Capri Holdings (CPRI) Q2 Earnings Miss Estimates, Fall Y/Y

Capri Holdings Limited (NYSE:CPRI) reported a negative earnings surprise in the second quarter of fiscal 2020, following a beat in the preceding. Revenues also came below the consensus mark for the second quarter in row. While the top line sustained year-over-year improvement, bottom line continued to struggle. Nonetheless, the company reiterated its fiscal 2020 revenues and earnings view.

Notably, the top line gained from the addition of Versace and higher revenues from Jimmy Choo. Also, Michael Kors registered positive comparable store sales. However, the bottom-line number was hurt by increased expenses and a tough environment in Hong Kong, and also came below management’s expectations. Again, adjusted operating margin also missed the company’s projection.

Let’s Delve Deep

This designer, marketer, distributor and retailer of branded apparel and accessories delivered adjusted quarterly earnings of $1.16 per share that missed the Zacks Consensus Estimate of $1.25 as well as management’s projection of $1.21-$1.26. Again, earnings fell sharply from $1.27 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 $1,442 million surged 15.1% from the prior-year period but fell short of the Zacks Consensus Estimate of $1,446.8 million. On a constant currency basis, total revenues were up 16.1%.

Adjusted gross profit increased 14.9% to $879 million, however, adjusted gross margin contracted 10 basis points to 61%. Adjusted operating income declined 7.3% to $202 million, while adjusted operating margin shrunk 340 basis points to 14%. We note that adjusted operating margin came below the company’s forecast of 15%. The company now expects third-quarter fiscal 2020 operating margin to be about 17.5%.

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 to $8 billion in the long term.

Top line includes revenues contribution of $1,089 million from Michael Kors, down 4.2% and $125 million from Jimmy Choo, up 7.8% year over year. Revenue from Versace came in at $228 million.

On a constant currency basis, comparable store sales rose in the low single digits at Michael Kors. The metric declined in the mid-single-digits at Jimmy Choo owing to soft performance in Hong Kong and a decline in Japan. Comparable store sales at Versace were flat on a constant currency basis. Versace continued to register double digit growth in the Americas and EMEA, but experienced sluggishness in Asia.

Other Details

Michael Kors ended the quarter with cash and cash equivalents of $179 million, long-term debt of $1,796 million and shareholders’ equity of $2,405 million, excluding non-controlling interest of $3 million.

As of Sep 28, 2019, there were 1,264 stores — 850 Michael Kors stores, 216 Jimmy Choo stores and 198 Versace.

Guidance

Management now envisions third-quarter revenues to be approximately $1.53 billion, which is below the current Zacks Consensus Estimate of $1.60 billion. This Zacks Rank #3 (Hold) company now forecasts earnings in the range of $1.55-$1.60, including dilution from Versace of about 15 cents. The mid-point — $1.575 — of earnings range is higher than the current Zacks Consensus Estimate of 1.56.

Management forecasts third-quarter 2020 revenues from Michael Kors to be marginally below $1.2 billion with comparable store sales expected to increase in the low single digits. Operating margin is expected to be lower than the year-ago period.

Revenues from Versace are estimated to be approximately $180 million with comparable store sales projected to be flat. Jimmy Choo revenues are envisioned to be approximately $165 million and comparable store sales are expected to be flat with the prior-year period.

For fiscal 2020, management continues to project total revenue to be approximately $5.8 billion. Operating margin is expected to come in at 15%. Management continues to envision earnings of $4.95 per share, including dilution from Versace of about 20 cents.

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