Capri Holdings posted better-than-expected first-quarter results, and it’s plotting higher price points on some products at Jimmy Choo and Michael Kors.
In a Nutshell: Capri’s results were fueled by sequential improvement in revenue trends through the first quarter and into July, with e-commerce sales up 30 percent in the period. The company reported strong full-price accessories sales and has reopened about 98 percent of its stores. Sales in Asia hit a low in February during the height of the continent’s lockdown and began rising in early March. In the Americas and Europe, Middle East and Africa regions, sales reached their nadir in early April during the widespread store shutdowns but began rising in early May as restrictions began to ease. All regions have shown steady increases and improving monthly retail sales trends, according to Capri’s presentation.
“Looking at our progress in the fiscal first quarter, we were encouraged by trends across all three of our luxury houses, with sales and margin performance ahead of our initial expectations. We were particularly pleased with the strong growth of our e-commerce business, as well the sequential improvement in overall revenue trends through the first quarter and into July,” said John D. Idol, chairman and CEO.
In a conference call to Wall Street analysts, Idol remained confident in the long-term business targets revealed last year in June that Capri had set for its three brands prior to the coronavirus disruption.
Versace is still expected to grow revenues to $2 billion by expanding its accessories and footwear categories to 60 percent of overall sales for the brand, and grow its global footprint to 300 stores, he said.
Jimmy Choo has a “significant opportunity to grow revenue to $1 billion,” buoyed by an increase in the growing accessories business to 50 percent of revenue and an expansion of its luxury footwear collection, Idol said, adding that the brand could support as many as 300 stores. He believes Jimmy Choo has been underpricing its offerings, suggesting that prices could be on the rise. The brand’s relatively new sneaker line continues to resonate with customers, he added.
The struggling Michael Kors brand has been shuttering stores, targeting up to 170 store closures over the next two years to improve profitability. By expanding its Signature offerings across all categories, doubling Asia revenue and broadening the men’s business, Capri expects Michael Kors will be able to grow revenue and bolster its financial position. “The men’s business continues to grow as we focus on essentials with a timeless edge,” Idol said.
The Kors brand is starting to realize benefits from initiatives to improve operating margins, gross margins through higher full-price sell throughs, lower manufacturing costs and a reduced cost structure through a streamlined organization. He said the company has been strategically moving prices up at Kors and will continue to price products accordingly. “We’ve seen no resistance when we’ve been pricing up,” Idol said, adding that much of that depends on “whether you have the right product.”
As for product offerings across its brands, “Customers are responding to newness,” Idol said. “It’s less about what’s on sale and more about newness.”
Capri’s offices in Hong Kong, as well as some stores, are closed again due to the resurgence of the virus. And in Australia, Melbourne has issued lockdown restrictions, Idol said.
Generally, as stores reopen, Idol said revenues are exceeding original expectations, including those at wholesale partners’ e-commerce sites and their reopened doors. However, many of these partners have reduced their order sizes as a result of lower consumer traffic. That said, sales from wholesale partners’ e-commerce sites indicate that the offerings from all three brands continue to resonate with consumers.
Capri’s store network was closed for about 80 percent of the quarter, while international travel, representing a sizable component of overall retail sales, remains at a standstill due to COVID-19, Idol said, adding it could take about two years before the travel sector returns to normal.
Net Sales: Total revenues for the three months ended June 27 fell 66.5 percent to $451 million from $1.35 billion in the year-ago quarter.
The company said gross margin for the quarter was 67 percent, up from 62 percent a year ago. The net inventory on June 27 was $948 million, representing a 7 percent decrease versus the prior year.
By business segment, Versace posted a 55.1 percent decrease in revenue to $93 million for the quarter, and the operating margin was down 44.1 percent versus down 1.4 percent last year. The brand saw e-commerce sales up by triple digits year-to-date, as well as encouraging sales of its Virtus accessories collection. It also saw strong recovery in Mainland China in the first quarter. Social media followers grew 13 percent year-over-year to 39 million in the quarter.
Jimmy Choo revenue fell 67.7 percent to $51 million, and its operating margin fell 56.9 percent compared with 7.0 percent in the prior year. E-commerce growth saw sequential improvement year-to-date, with its fashion active category penetration nearly doubling in the quarter. The JC Signature Varenne line of bags continues to be the best-selling collection for the brand. The footwear brand also saw strong recovery in Mainland China, and social media followers rose 6 percent year-over-year to 17 million in the quarter.
Michael Kors revenue decreased 68.7 percent to $307 million, while its operating margin declined 15.6 percent versus 20.5 percent in the prior year. The brand saw e-commerce growth rise 35 percent year-to-date, as its Signature line continues to perform in the period. Higher average unit retail and better channel mix between retail and wholesale sales helped expand gross margin for the quarter. The Kors brand has a global database that rose 17 percent year-over-year to 45 million, while social media followers grew 6 percent over the same period to 49 million.
“Overall, first quarter revenues and earnings came in a bit better than expected, though topline guidance was provided after the period had closed,” said Dana Telsey, chief investment officer at Telsey Advisory Group, who has a “market perform” rating on the company’s shares.
“In addition, the better than expected gross margin is encouraging, though fuller priced selling was likely supported by holding the line on pricing in a stressed e-commerce channel while stores were closed,” she added, noting that the move away from wholesale likely contributed to the improved margins. “Having said that, inventory is relatively controlled with a 7% decline for the quarter.”
Telsey isn’t so sure what the future holds for Capri. “Going forward, we are back to a lesser degree of visibility to performance in our view,” she said. “Stepping back, we continue to view the handbag space cautiously in the current environment, given the highly discretionary nature of the category as well as its reliance on travel/tourism and occasion-based buying.”
Earnings: The company posted a loss of $180 million, or $1.21 a diluted share, against net income of $45 million, or 30 cents, last year. On an adjusted basis, the loss per diluted share was $1.04.
Wall Street was expecting a wider loss of $1.11 on an adjusted basis on lower estimated revenues of $427.3 million.
Capri said it ended the quarter with $1.1 billion of liquidity and net debt of $1.6 billion.
Because of the coronavirus pandemic and the lack of visibility surrounding macroeconomic fundamentals and tourism, Capri will not be providing earnings guidance for fiscal year 2021.
CEO’s Take: “During these unprecedented times, we plan to continue to execute on our strategic growth initiatives and remain confident in the long-term opportunities for each of our unique global luxury houses. Capri Holdings has a portfolio of three iconic, founder-led fashion luxury brands that have enduring value and a long history of successfully navigating challenging periods. We will continue to carefully guide our business through the current retail environment, while positioning the company to resume its growth trajectory in fiscal 2022,” Idol said.