While the luxury holding firm easily beat Wall Street’s third-quarter estimates, the public health emergency has taken a toll on the company’s current fourth quarter and could pare revenues, the company said.
In a Nutshell: “We are in the midst of a dynamic global health emergency related to the coronavirus. Our thoughts and prayers go out to the people of China, including our own employees located in this region, as well as those affected by the virus globally,” chairman and CEO John D. Idol said.
“Given the extraordinary and appropriate efforts taken to contain the virus, our trading results in Greater China and certain other parts of the Asia region have been materially impact,” Idol said in a conference call to analysts Wednesday morning.
Sales in the region already have suffered as a result of the social unrest in Hong Kong.
As of Feb. 5, the company closed 150 of its 225 stores in Mainland China, joining other brands that have temporarily scaled back their operations there. “Additionally, most of the stores that remain open are operating with reduced hours and experiencing significant declines in customer traffic,” the company said. “While this global health emergency is expected to be temporary, the duration and intensity of the disruption is uncertain, including potential impact outside of China if travel and tourist traffic is further restricted and there is a resulting decline in Chinese tourist spending in other regions.”
Net Sales: For the three months ended Dec. 28, total revenue rose 9.2 percent to $1.57 billion from $1.44 billion.
Gross margin for the quarter was 59.3 percent, just slightly below 60.7 percent in the same year-ago quarter.
The company said Versace revenue was $195 million and comparable store sales rose in the mid-single digits on a constant currency basis. While it continued to deliver double-digit comps growth in the Americas and in Europe, Middle East and Africa region, the brand did post an operating loss of $12 million.
Jimmy Choo revenue rose 1.9 percent to $165 million, although comps were flat on a constant currency basis. Operating income fell to $9 million from $15 million in the year-ago period.
The Michael Kors business saw revenue fall 5.1 percent to $1.21 billion, although the decline was down 4.7 percent on a constant currency basis. Comps fell to the low single digits, also on a constant currency basis. Operating income in the period was $288 million, down from $320 million a year ago. Idol said revenue was in line with expectations, but retail revenue was below expectations, hurt by the comps decline.
“While the situation is China is very concerning, we continue to believe that the long-term opportunity in the Asia region will be a pillar for our future growth. The power of our three fashion luxury houses position us to achieve meaningful long-term revenue and earnings growth,” Idol told analysts.
The chairman also addressed the 125 stores Macy’s Inc., a significant wholesale partner, plans to close over the next three years. “I don’t think that these doors that they’ve announced, from what we understand, are going to be material to our business. It will have a small impact, but we don’t think it’s going to be anything significant,” Idol said.
Earnings: For the quarter, net income rose 0.1 percent to $210 million, or $1.38 a diluted share, from $200 million, or $1.33, a year ago. On an adjusted basis, net income was $253 million, or $1.66 a diluted share.
Wall Street was expecting adjusted diluted earnings per share of $1.59 on revenue of $1.54 billion.
Capri said it expects the situation in China to reduce revenue by $100 million and earnings per share by 40 cents to 45 cents in the fourth quarter and full year. “This estimate could materially change if the severity of the situation worsens,” the company said.
Guidance is based on what the company knows today, and an expectation that “nothing gets better through the end of March,” Idol said. “And I think that’s a very prudent way to view it.” The company now plans to close stores in Macau for a few weeks along with the casinos, he added.
For the year, Capri expects total revenue of $5.65 billion, with diluted EPS at between $4.45 to $4.50. That’s compared to prior guidance of revenue at $5.80 billion, with diluted EPS in the range of $4.95.
For the fourth quarter, total company revenue was guided to $1.30 billion, and diluted EPS in the range of 68 cents to 73 cents. Versace brand revenue was forecasted at $210 million. Jimmy Choo was estimated at $130 million for the upcoming quarter, and Michael Kors’ revenue at $950 million.
“Prior to consideration of the situation in China, Asia would have represented approximately 25 percent of total Capri revenue in our fourth quarter, and China makes up more than half of our business in that region,” Tom Edwards, chief financial officer, said during the conference call.
Capri sources less than 10 percent of its Michael Kors product in China, Edwards noted. “Our forecast could also be negatively impacted by disruption of our supply chain,” he said.
Many cities remain closed until next week on an extended Lunar New Year holiday break, when factories are expected to begin to open again. Until they actually reopen, no one knows how many may stay closed, which would impact shipping. There’s also the possibility of a disruption in freight movement, which could further impact the company’s forecast.
CEO’s Take: “For the third quarter, we were pleased to deliver revenue and earnings per share above our expectations. Our revenue increase reflected the addition of Versace and growth from Jimmy Choo, while Michael Kors revenue was better than anticipated. The initiatives for our recent acquisitions, Versace an Jimmy Choo, continue to gain traction, and we believe we are on the right path to position Michael Kors for future growth,” Idol said. “Longer term, as we continue to execute against our strategies, we are confident in our ability to deliver multiple years of revenue and earnings growth.”