In a Nutshell: Capri’s three global fashion luxury houses—Versace, Jimmy Choo (Choo) and Michael Kors (Kors)—each posted gains that helped the company best Wall Street estimates for both earnings per share (EPS) and revenue. Capri also raised its Fiscal 2022 revenue and earnings outlook.
“These results were driven by strength across all three of our luxury houses, as they continue to deepen consumer desire and engagement, adding 10 million new consumers to their databases,” company chairman and CEO John D. Idol said during a Friday morning conference call to Wall Street analysts. Idol was in Paris for the opening of a new Versace flagship store.
“As you know, Delta kind of moves through some of the economies around the world. We feel quite optimistic that even if there are bumps in over the next three, four or five months, that we think the world is on its way to recovery. And again, we think that our products are resonating with the consumers,” Idol said.
One interesting factoid from the last few quarterly reports has been the company’s strategy two years ago to pull back on promotions and raise prices, which Idol touched on in Friday’s call.
Capri has no plans to go back to the days when it upped promotions to chase sales, Idol said. That was particularly true for Kors and the North American market. “We’ve stayed firm to that commitment,” the CEO stressed, adding that improved gross margin performance has been due in part to full price sell-throughs. Noting that discounting was more a North American situation, Idol said, “We don’t have the inventory to do that…. It’s not going to happen. I don’t care if others do it. It doesn’t matter. We don’t have the money to do it. We just don’t want to do it.”
Idol said the company has already raised prices on some Kors items and reiterated the company’s plans to do so again next spring, but this time he said that prices will “go up considerably.” Dispelling Wall Street’s expectations that a broader promotional landscape could see promotions return over the holiday selling period, Idol said, “We’re in an up direction [and] that won’t happen for us…we’re going up, not down.”
In general, North American sales for Capri’s portfolio of brands during the quarter have been robust, thanks to Asia and Europe’s contribution.
For his part, Idol said Capri is “pleased with what we see happening in North America in terms of traffic, we’re also happy with what we see happening in China.” As for Europe, “we all wish things would go a little faster,” he added. The recovery there will depend on how countries open up and how the “new green passport for Europe really works and allowing people to move, country to country.” Idol said he was cautiously optimistic on the actual brick-and-mortar traffic component of the business for all three brands. He emphasized ongoing store closures overseas, with Europe not open, Japan closed, Australia starting lockdowns and most of Southeast Asia either under lockdown or seeing little business even where stores are open.
Following a recap of its five strategic pillars disclosed last month at its recent Investor Day meeting, Idol said the women’s accessories category at Versace is growing “much faster” than anticipated. “We are confident in our ability to position Versace as a leading luxury leather house and expand accessories revenue to $1 billion over time,” he said. In addition to women’s dress footwear, the brand also saw strength across both men’s and women’s ready-to-wear, he said.
Helping the brand was the return to in-person red carpet events during the quarter, “a wonderful sign of recovery, and an opportunity for Versace to once again adorn the world’s most famous celebrities,” Idol said.
At Choo, Capri is “beginning to realize the benefits of our strategic growth initiatives,” such as in accessories where sales showed “robust growth,” Idol said. A return to socializing was a positive sign in the quarter for the footwear brand, which saw “strong signs of recovery in dress status as people are returning to work, attending events and enjoying special occasions,” he added.
First quarter performance at Kors was “better-than-anticipated, with revenues increasing 184 percent compared to the prior year, reflecting broad-based strength,” Idol said. The Signature line represented 36 percent of the overall assortment mix, up from 30 percent a year ago, which helped to support higher gross margins. Accessories increased triple digits in the company’s company-owned stores, and consumers also responded positively to core styles, such as in women’s ready-to-wear. The men’s business remains one of the brand’s fastest growing categories, Idol said.
Idol said he expects to see continued regional closures and temporary restrictions as the global pandemic evolves. That said, “We believe the ultimate path to recovery remains strong,” Idol told analysts.
Noting that the Capri earnings report had a “broad-based top and bottom line beat,” BMO Capital Markets analyst Simeon Siegel believes shares of Capri are now “too cheap.” He has an “outperform” rating on the stock. Shares are trading in the $50 range and Siegel has a price target of $75.
“Capri raised its fiscal year guidance, which still assumes decelerating trends, suggesting ongoing conservatism. Additionally, net debt declined $133 million quarter-over-quarter, further bridging the gap between enterprise value and market [capitalization]. Bottom line, buy the stock; numbers keep going up and shares are too cheap,” Siegel said.
Net Sales: Total revenue for the quarter ended June 26 nearly tripled to $1.25 billion from $451 million in the year-ago period.
Capri chief financial officer Tom Edwards said total company retail sales rose 135 percent, driven by robust e-commerce sales, which increased 60 percent. Strong store sales reflected increased traffic trends and clienteling initiatives. Revenue in the wholesale channel also improved sequentially as sales rebounded versus the initial impact of the pandemic last year.
Edwards said North America was the strongest performing region, with total revenue up 304 percent. In Europe, Middle East and Africa (EMEA), revenue rose 148 percent, while revenues in Asia was up 55 percent. He also said mobile sales across its retail channels rose 141 percent, with e-commerce sales “increasing triple digits.”
The CFO noted that while wholesale revenue rose substantially year-over-year for Kors as shipments normalized in the first quarter of fiscal year 2022, “revenue remains well below historic levels in line with our strategic initiatives to have a smaller wholesale business for improving profitability.” The Americas was also the “best performing” region for Kors, where revenue rose 278 percent, he added. In comparison, revenue for the brand rose 109 percent in EMEA and were up 61 percent in Asia. The brand ended the quarter with a global fleet of 820 stores, down two doors from the same year-ago quarter.
“We’re seeing consumers return into the stores, or into the department stores, which I have to tell you is really exciting to see,” Idol said of Kors’ wholesale trends. The return to in-store shopping wasn’t just at North American stores, but “people are absolutely returning and shopping in foreign stores,” he added.
The company said net inventory at the end of the quarter was $760 million, down 20 percent from a year ago.
According to Siegel, Kors’ sales of $871 million beat the firm’s $770 million guidance, while Versace’s margins continue to scale. First quarter sales of $240 million for Versace beat company estimates of $220 million. And Choo sales were $142 million, versus company guidance of $110 million, which helped it return to profitability.
Siegel said gross margin for the quarter expanded 90 basis points year-over-year, despite the company guidance for a decline on increased wholesale sales on normalization shipments. On a percent basis, gross margin was 68.3 percent in the quarter, versus 67.0 percent last year.
Earnings: The balance sheet returned to the black as the company reported net income of $219 million, or $1.41 a diluted share, against a net loss of $180 million, or $1.21, in the year-ago quarter. Adjusted net income was $221 million, or $1.42 a diluted share, versus a net loss of $156 million, or $1.04, in the same year-ago quarter.
Wall Street was expecting adjusted diluted EPS of 70 cents on revenue of $1.11 billion.
Capri raised its annual forecast to total revenue of $5.3 billion, with diluted EPS pegged at $4.50. It estimated total revenue of $1.03 billion for Versace, $550 million for Choo and $3.73 billion for Kors.
For the second quarter, Capri expects total revenue to reach $1.25 billion, with diluted EPS of 90 cents. Total revenue was forecasted at $260 million for Versace, $120 million for Choo and $870 million for Kors.
Dana Telsey, chief investment officer at Telsey Advisory Group, noted this is the second time Capri raised its guidance in the past month. She noted that second quarter guidance was in line with expectations outline when the company posted fourth quarter results.
She has a “market perform” rating on shares of Capri stock. “It is clear that discretionary spend across the space is improving following the roll out of vaccines. However, Capri’s revenues remained below the two-year ago pre-pandemic levels as the company pursues a strategy of a smaller, more profitable revenue base at the Kors brand,” Telsey said.
CEO’s Take: “Looking forward, we are confident in the growth opportunities for Versace, Jimmy Choo and Michael Kors as the world continues to recover from the impact of the global pandemic. As we execute on our strategic initiatives, Capri Holdings is positioned to deliver multiple years of revenue and earnings growth,” Idol said.