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Michael Kors’ Owner Beat Wall St. Estimates. Here’s What Happened in Q3.

Michael Kors’ parent company easily beat Wall Street’s third quarter’s expectations, thanks to double-digit growth in Mainland China and e-commerce sales that jumped 65 percent, but the coronavirus pandemic will challenge the next six months.

In a Nutshell: For the most part, it was a good quarter for Capri Holdings, representing its second consecutive quarter of gains.

“We were pleased with our third quarter results as revenue improved sequentially and exceeded our expectations. As we continued to execute on our strategic initiatives, earnings were meaningfully higher than anticipated driven by significant gross margin expansion. We also remain encouraged by the double digit increases in our customer databases as we continue to attract new consumers to each of our luxury houses,” chairman and CEO John D. Idol said on Wednesday.

“We now believe that the near term will be more challenging,” Idol said in a conference call to Wall Street analysts. He attributed that to the resurgence of the virus, which has led to more temporary store closures, particularly in the Europe, Middle East and Africa (EMEA) region. That said, Idol believes that the vaccine rollout will bring an end to the pandemic, and boost luxury brands.

However, he doesn’t expect the company’s revenue and earnings per share to exceed pre-pandemic levels until the company’s fiscal year 2023, or around May of calendar year 2022. That’s because vaccine distribution has been slow, he said. Enough people need to be vaccinated globally before many feel comfortable traveling again, which probably won’t be until well into calendar year 2022, with the first signs of normalized routines starting possibly around September.

In the meantime, price increases at Jimmy Choo and Michael Kors, and higher full price sell throughs, should benefit these brand’s gross margins.

Idol said Versace will unveil a new signature V look later this month during its runway show at Milan Fashion Week. That new collection is expected to provide a “change in the growth trajectory of the company for the next 24 months,” he said.

Jimmy Choo and Versace over the next two years are expected to contribute 40 percent of total revenues and one-third of company earnings. Idols said Versace is still seen as the “largest growth opportunity” for Capri, with a revenue target of $2 billion over time.

In general, the company remains on track to close 100 doors over the next 18 to 24 months.

Net Sales: For the three months ended Dec. 26, total revenue fell 17.1 percent to $1.30 billion from $1.57 billion.

Capri said e-commerce sales improved sequentially, increasing 65 percent. In addition, the company posted positive retail sales in Asia across all of its luxury brands, led by double-digit growth in Mainland China.

The company said the operating margin was 12.8 percent, but was 19.7 percent on an adjusted basis. That compares with 13.0 percent and 16.8 percent, respectively, from the year-ago quarter.

Net inventory for the quarter was down 18 percent to $789 million.

By brand, Versace revenue of $195 million was flat versus a year ago. The operating margin was 6.7 percent. That’s far better than the operating margin of a year ago, which was a negative 6.2 percent. In addition, the company said Versace posted double-digit global retail sales growth in the quarter in Mainland China, along with double-digit retail sales growth in North America. E-commerce sales were up in the triple digits. Its global database rose 18 percent year-over-year.

Idol said physical stores remain important for luxury brands, so the company is being careful on where it is opening stores. Currently, about 40 percent of Versace’s doors reflect an updated store concept, and the majority of the fleet should have the new retail format over the next two years.

At Jimmy Choo, revenue fell 26.7 percent to $121 million, hurt by the absence of a holiday collection, which was pulled as the company focused on cost control. The brand also posted a negative 6.6 percent in operating margin. New offerings such as totes in handbags did well, while casual footwear can provide growth beyond sneakers. Soft shearling slippers embellished with sequins and crystals did well over holiday.

All wasn’t lost in the quarter as e-commerce sales increased for the brand, while its global database rose 15 percent year-over-year. The brand is seeing “significant improvement now in sales trends,” Idol said, with the arrival of new spring product. In addition, a new JC signature collection is expected in the second calendar quarter this year.

Doing better in the quarter was the Michael Kors brand. While revenue fell 18.6 percent to $986 million, operating margin was 28.5 percent, up from 23.8 percent a year ago. E-commerce sales improved sequentially, up 70 percent in the quarter, while the global database was up 16 percent year-over-year.

Sales in Asia offset the slowdown in the EMEA region. Sales in the signature collection did especially well, and represented 35 percent of the total assortment mix across all categories, versus 27 percent last year. “Accessories continue to perform well as consumers respond to newness,” Idol said, adding that men’s is still viewed as a growth driver for the brand, driven by signature and accessories.

For the nine months, revenue dropped 34 percent to $2.86 billion from $4.36 billion.

Earnings: Net income was down 15 percent to 179.0 million, or $1.18 a diluted share, from $210.0 million, or $1.38, a year ago. On an adjusted basis, net income was $250 million, or $1.65 a diluted share.

Wall Street’s consensus expectations were for adjusted diluted EPS of $1.01 on revenues of $1.33 billion.

For the nine months, net income fell 63.1 percent to $121.0 million from $328.0 million.

CEO’s Take: “As the world continues to emerge from this crisis, we are increasingly optimistic about the outlook for the fashion luxury industry and Capri Holdings. By fiscal 2023, we anticipate revenue and earnings per share will exceed pre-pandemic levels. 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,” Idol said.

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