Capri Holdings (CPRI) Beats on Q3 Earnings but Trims FY20 View

Capri Holdings Limited CPRI reported a positive earnings surprise in the third quarter of fiscal 2020, following a miss in the preceding. Revenues also surpassed the Zacks Consensus Estimate, after falling short of the same in the previous two quarters. While the top line sustained year-over-year improvement, the bottom line continued to decline.

Notably, the top line gained from the addition of Versace and higher revenues from Jimmy Choo. However, the bottom-line number was hurt by higher operating expenses. Also, adjusted operating margin missed the company’s projection. Nonetheless, both revenues and earnings exceed management’s expectations.

In spite of better-than-expected results, management trimmed its fiscal 2020 projection on account of coronavirus outbreak in China which the company believes will significantly hurt its financial results.

Capri Holdings informed that roughly 150 out of 225 stores in mainland China are closed as of Feb 5, 2020. Moreover, quite a number of outlets are operating with reduced hours and witnessing lower footfall. Given the current scenario in China, the company expects revenues and earnings per share to be hit by approximately $100 million and 40-45 cents a share, respectively, in both fourth quarter and fiscal 2020.

Notably, shares of Capri Holdings are up roughly 4% during the pre-market trading hours. In the past three months, the stock has declined 8.9% against the industry’s growth of 0.6%.

Let’s Delve Deep

This designer, marketer, distributor and retailer of branded apparel and accessories delivered adjusted quarterly earnings of $1.66 per share that came ahead of the Zacks Consensus Estimate of $1.58 as well as management’s projection of $1.55-$1.60. However, earnings fell sharply from $1.76 reported in the year-ago period. Rise in cost of goods sold and increased operating expenses acted as deterrents to the bottom line.

Total revenues of $1,571 million increased 9.2% from the prior-year period and surpassed the Zacks Consensus Estimate of $1,533.7 million. On a constant currency basis, total revenues were up 9.6%.

Adjusted gross profit increased 6.9% to $934 million, however, adjusted gross margin contracted 130 basis points to 59.5%. Adjusted operating income declined 16.5% to $264 million, while adjusted operating margin shrunk 520 basis points to 16.8%. We note that adjusted operating margin came below the company’s forecast of 17.5%. The company now expects fourth-quarter fiscal 2020 operating margin to be about 9%.

Brand Wise Performance

Capri Holdings has been steadily firming its position in the luxury fashion space with the buyouts of Jimmy Choo and Versace. These brands along with Michael Kors will help augment revenues in the long term.

Top line includes revenues contribution of $1,211 million from Michael Kors, down 5.1% and $165 million from Jimmy Choo, up 1.9% year over year. Revenue from Versace came in at $195 million.

On a constant currency basis, comparable store sales declined in the low single digits at Michael Kors. The metric remained flat at Jimmy Choo. Comparable store sales at Versace increased in the mid-single-digits on a constant currency basis. Versace continued to register double digit growth in the Americas and EMEA.

Other Details

Capri Holdings ended the quarter with cash and cash equivalents of $237 million, long-term debt of $1,085 million and shareholders’ equity of $2,609 million, excluding non-controlling interest of $2 million.

As of Dec 28, 2019, there were 1,277 stores — 846 Michael Kors stores, 223 Jimmy Choo stores and 208 Versace stores.

Guidance

Management now envisions fourth-quarter revenues to be approximately $1.3 billion, which is below the current Zacks Consensus Estimate of $1.46 billion. This Zacks Rank #4 (Sell) company now forecasts earnings in the range of 68-73 cents a share, and is below the current Zacks Consensus Estimate of 1.19.

Management forecasts fourth-quarter fiscal 2020 revenues from Michael Kors to be approximately $950 million. Operating margin is expected to be lower than the year-ago period on account of the current situation in China. This is partly offset by cost containment efforts in relation with the fleet optimization program.

Revenues from Versace are estimated to be about $210 million with operating margin likely to be positive in the fourth quarter. Jimmy Choo revenues are envisioned to be approximately $130 million and operating margin are expected to improve due to expense leverage.

For fiscal 2020, management now projects total revenues to be approximately $5.65 billion. Operating margin is expected to come in at 13.7%. Management now envision earnings between $4.45 and $4.50 per share. The Zacks Consensus Estimate for the fiscal year is pegged at $4.87. The company had earlier guided total revenues of approximately $5.8 billion with operating margin of 15% and earnings of $4.95 per share.

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