Despite supply chain headwinds, Capri Holdings’s third-quarter profits grew 80 percent to $322 million, while the company remains focused on growing the business to $6.1 billion in annual volume for Fiscal Year 2023.
In a Nutshell: Capri executive vice president, CFO and chief operating officer Tom Edwards flagged higher-than-expected third-quarter shipping delays.
“As a result, on-hand inventory levels were lower than expected, which constrained our ability to deliver higher revenue in the quarter,” he said during a Wall Street earnings call. Quarterly net inventory of $978 million marked a significant increase in in-transit goods.
The Versace, Jimmy Choo and Michael Kors owner expects an inventory-to-sales mismatch for the foreseeable future. “First, we will continue to tightly manage inventory, but levels need to increase to support revenue growth and ensure we meet consumer demand. Second, we are initiating a new program where we expect to receive core products earlier,” Edwards said. “This will enable us to better meet consumer demand, as well as reduce transportation costs. As a result, inventory growth is expected to outpace sales growth for the next 12 months.”
Capri CEO John D. Idol expects the ongoing supply chain disruption to “continue on for at least the next six months,” with some ports still “quite backed up.” The luxury firm “missed a lot of demand, particularly Michael Kors during the holiday season,” he added. Having “larger weeks of supply” doesn’t help when core product is missing, but it “will help us at our stores” and “increase our gross margins,” Idol said. The company plans to grow core-product inventory to get “fully caught up in a good position [where] we can support our own stores as well as our wholesale partners,” he added.
For Versace, the question isn’t whether it will reach $2 billion, according to Idol, who said the “real discussion is going to be around how much bigger is it going to be.”
In Idol’s opinion, Versace “belongs in the category of some of the most important luxury brands in the world,” and Capri is working on carefully nurturing its growth. “What we don’t want to do is to have something that explodes, and then comes back down off that trend. So with luxury, you have to invest, you have to pay for it, and let the consumer really desire it, and not try to push too hard,” he said.
And while Versace is driven by runway and ready-to-wear, the fashion house is being positioned as a luxury leather goods house. Renovating 50 percent of the brick-and-mortar fleet will increase store productivity, Idol said.
The price increases that elevated Michael Kors are coming to Versace too. But this won’t be a simple cost-offset measure as Capri is “improving quality” by “adding more to design,” which is what gives brands pricing power, Idol said.
Jimmy Choo’s sales increased in the double digits in the quarter as consumers returned to dressing up for social events. At Michael Kors, global average unit retail, of AURs, increased in the high teens versus the prior year. “Signature remains a core growth strategy. We continue to believe penetration will eventually grow to approximately 50 percent of our overall product assortments, which will drive higher AURs and margin,” Idol said, noting that Signature currently accounts for about 41 percent of the assortment. Footwear saw strong performance in boots and booties. Also doing well were women’s ready-to-wear and fashion outerwear. “Men’s remains one of the strongest performing categories in retail and we remain enthusiastic about our opportunity to expand the accessories collection,” he said.
Michael Kors CEO Josh Schulman, also the future CEO of Capri, addressed plans to grow the company’s digital footprint, double revenue in Asia and expand the men’s business. Capri added 11.5 million new consumers over the past year.
Net Sales: For the three months ended Dec. 25, net sales rose 24 percent to $1.61 billion from $1.30 billion.
Versace revenue for the quarter grew 29 percent to $251 million, while Jimmy Choo rose 47 percent to $178 million. Revenue at Michael Kors 20 percent to $1.18 billion. By region, revenue growth rose 26 percent in the Americas. Revenue in EMEA (Europe, Middle East and Africa) rose 35 percent, while Asia rose 3 percent.
For the nine months, net sales rose 45 percent to $4.16 billion from $2.86 billion.
Earnings: Net income rose 80 percent to $322 million, or $2.11 a diluted share, from $179 million, or $1.18, in the year-ago quarter. On an adjusted basis, earnings per share (EPS) was $2.22.
Wall Street expected adjusted diluted EPS of $1.69 on revenue of $1.47 billion.
For the fourth quarter, the company guided its diluted EPS to the range of 80 cents a share on a revenue forecast of $1.4 billion. For Fiscal Year 2022, the company expects diluted EPS of $6.00 a share on revenue of $5.56 billion, including $75 million contribution from the 53rd week. Idol said the $6-a-share projection represents the highest earnings per share growth in the company’s history.
Capri’s preliminary Fiscal Year 2023 guidance calls for diluted EPS forecasted at $6.60 a share on revenue of $6.1 billion.
For the nine months, net income totaled $741 million, or $4.82 a diluted share, from $121 million, or 80 cents, in the year-ago period.
CEO’s Take: “Our performance demonstrates the strength of our brands,” Idol said on the call. “The power of our three iconic founder-led fashion luxury houses position Capri Holdings to accelerate revenue, and deliver multiple years of earnings growth.”