Capri Holdings (CPRI) Beats On Q1 Earnings, Trims Sales View

Capri Holdings Limited (NYSE:CPRI) maintained its positive earnings surprise streak, when it reported first-quarter fiscal 2020 results. However, revenues came below the Zacks Consensus Estimate, following a beat in the preceding quarter. While the top line grew year over year, bottom line declined from the year-ago period.

Nonetheless, the company reiterated its fiscal 2020 earnings view but trimmed its full-year sales forecast due to adverse foreign currency fluctuations and lower Michael Kors revenue, related to North America wholesale.

We also noted that this Zacks Rank #4 (Sell) company did not provide an encouraging second-quarter view. Management now envisions second-quarter revenue to be approximately $1.45 billion, which is below the Zacks Consensus Estimate of $1.47 billion. The company now forecasts earnings in the range of $1.21-$1.26, including dilution from Versace of about 5 cents. The mid-point $1.235 of which is lower compared with the current Zacks Consensus Estimate of 1.26.

Let’s Delve Deep

This designer, marketer, distributor and retailer of branded apparel and accessories delivered adjusted quarterly earnings of 95 cents a share that surpassed the Zacks Consensus Estimate of 90 cents as well as management’s projection of 85-90 cents. However, earnings fell sharply from $1.32 reported in the year-ago period. Rise in cost of goods sold, increased operating expenses and higher interest expense acted as deterrents to the bottom line.

Total revenues of $1,346 million surged 11.9% from the prior-year period but missed the Zacks Consensus Estimate of $1,362 million. On a constant currency basis, total revenues were up 13.8%.

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 revenues to $8 billion in the long term.

Top line includes revenue contribution of $981 million from Michael Kors, down 4.8% and $158 million from Jimmy Choo, down 8.7% year over year. Revenue from Versace came in at $207 million. On a constant currency basis, comparable store sales fell in low single digits for Michael Kors, while the metric remained flat for Jimmy Choo. Comparable store sales for Versace rose double digits, on a constant currency basis.

Adjusted gross profit increased 11.4% to $840 million, however, adjusted gross margin contracted 30 basis points to 62.4%. Adjusted operating income declined 18.5% to $190 million, while adjusted operating margin shrunk 530 basis points to 14.1%. Nevertheless, adjusted operating margin came better than the company’s forecast of 13%. The company expects second-quarter fiscal 2020 operating margin to be about 15%.

Other Details

Michael Kors ended the quarter with cash and cash equivalents of $160 million, long-term debt of $1,917 million and shareholders’ equity of $2,277 million, excluding non-controlling interest of $3 million. On Aug 1, the company's board of directors announced a new $500 million share buyback program.

As of Jun 29, 2019, there were 1,264 stores — 853 Michael Kors stores, 215 Jimmy Choo stores and 196 Versace.

Guidance

Management forecasts second-quarter 2020 revenues from Michael Kors to be approximately $1.1 billion with comparable store sales likely to be flat year over year. Operating margin is expected to be lower than the year-ago period.

Revenue from Versace is estimated to be approximately $220 million with comparable store sales projected to increase in the mid-single digits. Jimmy Choo revenue is projected to be approximately $125 million and comparable store sales are expected to be flat with the prior-year period.

For fiscal 2020, management projects total revenue to be approximately $5.8 billion, down from the prior view of $6 billion. Operating margin is expected to come in at 15.5%. Management continues to envision earnings of $4.95 per share, including dilution from Versace of about 20 cents and the impact of recently announced U.S. tariffs as well as strong U.S. dollar.

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