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Michael Kors Weighs Down Capri Holdings’ Mixed Q2

Although Capri Holdings Ltd.’s second-quarter results met Wall Street’s revenue estimate, it still missed the per-share earnings estimate by 8 cents. And while protests in Hong Kong hurt Versace’s international business, results at Michael Kors that suggest that the brand’s turnaround is still a work in progress.

In a Nutshell: The second quarter wasn’t exactly kind to Capri, given some headwinds that have hit the luxury holding company. At its core Michael Kors brand, comparable-store sales were up in the low-single digits and better than expectations for flat comps, but that bit of good news was offset by a decline in revenue and operating margin.

According to research analyst Jessica Ramirez at Jane Hali & Associates, high distribution at department stores, outlet stores and heavy discounting remain a problem at the Kors brand. She noted a higher markdown cadence year-over-year in the U.S. for the second quarter. Also, the U.K.’s sale season was a month longer this year for Kors.

Compounding the problem were sluggish international sales for Versace stemming from the Hong Kong riots,  and a decline in comps in the mid-single digits at its Jimmy Choo footwear brand.

At the end of the day, it’s still the Kors brand—which represents about 74 percent of the company’s total revenue—that needs to shape up, even as company chairman and CEO John Idol highlights positive comps posted in the quarter.

If the company maintains a “continued focus on execution and investment to support our growth plans, we are confident that Capri Holdings remains on track to grow revenue to $8 billion over time and deliver multiple years of earnings growth,” Idol added.

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Much of the growth Idol is referring to could come from the Kors brand through a still-growing men’s business, stronger product innovation and an opportunity down the road to expand Kors to a $1 billion sales generator in Asia, according to Jefferies analyst Randal J. Konik.

Net Sales: Total revenues for the quarter ended Sept. 28 saw a 15.1 percent gain to $1.44 billion from $1.25 billion.

By brand, Versace revenue was $228 million, posting flat comps for the quarter due to challenges in Hong Kong and consumer reaction in China to an incorrectly labeled product, the company said.

At Jimmy Choo, revenue rose 7.8 percent to $125 million, while comps slipped in the mid-single digits, hurt by a weaker performance in Hong Kong and a decline in Japan on a year-over-year basis when compared to its 10th anniversary campaign in the same year-ago period.

The Michael Kors brand saw a 4.2 percent decrease in revenue to $1.09 billion, with comps down in the low-single digits.

Earnings: Net income fell 46.7 percent to $73 million, or 47 cents a diluted share, from $137 million, or 91 cents, a year ago. On an adjusted basis, diluted earnings per share was $1.16.

Wall Street was expecting adjusted diluted EPS of $1.24 on revenues of $1.44 billion.

Capri reiterated its forecast for revenues for full year fiscal 2020 to be $5.8 billion, with diluted EPS at between $4.95. That’s in line with current Wall Street estimates of $5.83 billion in revenue and $4.89 in adjusted diluted EPS.

For the third quarter, Capri guided revenues to $1.53 billion, and diluted EPS at between $1.55 to $1.60. Wall Street is expecting revenue of $1.6 billion and adjusted diluted EPS of $1.56.

CEO’s Take: According to Idol, “For Fiscal 2020, we remain focused on executing on our strategic growth initiatives and are reiterating our guidance … From a longer-term perspective, we are encouraged with the progress we are making developing our global fashion luxury group. The integration of Versace is going smoothly, and Jimmy Choo continues to advance its strategic initiatives. Additionally, the Michael Kors brand repositioning efforts are resonating with customers.”