On Tuesday, Guggenheim Securities upgraded Capri Holdings Limited (NYSE:CPRI) shares, the parent company of luxury fashion brands including Michael Kors, Versace, and Jimmy Choo, from Neutral to Buy, setting a price target of $30.00. The upgrade was based on the firm's view of the company's undervalued stock price relative to its historical earnings and the potential for the management team to enhance shareholder value.
According to the analyst, Capri Holdings' stock price has significantly deviated from the intrinsic value of its portfolio. Despite challenges faced by the Michael Kors brand, the firm believes that it is not irreparable and that the Versace and Jimmy Choo brands remain appealing.
Guggenheim highlighted a potential significant earnings recovery for Capri Holdings, with projected trough earnings this year of $1.50 per share, a mere 25% of the $6.00 earnings per share estimate in August 2023. The firm's updated Sum of The Parts (SOTP) analysis suggests a possible upside of nearly $1 billion.
The analyst outlined multiple strategies for Capri Holdings to create value, including focusing on the profitability recovery of Michael Kors through various initiatives and potentially changing the brand's leadership.
Improved operating results from Michael Kors are expected to contribute to the earnings per share recovery at Capri Holdings. The analysis includes a modest top line rebound estimate of 1% in the fiscal year 2026 and the achievability of 15%+ EBITDA margins for Michael Kors.
Moreover, Capri Holdings' management has shown a willingness to undertake corporate actions to maximize shareholder value. The company is entering a new phase with financial stability and the potential to return to its normalized free cash flow generation of $500 million per year.
If operating margins were to improve to 10% in the fiscal year 2026, this could result in an earnings per share of approximately $3.40. Given the current share price of around $22, Guggenheim sees a favorable risk/reward ratio at these levels, leading to the establishment of a $30 price target for Capri Holdings.
In other recent news, Capri Holdings experienced a shortfall in its second quarter earnings, with adjusted earnings per share of $0.65, falling short of the anticipated $0.73. The company's revenues were reported at $1.08 billion, below the projected $1.18 billion, marking a 16.4% YoY decrease.
Despite these challenges, Capri Holdings managed to add 10.9 million new consumers across its brands, indicating a 13% growth compared to the previous year. TD Cowen and Telsey Advisory Group reduced the price target for Capri Holdings, citing the weaker than anticipated performance of the company's Michael Kors brand and the termination of a merger agreement.
Bernstein maintained its Market Perform rating on Capri Holdings shares, suggesting a breakup could be the most beneficial move for shareholders. These are recent developments in the dynamic business landscape that Capri Holdings operates within.
The company's proposed acquisition by Tapestry (NYSE:TPR) has been temporarily halted due to a court injunction, with both companies filing an appeal against the decision. Amidst these ongoing challenges, Capri Holdings is evaluating strategic options as it navigates its future direction.
InvestingPro Insights
Adding to Guggenheim's optimistic outlook on Capri Holdings Limited (NYSE:CPRI), recent data from InvestingPro provides additional context to the company's financial situation. Despite the challenges highlighted in the article, InvestingPro Tips indicate that Capri Holdings maintains "impressive gross profit margins," which could support the potential earnings recovery mentioned by Guggenheim.
Moreover, aligning with the analyst's projection of improved future performance, another InvestingPro Tip suggests that "net income is expected to grow this year." This expectation reinforces Guggenheim's view of a possible significant earnings recovery for the company.
However, it's worth noting that according to InvestingPro data, Capri Holdings' stock price "has fallen significantly over the last year," which may explain why Guggenheim sees the current stock price as undervalued relative to its historical earnings.
For investors seeking a more comprehensive analysis, InvestingPro offers 12 additional tips for Capri Holdings, providing a deeper understanding of the company's financial health and market position.
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