It has been about a month since the last earnings report for Capri Holdings (CPRI - Free Report) . Shares have added about 0.4% in that time frame, underperforming 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 the most recent earnings report in order to get a better handle on the important drivers.
Capri Holdings Q4 Earnings Miss Estimates, Sales Fall
The deadly coronavirus that led to the closure of vast majority of stores hurt Capri Holdings Limited fourth-quarter fiscal 2020 results. The global fashion luxury group reported a negative earnings surprise in the quarter under review, following a beat in the preceding quarter. Further, we note that both the top and the bottom line declined from the year-ago period. While Versace contributed to the top-line performance, revenues from Jimmy Choo and Michael Kors hurt the same.
Let’s Delve Deep
This designer, marketer, distributor and retailer of branded apparel and accessories delivered adjusted quarterly earnings of 11 cents a share that missed the Zacks Consensus Estimate of 32 cents. The figure also declined sharply from earnings of 63 cents reported in the year-ago period. The bottom line was adversely impacted by lower revenues, resulting expense deleverage and a higher-than-anticipated tax rate.
Total revenues of $1,192 million decreased 11.3% from the prior-year period. On a constant currency basis, total revenues were down 11%. Top line includes revenue contribution of $872 million from Michael Kors, down 18.4% and $107 million from Jimmy Choo, down 23% year over year. Revenues from Versace were $213 million, up 55.5% from the prior year period.
Adjusted gross profit fell 9.4% to $723 million, however, adjusted gross margin expanded 130 basis points to 60.7%. This primarily reflects gross margin expansion across Versace and Michael Kors brands. Adjusted operating income declined 20.8% to $99 million, while adjusted operating margin shrunk 100 basis points to 8.3%.
Capri Holdings ended fourth-quarter fiscal 2020 with cash and cash equivalents of $592 million, net receivables of $308 million, total debt of $2,179 million and shareholders’ equity of $2,167 million, excluding non-controlling interest of $1 million. Total inventory at the end of the quarter under review was $827 million, reflecting a decline of 13.2% year over year.
Further, the company amended its Revolving Credit and Term Loan Facility and entered into a new $230 million 364-day Revolving Credit Facility to enhance financial flexibility. With the additional 364-day Revolving Credit Facility, the company expects to end first-quarter fiscal 2021 with roughly $1.1 billion of liquidity and total borrowings outstanding of $1.8 billion. Management anticipates incurring capital expenditures of approximately $130 million in fiscal 2021.
As of Mar 28, 2020, there were 1,271 stores — 839 Michael Kors stores, 226 Jimmy Choo stores and 206 Versace stores. As part of fleet optimization strategy, the company intends to close up to 170 stores over the next two years, of which majority would be of Michael Kors.
Management pointed that fiscal 2021 is likely to be meaningfully impacted by the coronavirus. However, it also notified that initial revenue generation from stores reopened globally is exceeding expectations. Capri Holdings highlighted that about 70% of the 455 retail stores in the Americas region, roughly 98% of the 316 retail stores in the EMEA region and 98% of the company’s 500 stores in the Asia region are currently operating. The company announced that since the stores have reopened, revenue performance has ranged between 50% and 75% of the previous year's levels. Moreover, sales trends were robust in Mainland China. Capri Holdings stated that e-commerce revenues rose during the final quarter of fiscal 2020, and registered double-digit growth in first-quarter fiscal 2021 compared with the prior year.
However, the company informed that in first-quarter fiscal 2021, stores were closed for an average of about 55% of the period compared with 10% in the preceding quarter. Management envisions first-quarter revenues to fall approximately 70% from the prior-year period on account of significant store closures, the gradual recovery in revenues as stores reopen and low wholesale shipments. Capri Holdings indicated that its department store partners have placed limited replenishment orders during the quarter, and as a result, it has not had a significant level of wholesale shipments. Further, travel retail, which is part of the wholesale channel, is bearing the brunt of decline in tourism.
Management projected a significant loss per share in the first quarter on account of the lower revenues and resulting deleverage. Industry experts believe that demand for high-end fashion clothing and accessories is likely to remain soft, as consumers will be cautious on making any discretionary purchases. We note that the company expects loss per share in the first half of fiscal 2021, but anticipates to report earnings per share in the second half with gradual improvement in revenues trend across Americas, EMEA and Asia regions.
To address the challenges tied to the pandemic, Capri Holdings has been focusing on maintaining strong liquidity position in fiscal 2021. Notably, the company is cutting operating expenses by approximately $500 million, lowering capital expenditures by about $150 million and suspended the remaining $400 million share buyback plan. The company through efficient inventory management, expects to realize a cash flow benefit of approximately $400 million.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates review. The consensus estimate has shifted -62.66% due to these changes.
At this time, Capri Holdings has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Capri Holdings has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.