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A month has gone by since the last earnings report for Capri Holdings (CPRI). Shares have lost about 1.6% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Capri Holdings due for a breakout? 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 Q4 Earnings Top, E-Commerce Sales Solid
In spite of a challenging backdrop, Capri Holdings Limited reported stronger-than-anticipated fourth-quarter fiscal 2021 results. The company was encouraged by the performance of all three luxury brands. While the top line remained almost flat year over year, bottom line increased meaningfully. Also, management provided an upbeat view for fiscal 2022.
Quite apparent, the fashion and apparel space is brimming with optimism, courtesy of rapid inoculation drive and coronavirus relief package. The return to active social lifestyle, events and occasions are likely to spur demand, and Capri Holdings looks well-poised to tap the same.
John D. Idol, chairman and CEO, said, “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.”
Let’s Delve Deep
Capri Holdings reported adjusted quarterly earnings of 38 cents a share that increased sharply from 11 cents posted in the year-ago period. The quarterly earnings also compared favorably with the Zacks Consensus Estimate of loss of 1 cent. Better revenue performance and gross margin expansion across all three luxury brands resulted in higher-than-anticipated earnings.
Revenues came in at $1,197 million that comfortably surpassed the Zacks Consensus Estimate of $1,032 million but remained approximately flat year over year. On a constant-currency basis, total revenues were down 3.8%.
During the quarter, the company witnessed temporary door closures in geographies impacted by lockdowns owing to the ongoing pandemic. Management informed that on average, about 60% of the company's retail stores in EMEA and roughly 40% of the company’s retail stores in Canada were shuttered during the quarter.
The company’s e-commerce business was strong with sales up 80% on a sequential basis. Retail sales grew 13% year over year driven by an improvement in both e-commerce and store sales. Store performance improved meaningfully on a sequential basis owing to local clientele initiatives and healthy traffic trends. In the wholesale channel, revenue also increased sequentially.
The company witnessed double digit retail sales increase in Asia due to triple digit growth in Mainland China. In the Americas, retail revenues rose double digits in spite of 40% of stores being closed in Canada. On the contrary, in EMEA, revenues trend remains negative as 60% of stores in the region were closed during the quarter. Despite the heightened restrictions and store closures in EMEA, retail sales trends improved on a sequential basis driven by triple-digit growth in e-commerce.
Adjusted gross profit increased 5.1% year over year to $760 million, while adjusted gross margin expanded 280 basis points to 63.5%. This reflected increased full price sell-throughs and select price increases at Jimmy Choo and Michael Kors, partly offset by higher tariffs and increased transportation costs. The company reported adjusted operating income of $143 million, up significantly from $99 million in the prior-year quarter. Notably, adjusted operating margin increased 360 basis points to 11.9%.
Revenues from Versace increased 10.3% year over year to $235 million. Retail sales were robust, up double digits. The brand witnessed double digit growth in Asia and the Americas. Notably, e-commerce sales were up triple digits year over year. Operating income came in at $29 million versus an operating loss of $2 million in the year-ago period.
Jimmy Choo revenues came in at $124 million, up 15.9% compared with the prior year. Retail sales increased in high single digits with double digit growth in Asia and the Americas. Again, e-commerce sales improved sequentially, rising more than 50%. The segment posted operating loss of $18 million compared with operating loss of $23 million in the prior-year quarter.
Revenues from Michael Kors declined 3.9% year over year to $838 million. Retail sales were up mid-teens with double digit growth in Asia and the Americas. Markedly, e-commerce sales surged 75% sequentially. Operating income rose 23.7% year over year to $172 million, whereas operating margin expanded 460 basis points to 20.5%.
Capri Holdings ended the quarter with cash and cash equivalents of $232 million, net receivables of $373 million, long-term debt of $1,219 million and shareholders’ equity of $2,157 million. Net inventory as of Mar 27, 2021 was $736 million, down 11% year over year. The company paid down about $70 million of debt during the quarter and approximately $850 million during the fiscal year. Total liquidity at the end of the fiscal year was $1.5 billion.
Management incurred capital expenditures of $111 million during the fiscal year on new store development, renovations, IT, and e-commerce enhancements. The company estimates capital expenditures of approximately $200 million for fiscal 2022. The company has reinstated its share repurchase program. It has $400 million remaining under its authorization.
As of Mar 27, 2021, the company had 1,257 retail stores, which included 820 Michael Kors stores, 227 Jimmy Choo stores and 210 Versace stores.
Capri Holdings anticipates revenues of approximately $5.1 billion and earnings in the bracket of $3.70-$3.80 per share for fiscal 2022. We note that the company had reported revenues of $4,060 million and earnings of $1.90 per share for fiscal 2021.
The company anticipates gross margin expansion of about 50 basis points for the fiscal year, reflecting benefits from strategic endeavors, including higher full price sell-throughs, select price increases at Jimmy Choo and Michael Kors, and increased penetration of accessories at Versace and Jimmy Choo. These are partly offset by increased transportation expenses.
Capri Holdings estimates operating expenses of approximately $2.6 billion, higher than $2.2 billion reported in fiscal 2021. Management expects operating margin of approximately 14%, reflecting year-over-year operating margin improvement across all brands.
Fiscal 2022 revenue forecast includes about $75 million associated with the 53rd week and assumes revenues of $925-$975 million from Versace, $500-$525 million from Jimmy Choo and approximately $3.5-$3.6 billion from Michael Kors. Management anticipates operating margin in the low-double-digit range for Versace, in the negative mid-single-digit range for Jimmy Choo due to continued expense deleverage, and in the low 20% range for Michael Kors.
For the first quarter, the company anticipates total revenues of approximately $1.1 billion, suggesting continued growth in the Americas and Asia region. The guidance indicates revenues of approximately $220 million from Versace, $110 million from Jimmy Choo and $770 million from Michael Kors.
Management guided about 100 basis points contraction in gross margin during the first quarter, mainly due to higher wholesale channel mix. The company forecast operating expenses to increase approximately $150 million year over year. The company projected operating margin of approximately 12%, suggesting high single-digit range for Versace, negative low to mid-teens range for Jimmy Choo, low 20% range for Michael Kors. It expects earnings to be 75 cents a share.
Management envisions second-quarter revenues to be roughly $1.2 billion supported by reopening in EMEA, Canada, Japan and Southeast Asia. It projected operating margin of approximately 11% (versus 16.4% in the prior-year quarter) and guided earnings in the band of 70-75 cents a share (versus 90 cents in the year-ago period).
For the third quarter, Capri Holdings anticipates total revenues of approximately $1.4 billion and operating margin of approximately 20%. It estimates earnings in the range of $1.65-$1.70 per share.
For the final quarter, the company expects total revenues of about $1.4 billion and operating margin of approximately 12%. It anticipates earnings between 55 cents and 60 cents a share.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in estimates revision. The consensus estimate has shifted 42.32% due to these changes.
Currently, Capri Holdings has an average Growth Score of C, a grade with the same score on the momentum front. However, 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 B. 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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