A month has gone by since the last earnings report for Capri Holdings (CPRI - Free Report) . Shares have lost about 5.2% 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 the most recent earnings report in order to get a better handle on the important catalysts.
Capri Holdings Q3 Earnings Top, Sales Miss Estimates
Capri Holdings Limited, formerly known as Michael Kors Holdings Limited, maintained its positive earnings surprise streak for the 15th straight quarter, when it reported third-quarter fiscal 2019 results. On the contrary, revenues fell short of the Zacks Consensus Estimate for the second quarter in row.
Management highlighted that sturdy performance of Jimmy Choo contributed to the results. Also, the company remains optimistic about Michael Kors to return on growth path on the back of Runway 2020 strategic initiatives. Moreover, Capri Holdings expects to deliver double digit revenue and adjusted earnings per share growth during fiscal 2019.
Capri Holdings has been steadily firming its position in the luxury fashion space, as evident from the acquisition of Jimmy Choo and Versace. These brands along with Michael Kors will help augment the company’s revenues to $8 billion in the long term.
Let’s Delve Deep
This designer, marketer, distributor and retailer of branded apparel and accessories delivered adjusted quarterly earnings of $1.76 per share that surpassed the Zacks Consensus Estimate of $1.57 but came marginally below $1.77 reported in the year-ago quarter. Bottom line declined on account of higher operating expenses. However, share repurchase activity did provide some cushion.
Total revenues of $1,438 million remained almost flat year over year but fell short of the Zacks Consensus Estimate of $1,454 million. Top line includes revenue contribution of $1,276.4 million from Michael Kors, down 3.7% year over year and $161.6 million from Jimmy Choo. On a constant currency basis, total revenues were up 1.1%.
Adjusted gross profit slipped 1.3% to $874.1 million. Meanwhile, adjusted gross margin shrunk 70 basis points (bps) to 60.8% due to 120 bps contraction in Michael Kors brand gross margin, partly offset by 50 bps contribution from the inclusion of Jimmy Choo. The Michael Kors brand gross margin declined on account of contraction of 280 bps in retail gross margin due to additional markdowns taken in the festive season. In the wholesale segment, gross margin expanded 120 basis points, reflecting higher margins in European business.
Adjusted operating income declined 8.4% to $316.5 million, while operating margin contracted 200 bps to 22%.
MK Retail revenue came in at $838 million, down 1% year over year due to lower revenue contribution from Europe and Asia. Comparable sales (comps) slid 2.4%. On a constant currency basis, comps fell 1%. Global e-commerce benefited comps by 290 basis points.
MK Wholesale revenue fell 8.3% to $394.9 million due to the company’s strategy to lower inventory and raise full price sell through during the festive season. We note that decline in revenue across The Americas and EMEA, was partially offset by higher revenue from Asia.
MK Licensing revenue decreased 9.9% to $43.5 million due to soft performance in the EMEA compared with the year-ago period. Management highlighted that continued decline in fashion watches and lower jewelry revenue hurt the results. Management envisions negative impact from fashion watches and jewelry to continue in the final quarter and fiscal 2020.
Other Financial Details
Michael Kors ended the quarter with cash and cash equivalents of $264.5 million, long-term debt of $1,954.7 million and shareholders’ equity of $2,263.7 million, excluding non-controlling interest of $3.4 million.
During the quarter, the company bought back approximately 2.1 million shares for approximately $100 million. The company had $442.2 million remaining under its share buyback program as of Dec 31, 2018.
Management incurred capital expenditures of approximately $45 million in new store development, refurbishment and enhancement of information technology and e-commerce. The company projects capital expenditures of approximately $225 million for fiscal 2019. This reflects the opening of 75 Michael Kors outlets and 30 Jimmy Choo stores.
As of Dec 29, 2018, there were 1,076 stores (870 Michael Kors stores — 401 in the Americas, 198 in Europe and 271 in Asia — and 206 Jimmy Choo stores). As a part of fleet optimization program, the company plans to close 50 Michael Kors stores.
Management now envisions fourth-quarter fiscal 2019 total revenue to be about $1.33 billion. Revenues from Michael Kors are expected to be approximately $1.07 billion, comprising a low single digit fall in comps close to the upper end of the range. Jimmy Choo revenue is projected to be about $130 million, including low single digit growth in comps. Versace revenue is estimated to be approximately $130 million.
Operating margin is envisioned to be approximately 10.3%. The company forecast earnings in the range of 56-61 cents, including dilution from Versace of about 15 cents.
For fiscal 2019, management projects total revenue to be approximately $5.22 billion. Michael Kors revenue is estimated to be roughly $4.51 billion, comprising a low single digit fall in comps. Revenues from Jimmy Choo and Versace are expected to be about $580 million and $130 million, respectively. Operating margin is now expected to be roughly 17.3%.
Management envisions earnings in the band of $4.90-$4.95 per share, including dilution from Jimmy Choo of approximately flat to 5 cents and from Versace of about 15 cents.
Fiscal 2020 View
For fiscal 2020, management envisions total revenue of approximately $6.1 billion, comprising roughly $900 million from Versace, $650 million from Jimmy Choo and $4.55 billion from Michael Kors. Operating margin is now expected to be roughly 15.5% with earnings per share of approximately $4.95.
Capri Holdings anticipates capital expenditures of approximately $300 million on new store development, IP and infrastructure. The company expects to lower its debt burden by more than $500 million in fiscal 2020.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -15.19% due to these changes.
At this time, Capri Holdings has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top 20% 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 broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Capri Holdings has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.