It has been about a month since the last earnings report for Capri Holdings (CPRI). Shares have added about 3.5% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Capri Holdings due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Capri Holdings Q2 Earnings Miss Estimates, Fall Y/Y
Capri Holdings Limited reported a negative earnings surprise in the second quarter of fiscal 2020, following a beat in the preceding. Revenues also came below the Zacks Consensus Estimate for the second quarter in row. While the top line sustained year-over-year improvement, bottom line continued to struggle. Nonetheless, the company reiterated its fiscal 2020 revenues and earnings view.
Notably, the top line gained from the addition of Versace and higher revenues from Jimmy Choo. Also, Michael Kors registered positive comparable store sales. However, the bottom-line number was hurt by increased expenses and a tough environment in Hong Kong, and also came below management’s expectations. Again, adjusted operating margin also missed the company’s projection.
Let’s Delve Deep
This designer, marketer, distributor and retailer of branded apparel and accessories delivered adjusted quarterly earnings of $1.16 per share that missed the Zacks Consensus Estimate of $1.25 as well as management’s projection of $1.21-$1.26. Again, earnings fell sharply from $1.27 reported in the year-ago period. Rise in cost of goods sold and increased operating expenses acted as deterrents to the bottom line.
Total revenues of $1,442 million surged 15.1% from the prior-year period but fell short of the Zacks Consensus Estimate of $1,446.8 million. On a constant currency basis, total revenues were up 16.1%.
Adjusted gross profit increased 14.9% to $879 million, however, adjusted gross margin contracted 10 basis points to 61%, reflecting a lower Michael Kors brand gross margin.
Adjusted operating income declined 7.3% to $202 million, while adjusted operating margin shrunk 340 basis points to 14% on account of lower operating margin for Michael Kors. We note that adjusted operating margin came below the company’s forecast of 15%. The company now expects third-quarter fiscal 2020 operating margin to be about 17.5%.
Brand Wise Performance
Capri Holdings has been steadily firming its position in the luxury fashion space with the buyouts of Jimmy Choo and Versace. These brands along with Michael Kors will help augment revenues to $8 billion in the long term.
Top line includes revenues contribution of $1,089 million from Michael Kors, down 4.2% and $125 million from Jimmy Choo, up 7.8% year over year. Revenue from Versace came in at $228 million.
On a constant currency basis, comparable store sales rose in the low single digits at Michael Kors, reflecting continued growth in Asia and Europe, while trends improved to flat in the Americas. The metric declined in the mid-single-digits at Jimmy Choo owing to soft performance in Hong Kong and a decline in Japan. Comparable store sales at Versace were flat on a constant currency basis. Versace continued to register double digit growth in the Americas and EMEA, but experienced sluggishness in Asia due to challenges related to the situation in Hong Kong and consumer reaction in China to an incorrectly labeled product.
Capri Holdings ended the quarter with cash and cash equivalents of $179 million, long-term debt of $1,796 million and shareholders’ equity of $2,405 million, excluding non-controlling interest of $3 million. Management now anticipates capital expenditures to be approximately $275 million. The company intends to lower debt load by roughly $500 million during the fiscal year.
As of Sep 28, 2019, there were 1,264 stores — 850 Michael Kors stores, 216 Jimmy Choo stores and 198 Versace.
Management now envisions third-quarter revenues to be approximately $1.53 billion, reflecting mid-single digit growth from year-ago period. The company now forecasts earnings in the range of $1.55-$1.60, including dilution from Versace of about 15 cents.
Management forecasts third-quarter 2020 revenues from Michael Kors to be marginally below $1.2 billion with comparable store sales expected to increase in the low single digits. Operating margin is expected to be lower than the year-ago period.
Revenues from Versace are estimated to be approximately $180 million with comparable store sales projected to be flat. Jimmy Choo revenues are envisioned to be approximately $165 million and comparable store sales are expected to be flat with the prior-year period.
Management projects third-quarter operating margin to be approximately 17.5%. For Versace, the company anticipates a slightly negative operating margin due to seasonality and higher investments. For Jimmy Choo, it envisions positive operating margin. Michael Kors brand operating margin is forecasted to be lower than prior year. The company expect retail margin expansion but a contraction in wholesale margin.
For the final quarter, Capri Holdings projects earnings per share to double from prior-year period on account of 500 basis points expansion in operating margin benefiting from higher margin across all brands.
For fiscal 2020, management continues to project total revenue to be approximately $5.8 billion, comprising improved comparable sales performance for Michael Kors retail, offset by challenges related to the situation in Hong Kong. The company now envisions Hong Kong will represent roughly 1.5% of group revenue in fiscal 2020 compared to prior projection of 2.5%.
Operating margin is expected to come in at 15%, reflecting lower operating income from Hong Kong. Management continues to envision earnings of $4.95 per share, including dilution from Versace of about 20 cents.
How Have Estimates Been Moving Since Then?
It turns out, estimates review have trended upward during the past month.
Currently, Capri Holdings has a subpar Growth Score of D, however its Momentum Score is doing a lot better with an A. Following the exact same course, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Capri Holdings has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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