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Factors Likely to Aid Capri Holdings' (CPRI) Momentum in 2021

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The coronavirus pandemic casted a pall over several apparel retailers last year. Not only did stay-at-home practices eclipse footfall across brick-and-mortar format stores, tighter pockets compelled consumers to limit spending on luxury apparel products. Nevertheless, rapid growth in the e-commerce realm turned out to be quite an upside for some of the retail players. Capri Holdings Limited (CPRI - Free Report) is one such stock. The company is also witnessing recovery in its top- and bottom-line performances, as matters in the retail space have begun improving with the easing of pandemic-led restrictions.

Impressively, shares of this well-known luxury apparel, accessories and footwear retailer have soared 93.2% in the past three months compared with the industry’s rise of 53.1%.  The stock currently carries a Momentum Score of A. Looking at the company’s Price-to-Earnings (P/E) ratio, it is currently trading at 14.20X forward 12-month earnings compared with 24.41X for the Zacks sub-industry. The lower valuation indicates that the company has room to climb higher in the forthcoming periods. That said, let’s take a closer look at the aspects that are likely to keep helping this Zacks Rank #2 (Buy) company’s momentum.

Strong E-commerce Sales

Capri Holdings e-commerce business is witnessing sturdy growth, thanks to the increasing number of shoppers shifting to online transactions. The trend was even more pronounced during the pandemic. In second-quarter fiscal 2021, the company’s e-commerce sales surged 60% year on year, with triple digit growth across Versace and Jimmy Choo, while at Michael Kors the metric increased in double-digits. The company continues to invest heavily to boost omni-channel capacities, increase assortments availability and improve customer engagement.

Revenue Trends Improve

Although Capri Holdings’ total revenues during the second quarter fell year on year, the rate of decline sharply decelerated from the preceding quarter. Markedly, total revenues more than doubled on a sequential basis. The improvement can be attributed by strong e-commerce sales alongside growth in Mainland China and in the Americas. Notably sales increased in Mainland China across Versace, Jimmy Choo and Michael Kors. Additionally, revenues have been recovering at a great pace in the Americas with retail channel sales increasing double digits at Versace and low single digits at Jimmy Choo.

With the luxury retail market expected to remain on growth trajectory, Capri Holdings is well positioned to expand its revenues. The company on its last earnings call stated that it anticipates a modest sequential improvement in total revenues in third-quarter fiscal 2021 and a more pronounced improvement in trends in the final quarter. It anticipates sales trends to keep improving in retail channel, while wholesale channel sales are expected to recover slightly.

Growth Efforts are Encouraging

Capri Holdings is constantly deploying resources to expand product offerings and upgrade distribution infrastructure. Buyouts and innovation have played an important role in strengthening the company’s product portfolio. Markedly, the company is focusing on expanding men's business, which is one of its high growth categories. Management also sees tremendous growth opportunity for Michael Kors in Asia, primarily in China.

The company has also been adopting cost-containment measures to address some of the challenges tied to the pandemic. Notably, the company is cutting operating expenses as well as reducing all non-essential discretionary spending, including lowering of marketing spending, delaying or canceling select new store openings and reducing external third-party services. We note that the company expects to drive gross margin expansion through higher full price sell-throughs, strategic increase in prices and lower manufacturing expenses. Moreover, as a part of fleet optimization strategy, the company intends to close up to 170 stores in two years.

Wrapping Up

Although the pandemic continues to be a roadblock for the company, trends of recovery witnessed in several regions as well as strong growth in the online platform are likely to keep supporting the company’s performance in fiscal 2021. In fact, management believes that Capri Holdings is well-positioned to drive strong revenue and earnings growth in fiscal 2022, as the company gradually emerges from the pandemic. 

Looking For Retail Stocks? Check These

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