Capri Holdings Stock Poised to Fall After A 26% Rally Since Last Year?
Capri Holdings stock (NYSE: CPRI), an apparel marketer and retailer focusing on premium and luxury fashion, under brands Michael Kors, Versace, and Jimmy Choo, became vulnerable during the pandemic due to its nonessential product assortment. Consequently, the company’s revenues have fallen 22% to a consolidated figure of $4.3 Bil for the last 4 quarters from the consolidated figure of $5.5 Bil for the 4-quarter period before that. However, CPRI stock gained 26% – moving from about $36 to $45 in the last 12 months, due to better-than-expected fiscal Q2 (ended Sept), the announcement of two Covid vaccines, and the U.S. federal elections. That said, we believe the company stock could potentially slump going forward due to this revenue and stock price mismatch.
This is taking into account a lackluster revenue growth of Capri’s CPRI Michael Kors brand which represents over two-thirds of its business and almost its entire operating profit. A disappointing year-over-year 8% decline in MK revenues in FY 2020 (year ended March 2020) and flat revenue growth in both FY 2019 and FY 2018 – even before the pandemic – signal weakness in the brand. MK continues to represent a drag on the company’s business as it has lost its target audience attempting to be too many things at once. While Capri bought Versace and Jimmy Choo to address these dynamics and diversify its portfolio, it will take time for these two brands to contribute meaningfully to the company’s top line and bottom line. Our dashboard, ‘Buy or Fear Capri Holdings Stock?‘ provides the key numbers behind our thinking, and we explain more below.
Capri Holdings stock declined 83% from almost $62 in fiscal 2018 to close to $11 in fiscal 2020 (year ended March 2020), with much of this decline coming from the pandemic driven store closures. During this period, the company’s revenues grew 18% from $4.7 billion in FY2018 to $5.6 billion in FY2020, and the shares outstanding declined 1%. Taken together, this helped revenue per share surge by 19% from around $31 in FY2018 to $37 in FY2020.
Finally, Capri’s P/S multiple declined from 2.0x in fiscal 2018 to 0.3x in fiscal 2020. While the company’s P/S has now increased to 1.6x, there is a downside risk when the current P/S is compared to levels seen in the past years.
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In the recent fiscal Q2, Capri’s revenue fell 23% year-over-year to over $1 billion but the company still posted an adjusted profit of 90 cents for the period (down 22% y-o-y). The company benefited from growing e-commerce sales and strong performance in China (positive sales growth). It should be noted that Jimmy Choo was the best-performing of its three brands as revenue there only fell 2.4% in Q2.
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