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Capri Narrows Q4 Loss as it Looks to Higher Prices for Kors

The owner of Michael Kors missed fourth-quarter revenue targets but narrowed the loss on a year-ago basis and beat Wall Street’s earnings estimates by $0.36

In a Nutshell: About 60 percent of Europe, Middle East and Africa (EMEA) stores were closed, on top of 40 percent in Canada, according to Capri Holdings. Despite revenue coming in comparably flat year over year, the affordable luxury firm reported improvements versus the third quarter. Global retail sales rose 13 percent, with all three luxury houses, Michael Kors, Jimmy Choo and Versace, showing growth and e-commerce sales improved sequentially, increasing 80 percent.

Revenue and earnings topped internal expectations, despite pandemic headwinds, said Capri chairman and CEO John D. Idol.

Idol said Capri will “take more” price increases in the months ahead, referring specifically to Michael Kors. Prices are likely rise in the fall and additional hikes seen for next spring.

“Our feeling is, as we’ve stated a number of times, we want the Michael Kors brand to be higher positioning from a luxury standpoint,” Idol said. “We want to reduce the amount of promotional activity and the way we do that is to really curtail the amount of supply.”

During a Wall Street conference call, Idol said Capri believes its trio of founder-led luxury brands can grow “revenues to $7 billion, and deliver multiple years of earnings growth.”

Capri’s gross margin jumped roughly 340 basis points in fiscal 2021, Idol said, while nearly 9 million new consumers filled the company’s customer database over the past year.

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Spring collections are resonating with consumers, with women’s accessories and footwear driving growth, he said.

Versace poses the largest growth opportunity for Capri, he said, with $2 billion in revenue potential. Women’s and men’s ready-to-wear showed strength. Versace introduced the La Medusa collection in February, and the new “La Greca” signature monogram pattern in March.

At Jimmy Choo, Sandra Choi’s new footwear designs continue merge shoes and jewelry, featuring styles adorned with crystals and pearls, Idol said.

“As restrictions begin to ease in many parts of the world, we have seen trends improve in the dress footwear category,” he said, though the diamond sneaker franchise continues to perform well. Jimmy Choo is on track to reach a $1 billion revenue target, Idol said.

Michael Kors recorded quarter-over-quarter growth with sales in Capri-owned retail increasing in the mid-teens globally in the Americas and Asia. Idol said Kors’ signature line can eventually grow to about 50 percent of the overall product assortment, “which will drive higher margins.” Accessory sales in Capri-owned retail increased double digits globally.

In general, sales of Kors totes and larger bags remain strong. “As we continue to build upon the assortment, offering a variety of new shapes and functionality within footwear, we have seen a positive response to new spring updates, driven by signature shine and feminine detail,” Idol said. “Turning to men’s, which remained our fastest growing category in the fourth quarter, sales increased double digits, driven by signature and accessories.”

Watch sales were positive for the first quarter since 2016, with retail sales up double digits. “Overall, we were encouraged by the sequential improvement in revenue trends and continued gross margin expansion at Michael Kors. As a result, we remain confident in our ability to grow our revenue at Michael Kors to $4 billion in total,” Idol said.

Tom Edwards, chief financial officer and chief operating officer, reported delays in receiving merchandise, as well as higher costs, though Capri is working to further “mitigate transportation challenges.”

The luxury firm is focused on building brand equity, including renovating stores and developing the business in Asia, and in paying down debt to strengthen the balance sheet. Capri paid down $850 million in the fiscal year that just ended.

Edwards didn’t rule out additional acquisitions “at some point in the future,” but said Capri is “really focused on our business right now.”

Net Sales: Total revenue was essentially flat at $1.197 billion from $1.192 billion for the quarter ended March 27.

By brand, revenue for Versace rose 10 percent to $235 million. Growth in Asia for the quarter was up 43 percent to $73 million, and rose 30 percent to $69 million in the Americas. Revenue in the EMEA region fell 15 percent to $93 million. Jimmy Choo revenue rose 16 percent to $124 million. Growth in Asia saw revenues rise 58 percent to $49 million, while revenue in the Americas was up 41 percent to $31 million. Revenue in EMEA fell 19 percent to $44 million. For the Michael Kors brand, total revenue slipped 4 percent to $838 million. The brand saw revenue growth in Asia at up 26 percent to $130 million. Revenue in the Americas fell 9 percent to $548 million, while EMEA revenue was down 5 percent to $160 million.

“[S]tore performance improved significantly quarter over quarter, driven by local clienteling initiatives and improved traffic trends in the wholesale channel,” Idol said. “Sales also improved sequentially by geography. Asia remains the fastest recovering region, with retail sales increasing double digits versus the prior year.”

The North American department store business is “quite strong,” Idol said. “So we’re really pleased to see that, and again this is on significantly reduced inventories. So the sell through, the turn, the margins, it’s all really in a great place.”

That said, Idol expects to see “depressed wholesale numbers” until Europe bounces back in 2022 and there are signs of life in the international duty-free business, which represents the third component of wholesale. International travel is still basically shut down and probably won’t return until 2022. “So that’s going to be a nice addition for us, when that business does come back,” he said, adding, “we basically have been out of that business for all intents and purposes for two years.”

Gross margin for the quarter was 61.6 percent. Net inventory at March 27, 2021 was $736 million, representing a decrease of 11 percent from the same quarter a year ago.

For the year, total revenue fell 27 percent to $4.06 billion from $5.56 billion.

Earnings: The net loss for the quarter narrowed to $182 million, or $1.21 a diluted share, from a net loss of $551 million, or $3.69, a year ago. On an adjusted basis, diluted earnings per share (EPS) were 38 cents.

Wall Street was expecting adjusted diluted EPS of $0.02 on revenue of $1.02 billion.

Capri guided its outlook for fiscal year 2022, which includes a 53rd week, to total revenue of $5.1 billion on diluted EPS of $3.70 to $3.80. For the first quarter, the company forecasted total revenue at $1.1 billion on diluted EPS of 75 cents.

Second quarter guidance is pegged at total revenue at $1.2 billion on diluted EPS of 70 cents to 75 cents. Third quarter estimates were for total revenue to reach $1.4 billion on diluted EPS of 55 cents to 60 cents, while fourth quarter estimates expect total revenue to reach $1.4 billion on diluted EPS of 55 cent to 60 cents.

Capri said the guidance does not include any additional store closures, extensions of closure or new government restrictions that could impact traffic and sales trends.

For the year, the net loss narrowed to $62 million, or 41 cents a diluted share, from a net loss of $223 million, or $1.48, in the prior year.

CEO’s Take: “As the world starts to recover from the pandemic, we are confident in our growth opportunities for Versace, Jimmy Choo and Michael Kors. We believe our three luxury houses position Capri Holdings to deliver multiple years of revenue and earnings growth, as well as increase shareholder value,” Idol said.