Global supply disruption clipped revenue at Michael Kors, though parent company Capri Holdings beat Wall Street’s second-quarter earnings and revenue estimates on surging luxury demand and bumped its outlook despite ongoing bottlenecks hampering inventory deliveries.
In a Nutshell: More so than Jimmy Choo or Versace, Michael Kors faced the “biggest inventory issue,” Capri CEO John Idol told Wall Street analysts on a conference call Wednesday. Logistics logjams piled “somewhere between 45 and 60 days” onto deliveries across brands, he added, thanks in part to customer demand for Kors that is “absolutely outpacing” available inventory. Though Southern California’s port problems have dominated headlines, shipping backups are affecting “all regions,” Idol said, forcing Capri to air freight merchandise as needed.
Shuttered Vietnam factories that have reopened will need time to “reach full capacity and get back into a cadence that will really fill our supply chain needs,” Idol said. That ramp-up time is why Capri is heading in its fiscal third quarter with “lighter inventory than we would have liked to have had,” he added.
CFO and COO Tom Edwards expects supply chain delays to spill into 2023, though Capri is searching for solutions in its sourcing matrix, ocean shipping agreements and logistics carriers.
Hiking prices at Kors two years ago now means “higher revenues at higher gross margins” that pad the bottom line, Idol said. The more recent price increase at Jimmy Choo not only offsets supply-chain costs but positions the brand where it belongs, he added.
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What’s more, pulling back on promotions when ticket prices are higher has paid off in a competitive, supply-constrained environment, Idol said. The company’s results have “shown that we make more money on lower sales than we did on having higher sales,” he added.
Each of Capri’s three brands have a different focus area. Versace’s women’s accessories sales generated an increase in the “strong double digits” while women’s footwear, a key area of growth, saw an uptick in the double digits, Idol said.
With consumers beginning to resume office life and attend social events, dressy shoes are powering Jimmy Choo’s footwear sales, while Idol said “embellished styles” are resonating in the casual category.
Kors is making good on its plan to grow its Signature products—at 39 percent up from 32 percent the previous year—Idol said, to 50 percent of its assortment. “Signature has become an important foundation and driving force behind revenue growth in every region globally as we have been building out the Signature classification,” he said, noting that this classification “has been generating higher [average unit retail] and gross margin expansion in the quarter.”
Plus, the brand isn’t worried that MK Go, a “$200 million revenue opportunity” and “true product extension,” will cannibalize the core Kors business, Idol said.
Overall, though Capri said its quarterly metrics outperformed internal expectations, supply disruptions created a missed opportunity.
“Looking at group revenue trends by geography, revenue growth continued to exceed our expectations in the Americas, and would have been even stronger if not for inventory constraints,” Idol said, noting that revenue, gross margin, operating margin and earnings per share all came in ahead of Capri’s own estimates.
Europe, Middle East and Africa (EMEA) revenue trends across brands also beat company expectations. “We saw strong momentum driven by robust domestic consumer demand [as] stores in the region reopened and vaccination rates increased significantly,” Idol said. In Asia, Covid-19 restrictions and increasing cases in Japan, Southeast Asia and Australia kept revenue flat. Revenue in mainland China rose during the quarter despite new limitations on mobility to curb a growing infection rate.
Net Sales: For the three months ended Sept. 25, net sales rose 17 percent to $1.30 billion from $1.11 billion, while e-commerce sales increased in the double digits, Idol said.
Versace revenue rose 45 percent to $282 million from $195 million. Sales in the Americas rose 78 percent to $107 billion, while EMEA sales rose 48 percent to $118 million. Sales in Asia increased 4 percent to $57 million.
For Jimmy Choo, revenue rose 12 percent to $137 million from $122 million. Sales in the Americas were up 15 percent to $38 million. In the EMEA, sales rose 22 percent to $56 million. Sales in Asia were flat at $43 million.
For Michael Kors, revenue gained 11 percent to $881 million from $793 million. Sales in the Americas increased 13 percent to $556 million, while sales in EMEA gained 16 percent to $214 million. Sales in Asia fell 3 percent to $111 million.
For the six months, net sales rose 64 percent to $2.55 billion from $1.56 billion.
Earnings: Net income rose 64 percent to $200 million, or $1.30 a diluted share, from net income of $122 million, or 81 cents, in the year-ago quarter. On an adjusted basis, diluted earnings per share (EPS) totaled $1.53.
Wall Street expected adjusted diluted EPS of 95 cents on revenue of $1.27 billion.
For the third quarter, Capri expects revenue at around $1.46 billion with diluted EPS at $1.65.
For Fiscal 2022, Capri guided expectations to $5.4 billion in revenue, up from $5.3 billion. It forecasted diluted EPS at $5.30. The raised guidance reflects strong second quarter and an increase in its third quarter outlook.
For the six months, net income was $419 million, or $2.71 a diluted share, against a net loss of $58 million, or 39 cents, in the year-ago period.
CEO’s Take: “Our new outlook reflects both stronger revenue performance as well as greater than anticipated gross margin expansion driven by the execution of our strategic initiatives. The success of these initiatives is currently offsetting the Covid-19 related industry headwinds including supply chain delays and increased transportation costs,” Idol said.