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Capri Holdings (CPRI) Down 10.5% Since Last Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for Capri Holdings (CPRI). Shares have lost about 10.5% 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 catalysts.

Capri Holdings Q3 Earnings Miss, Revenues Decline Y/Y

Capri Holdings Limited reported lower-than-expected third-quarter fiscal 2023 results, wherein the top and bottom lines declined on a year-over-year basis. A tough operating environment weighed on the company’s performance. Management highlighted that the soft global wholesale business resulted in expense deleverage and a lower operating margin.

Following dismal results, Capri Holdings trimmed its fiscal 2023 sales and earnings view. The company’s fiscal 2024 forecast also came below analysts’ expectations. The sluggish demand for luxury items and pandemic-related restrictions in China hurt the company’s performance.

Let’s Delve Deeper

This designer, marketer, distributor and retailer of branded apparel and accessories posted adjusted quarterly earnings of $1.84 per share, which showcased a sharp decline from the adjusted earnings of $2.22 reported in the year-ago period. The quarterly earnings missed the Zacks Consensus Estimate of $2.21.

Total revenues of $1,512 million fell short of the Zacks Consensus Estimate of $1,539 million and decreased 6% year over year. On a constant-currency basis, total revenues declined 0.5%.

By geographic region, revenues in the Americas decreased 4%, with mid-single-digit growth in retail, offset by significant declines in wholesale channel. In EMEA, revenues declined 2% on a reported basis, but increased 9% in constant currency. In Asia, revenues decreased 20% on a reported basis and 8% in constant currency. This reflects strong results in Japan and Southeast Asia, offset by a nearly 40% decline in Mainland China.

The adjusted gross profit decreased approximately 4.2% year over year to $1,003 million. However, the adjusted gross margin expanded 120 basis points (bps) to 66.3% driven by moderating inbound transportation costs, price increases and channel mix.

The company reported an adjusted operating income of $256 million, down from $359 million in the prior-year quarter. The operating margin shrunk 540 bps to 16.9% due to the operating expense deleverage.

Segment Details

Revenues from Versace decreased 0.8% year over year to $249 million during the quarter under discussion. Women’s accessories retail sales increased 40%. The operating margin contracted 310 bps to 9.6%. Global retail sales increased in the mid-single digits in constant currency. By geography, total revenues in the Americas decreased 4%. Revenues in EMEA increased 14% on a reported basis and 28% in constant currency. Revenues in Asia decreased 19% on a reported basis and 11% in constant currency, driven by greater declines in Mainland China.

Jimmy Choo’s revenues came in at $168 million, down 5.6% from the prior-year period. Women’s accessories retail sales grew in the high single digits. The operating margin expanded 170 bps to 10.7%. Global retail sales increased low single digits in constant currency. By geography, total revenues in the Americas increased 6%. Revenues in EMEA increased 1% on a reported basis and 14% in constant currency. Revenues in Asia decreased 24% on a reported basis and 13% in constant currency driven by greater declines in Mainland China.

Revenues from Michael Kors fell 7.2% year over year to $1,095 million. Women’s accessories retail sales grew in the low single digits. The operating margin shriveled 550 bps to 22.9%. Global retail sales increased low single digits in constant currency. Sales in the Americas decreased 5% driven by the decline in wholesale. Revenues in EMEA decreased 11% on a reported basis and 1% in constant currency, also driven by a decline in wholesale. Revenues in Asia decreased 18% on a reported basis and 5% in constant currency, driven by greater declines in Mainland China.

Other Details

Capri Holdings ended the quarter with cash and cash equivalents of $281 million, net receivables of $372 million, long-term debt of $1,521 million and total shareholders’ equity of $2,223 million. During the quarter, the company repurchased roughly 5.7 million shares for approximately $300 million.

As of Dec 31, 2022, the company had 1,294 retail stores. These include 827 Michael Kors, 242 Jimmy Choo and 225 Versace stores.

Guidance

Capri Holdings now estimates revenues of approximately $5.56 billion for fiscal 2023, down from the prior projection of $5.7 billion and reported revenue of $5.65 billion for fiscal 2022. It guided earnings per share of approximately $6.10, down from the prior forecast of $6.85. The current view indicates a decline from the adjusted earnings of $6.21 reported in fiscal 2022.

Management projected a modest gross margin expansion and an operating margin of approximately 16% (versus 19% in fiscal 2022). The company had earlier guided the operating margin to be roughly 18.3%.

The fiscal 2023 top-line projection assumes revenues of approximately $1.1 billion from Versace, $610 million from Jimmy Choo and $3.83 billion from Michael Kors. Management anticipates an operating margin of approximately 15%, 4% and 22% for Versace, Jimmy Choo and Michael Kors, respectively, for the fiscal year.

Management envisions fourth-quarter fiscal 2023 revenues to be roughly $1.275 billion, down from $1.492 billion reported in the year-ago period owing to the uncertain macroeconomic environment. It projected earnings per share in the band of 90-95 cents compared with the adjusted earnings of $1.02 reported in the fourth quarter of fiscal 2022. The company expects its operating margin to be approximately 8.5% compared with 14.2% in the year-ago period. This reflects continued gross margin expansion, offset by operating expense deleverage.

For the fourth quarter, Capri Holdings anticipates revenues of approximately $280 million from Versace, a decline of 11% on a reported basis; $130 million from Jimmy Choo, a decline of 16%; and $865 billion from Michael Kors, a decline of 15%. For Versace, the company now anticipates an operating margin of approximately 10%. For Jimmy Choo, it expects an operating margin in the negative mid-teens. For Michael Kors, the company now anticipates an operating margin in the mid-teens.

For fiscal 2024, the company expects total revenues of $5.8 billion and earnings of $6.40 per share, with an operating margin of 16.5% reflecting gross margin expansion, partially offset by expense deleverage. The fiscal 2024 top-line projection assumes revenues of approximately $1.25 billion from Versace, $650 million from Jimmy Choo and $3.9 billion from Michael Kors. The company expects the operating margin in the mid-teens range for Versace, a high-single-digit range for Jimmy Choo and a low-20% range for Michael Kors.

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How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision.

The consensus estimate has shifted -32.06% due to these changes.

VGM Scores

Currently, 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.

Outlook

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 #4 (Sell). We expect a below average return from the stock in the next few months.

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