Wholesale performance and disappointing China sales tripped up Capri Holdings’ third quarter earnings report.
In a Nutshell: Capri chairman and CEO John D. Idol said third quarter performance was “more challenging than we anticipated.” But parts of the business performed well, with Versace, Jimmy Choo and Michael Kors’ stores all doing solid business.
Disappointing international wholesale performance resulted in “expense deleverage and a lower operating margin.” Idol said that the company is better aligning operating expenses with the change in revenue by quarter.
In a Wednesday conference call, Idol told investors that “revenue in mainland China declined significantly due to the surge in COVID cases as the country reopens.”
One bright spot was total retail sales, which increased mid-single digits globally in constant currency, Idol said. Capri added “more than 12 million new names” to its customer database versus the prior year for the “largest year-over-year increase in our history,” Idol said.
Did price increases mess with the wholesale channel? Perhaps.
Idol suggested as much, noting that Michael Kors played a big role in the company’s 20 percent wholesale sales decline. After “fairly significant price increases” at Jimmy Choo and Versace, Capri is “stopping the price increases across the group,” he said.
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For Versace, Idol pointed to accessories as a key growth driver, saying “Women’s accessories was the strongest performing category, with sales in our retail channel up over 40 percent.” Footwear plans include the “Pin Point Collection, a new range of statement pumps characterized by a curved metal stiletto heel,” he said.
China sales were a problem for Jimmy Choo’s revenues. “Women’s accessories was the strongest performing category, with sales in our retail channel up high single digits, versus prior year,” Idol said. He added that women’s footwear sales in the quarter were driven by dressier styles.
Launched in the quarter, the Jimmy Choo x Timberland collaboration reimagines the latter’s original yellow boot through the eyes of creative director Sandra Choi, alongside Harlem’s Fashion Row and designer Shanel Campbell. “This exciting collaboration generated over 50 million impressions across social media, as well as strong product sell-throughs,” Idol said.
Of the three brands, the problem child seemed to be Michael Kors. Retail sales were up in the low-single digits, but saw greater declines in Mainland China. Wholesale sales fell 25 percent in the quarter, which Idol attributed to the sales mix shift between retail and wholesale.
Because anticipated sales increases during the holidays failed to materialize, “we shipped less into the channel because we did not want to end up with excess inventory, which will result in additional markdowns,” he said.
He noted that pricing for the brand is up on average “close to 25 percent since we started our price increases in 2019,” adding that the consumer was more cautious during the holiday season. While the company saw strong performance at its own stores through Black Friday and beyond, that wasn’t the case in the North American wholesale channel.
Idol also noted a “significant delta” between the performance in department versus company-operated stores, prompting Capri to further invest in training and staffing at its wholesale partners.
Capri continues to elevate the Michael Kors brand and product, which Idol said is the “right strategy for the brand.”
Consumers are responding positively to the “core iconic collection featuring Michael Kors Signature and hardware,” with Signature representing 55 percent of accessory sales during the quarter, he added.
Footwear can continue to expand to drive incremental revenues, while men’s remains one of the “strongest performing categories in retail, Idol said, adding that retail sales in men’s in the quarter “increased strong double digits, globally, led by signature product.”
Net inventory at the end of the quarter was $1.19 billion, a 21 percent increase from the same year-ago period. Capri said that management expects inventory levels to be below prior year by the end of the fourth quarter.”
At the end of the quarter Capri operated a total of 1,294 doors in its store network. The locations comprised 225 Versace stores, up from 212 a year ago, 242 Jimmy Choo doors, up from 240, and 827 Michael Kors stores, down from 834.
Net Sales: For the three months ended Dec. 31, total revenue fell 6 percent to $1.51 billion from $1.61 billion.
By brand, Versace revenue slipped 0.8 percent to $249 million, Jimmy Choo was down 5.6 percent to $168 million and Michael Kors fell 7.2 percent to $1.095 billion.
By region, Versace revenue in The Americas was down 4 percent, up 14 percent in EMEA (Europe, Middle East and Africa) and down 19 percent in Asia. Jimmy Choo revenue in The Americas rose 6 percent, was up 1 percent in EMEA and down 24 percent in Asia. Michael Kors revenue in The Americas was down 5 percent, fell 11 percent in EMEA and decreased 18 percent in Asia.
For the nine months, total revenue rose 3 percent to $4.28 billion from $4.16 billion.
Earnings: Net income dropped 30 percent to $225 million, or $1.72 a diluted share, from $322 million, or $2.11, in the same year-ago period. On an adjusted basis, diluted earnings per share (EPS) were $1.84.
Wall Street was expecting adjusted diluted EPS of $2.22 on revenue of $1.53 billion.
For the fourth quarter, the company is expecting total revenue of $1.275 billion, with diluted EPS in the range of 90 cents to 95 cents. Versace revenue was estimated at $280 million, Jimmy Choo at $130 million and Michael Kors at $865 million.
Given the weakness in wholesale POS performance in the third quarter, which continued into the fourth quarter, Idol said Capri is “reducing shipments into this channel.”
Tom Edwards, executive vice president, chief operating officer and CFO, said the company is “more cautious” in its revenue outlook due to the “increasingly uncertain macro economic environment.” He said the company planned wholesale to be down, but are “now planning it down further and forecast an approximate 35 percent decline.”
For the Fiscal Year 2023, Capri forecasted total revenue of $5.56 billion, and diluted EPS at $6.10. Versace revenue was guided to $1.1 billion, Jimmy Choo at $610 million and Michael Kors at $3.83 billion. The full year forecast is below prior estimates of adjusted EPS at $6.85 on revenue of $5.70 billion issued when the company reported on second quarter results in November.
For Fiscal Year 2024, early guidance pegs total revenue at $5.8 billion, and diluted EPS of $6.40. Versace revenue was forecasted at $1.25 billion, Jimmy Choo at $650 million and Michael Kors at $3.9 billion.
Edwards said wholesale penetration will decline from “27 percent of revenue in Fiscal ’23 to approximately 23 percent of revenue in Fiscal ’24.”
For the nine months, net income was down 12 percent to $650 million, or $4.74 a diluted share, from $741 million, or $4.82, a year ago.
CEO’s Take: “In our own retail channel, we anticipate solid growth driven by our strategic Initiatives, clienteling and personalized strategies as well as a recovery in China as the country reopens,” Idol said. “In the wholesale channel, we expect revenue to decline in the mid teens, with trends normalizing in the back half of the fiscal year.”