Inflation and Supply Chain Disruptions Cut Into Capri Holdings’ Quarterly Profits
Capri Holdings Ltd. is the latest company to reveal a mixed bag this quarter.
The fashion group — parent to the Michael Kors, Versace and Jimmy Choo brands — revealed quarterly earnings Tuesday before the market opened, improving on top-line revenues as demand for luxury goods remains strong. But continued supply chain disruptions and rising prices cut into quarterly profits.
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Investors seemed unsure of how to respond to the news. While shares were up nearly 8 percent during pre-market trading, Capri’s shares closed down 4.7 percent to $48.59 apiece Tuesday.
But John D. Idol, Capri’s chairman and chief executive officer, said in a statement that he is “pleased with our first-quarter performance with revenue, gross margin, operating margin and earnings per share all exceeding our expectations. Better-than-anticipated results were driven by strong momentum across all three luxury houses, reflecting the power of our brands as they continue to deepen consumer desire and engagement.”
Revenues for the first quarter ending July 2 grew 8.5 percent to $1.36 billion, up from $1.25 billion a year ago. By brand, sales at Versace grew 14.6 percent to $275 million, up from $240 million a year ago. At Jimmy Choo, revenues rose 21.1 percent to $172 million, up from $142 million, while Michael Kors revenues increased 4.8 percent to $913 million, up from $871 million. Across all brands, the biggest drops in revenue stemmed from the Asia region.
Profits fell to $201 million, down from $219 million a year ago.
Investors weren’t the only ones with mixed feelings about the results. Analysts were, too.
Zachary Warring, equity analyst at investment research firm CFRA Research, placed a “hold” rating on Capri’s stock and cut the 12-month price target to $67 a share.
“In [the first quarter], the company’s largest brand Michael Kors grew 5 percent, year-over-year, while Versace grew 15 percent and Jimmy Choo grew 21 percent,” Warring wrote. “Foreign exchange had a 670 bps [basis points] negative impact to revenues in the quarter as the dollar surged. [Capri] repurchased $300 million in shares in the quarter with $700 million remaining in the program. We remain neutral and like other luxury retailers better.”
Simeon Siegel, managing director at BMO Capital Markets, however, rated the stock “outperform” and set a $74 price target.
“Despite the macro, [Capri] beat revenues across concepts, at slightly worse [gross margins], but meaningfully better [earnings before interest and taxes] margin,” Siegel wrote. “With attractive valuation and healthy cash flow, we believe [Capri] provides a compelling opportunity as one of the few committed to maintaining brand elevation and margin, holding back discounts, even if it costs volume.”
In the current quarter, the company is anticipating total sales will be roughly $1.4 billion — or about $300 million at Versace, $140 million at Jimmy Choo and $960 million at Michael Kors. For the full year, Capri expects total revenues of $5.85 billion — or $1.17 billion at Versace, $650 million at Jimmy Choo and more than $4 billion at Michael Kors.
Idol added on Tuesday morning’s conference call with analysts that declines in China were down in the mid-30s percentile range for the quarter, year-over-year, partially offset by gains in Japan and Southeast Asia.
“We are less optimistic, and you could see that in our forecast about China,” the CEO said. “We now expect the impact of COVID-[-19]-related restrictions in China will continue into the second half of fiscal [year] ’23. As a result, we anticipate approximately $50 million less in revenue from mainland China relative to our prior forecast. We now assume revenue in Mainland China will decline approximately 20 percent, year-over-year, in the third quarter and approximately 10 percent in the fourth quarter.”
In addition, the company is anticipating higher transportation costs and added supply chain expenses in the back half of the year, compared with a year ago.
Still, Idol said he remains optimistic about the future.
“With our portfolio of iconic, founder-led fashion luxury brands, Capri Holdings is positioned to deliver multiple years of revenue and earnings growth,” he said.
The CEO added on the call that “none of us know what’s going to happen in the back half of the year with the consumer. But it appears that the luxury industry is quite robust and quite healthy. And we think that is going to continue for the foreseeable future in the back half of the year. There might be some consumer adjustments. Again, we don’t know. But from what we’re seeing currently, that [strength in luxury goods] seems to be holding up.”
He called out strength in dresses, the Michael Kors’ men’s business and Europe as additional tailwinds.
“In terms of Europe, I would say, I would use the word surprised,” Idol told analysts. “We were very pleasantly surprised at how strong and robust the consumer is in Europe. I think that they are clearly showing a resilience and a desire to get back out and enjoy an open environment. Lockdowns are basically nonexistent in Europe. And even though COVID cases are on the rise around the world, I think people are learning to live with it. And so we think that, again, there’s quite a bit of pent-up demand in Europe where they really reopened a bit later than North America.”
He added that travel in Europe, the Middle East, Africa and North America is also gaining momentum.
“Travel is quite strong and that’s generating business both in the local markets and we’re seeing some return with our travel retail business,” Idol said. “It’s not where it was pre-pandemic, but we’re definitely starting to see some pickup in that business.”
An expansion to Capri’s portfolio isn’t off the table either, Idol said, but it would have to be the right fit and likely a European luxury house.
“That’s where the value is and the sustained growth opportunity is for the group over many, many years,” he said. “There are assets that either are available, or will be available.
“It has to have scale to it because we don’t want to buy something that’s small and would distract management given we have this very big opportunity in front of us with our three existing luxury houses,” he added. “But if the right asset were to come available, we would certainly be in the mix.”
The retailer ended the quarter with 1,265 brick-and-mortar locations, $221 million in cash and cash equivalents and $1.38 billion in long-term debt.
Shares of Capri Holdings are down 18.8 percent, year-over-year.
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