In a Nutshell: Capri’s second quarter results bested Wall Street’s expectations, but chairman and CEO John D. Idol was quick to note a more “cautious view” on revenue outlook for the balance of 2023. That’s due to more uncertainty over the macroeconomic backdrop, foreign currency headwinds and ongoing Covid-related restrictions in China. Despite the near-term hiccups that could be on the horizon, Idol remained optimistic about the long-term potential for Capri’s three luxury brands, Versace, Jimmy Choo and Michael Kors.
“I do want to say that we will take one last price increase [for] spring, and then we’re going to pause our price increases in most of the group for the fall season, and we’ll see what happens,” Idol said. “We’ve raised prices very significantly over the last three years at Michael Kors and in Jimmy Choo and Versace…. So we think we’re in a great place and I think you’re seeing that flow through our gross margin.”
Helping to boost margins will be fewer stock keeping units. Idol said inventory levels will moderate and while it’s been stepped down over the last two years, “we’re going to step it down a fairly significant amount next year as well.”
Gross margin for the second quarter was 67.1 percent, versus 67.6 percent in the year-ago period. Operating margin of 19.8 percent, reflecting better than anticipated gross margin and diligent expense management.
Price increases began at Kors about three years ago, and more recently at Versace and Jimmy Choo. In Kors for example, the brand is doing more to elevate the brand, such as new hardware. And Signature, because it is more carryover product, has seen higher gross margins and is “clearly resonating with the consumer, reaching 50 percent of our revenues.” Idol said the hardware strategy helped to boost sales of accessories and footwear, and that consumers have “responded positively to not only product” but also that they haven’t pushed back on price increases.
Looking ahead, Idol said the company will manage its business by focusing on profitability and controlling expenses. He also noted that China has seen a slowdown starting about a month or so ago because of Covid spikes.
Idol also said that wholesale sales have slowed “over the last few weeks,” which has mostly impacted its Michael Kors brand. “We don’t know whether that’s a shift in consumer behavior. We don’t know whether a result of less stimulus checks. We’re not really sure what that is,” Idol said. “We’d rather have less inventory in the channel, we’d rather preserve our margins. We’ve worked very hard over the last three years to elevate the Michael Kors brand. And we don’t want to take a step backwards. And so we think that having the appropriate amount of inventory in those channels will will make it so that we keep up brand integrity. And I think that’s been a very positive thing.”
Also helping Kors in the department store channel has been the strategy of adding back sales associates in its North American and European shop-in-shops locations. The program was pared back during Covid. “We’re seeing a very significant uplift in the business and we see that again, the more clienteling we can do, the more of the customer journey we can get in-store as well as online. The consumer is definitely responding to that,” Idol said.
He said the company added more than 12 million new names across its databases versus the prior year. “We’re definitely attracting consumers. We’re engaging with consumers, and we’re seeing very strong results,” Idol said.
Net Sales: For the three months ended Oct. 1, total revenue rose 9 percent to $1.41 billion from $1.30 billion.
Versace revenue rose 9.2 percent to $308 million. Its best performing region was EMEA (Europe, Middle East and Africa) at $130 million, followed by The Americas at $120 million and Asia at $58 million. Idol said accessories were a key component of the brand’s growth strategy, with women’s accessory sales in company’s owned stores rising up 60 percent versus year-ago levels. “We are making significant progress in our goal to position Versace as a leading luxury leather house,” Idol said, adding that it also plans to expand women’s footwear a part of its growth strategy. He also said that both women’s and men’s ready to wear saw customers embrace the La Greca pattern, as well as new barocco prints. Idol also said Versace is among the top engaged Italian fashion brands on social media, noting that the Spring 2023 show during Milan Fashion Week generated over 23 million views globally. The brand also restaged its Fall 2022 show in Bangkok, with celebrities, models and influencers attending the event along with nearly 50 million impressions across social media.
Jimmy Choo revenue rose 3.6 percent to $142 million in the quarter. Its best performing region was EMEA at $57 million, following by The Americas at $43 million and Asia at $42 million. Women’s accessories sales jumped over 30 percent in the quarter. As part of its product strategy, Choo’s casual footwear sales in owned retail doors rose double-digits, driven by “strong performance of the new diamond light Maxi,” which has a platform sole that resembles diamonds. Idol said storytelling and data analytics are driving customer acquisition, with Kendall Jenner fronting the brand.
Michael Kors saw revenue jump 9.2 percent to $962 million. Its best performing region was The Americas at $643 million, followed by EMEA at $213 million and Asia at $106 million. Idol said consumers are responding to the Kors’ jet set designs. The brand is looking to expand its footwear lines, while men’s continues to represent a growth opportunity. Brand awareness and consumer engagement was helped by Bella Hadid and friends exploring London and Asia. He also said the urban resort theme for the Spring 2023 show generated over 23 million views globally. The brand will open two new 10,000 square foot flagship locations, one on Madison Ave. in N.Y.C. and the other on Bond Street in London, with both slated to open next year before the holiday season. He said the brand also launched its pre-loved site during the quarter.
Total revenue for six months also grew 9 percent to $2.77 billion from $2.55 billion.
Earnings: Net income rose 12 percent to $224 million, or $1.63 a diluted share, from $200 million, or $1.30, a year ago. On an adjusted basis, net income was $245 million or $1.79 a diluted share.
Wall Street was expecting adjusted EPS of $1.54 on revenue of $1.4 billion.
For the third quarter, Capri is expecting adjusted EPS at $2.20 on revenue of $1.53 billion, below initial estimates of $2.45 in adjusted EPS on revenue of $1.65 billion in August. Capri is guiding adjusted EPS for the fourth quarter at $1.35 on revenue of $1.40 billion. Earlier estimates were $1.35 in adjusted EPS on revenue of $1.44 billion. For the full year, Capri is maintaining is forecast of adjusted EPS at $6.85 on revenue of $5.70 billion.
For the six months, net income was up 1 percent to $425 million, or $3.03 a diluted share, from $419 million, or $2.71, in the year-ago period.
CEO’s Take: “Beyond Fiscal 2023 we remain optimistic about the long-term potential for Versace, Jimmy Choo and Michael Kors. Our powerful brands have enduring value and proven resilience, reinforcing our confidence in the ability to deliver strong revenue and earnings growth over time,” Idol said.