiscal 2015. Meanwhile, sales have shifted to outlet stores, which increased to 301 from 153 over the same period.
CPRI sells high-end products to the at least somewhat wealthy who will still have money even in an economic downtrend. I believe some of their products have pricing power, and they can increase selected prices if they desire to, although it will be at the cost of volume.
StockRover.com
The stock price has not yet caught up with the increasing sales and EPS.
StockRover.com
Sell Covered Calls
My answer to uncertainty is to sell covered calls on CPRI six months out. CPRI closed at $53.30 on November 25th, and May’s $55.00 covered calls are at or near $6.70. One covered call requires 100 shares of stock to be purchased. The stock will be called away if it trades above $55.00 on May 19th. It may even be called away sooner if the price exceeds $55.00, but that’s fine since capital is returned sooner.
The investor can earn $670 from call premium and $170 from stock price appreciation. This totals $840 in estimated profit on a $5,330 investment, which is a 33.2% annualized return since the period is 173 days.
If the stock is below $53.30 on May 19th, investors will still make a profit on this trade down to the net stock price of $46.60. Selling covered calls reduce your risk.
Takeaway
CPRI will see higher stock prices due to debt reduction, share buybacks, product diversification, and distribution channel improvements. Even if CPRI’s stock price only moves from $53.30 to $55.00 by May 19th, a 33.2% potential annualized return is possible, including the covered call premium.
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