Capri Holdings

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Capri Holdings is a global fashion luxury group consisting of three iconic brands: Versace, Jimmy Choo, and Michael Kors, each with distinct positioning and offerings in apparel, footwear, accessories, and related categories.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

The core of Capri’s value creation is its brand portfolio, each brand creating a unique identity. While this strategy has generated revenue and profit growth, it also carries some associated risks.

Business Overview Capri Holdings (CPRI) operates in the fashion luxury market, owning three distinct brands: Versace, Jimmy Choo, and Michael Kors.

  • Versace is an Italian fashion house known for its luxury apparel, handbags, jewelry, and home furnishings. The brand targets a high-end luxury consumer with its bold designs and iconic Medusa logo.
  • Jimmy Choo is a British luxury fashion brand specializing in shoes, handbags, and accessories. It’s known for its glamorous and sophisticated aesthetic.
  • Michael Kors offers apparel, accessories, watches, jewelry, and footwear, blending accessible luxury with a modern design approach. Its products are sold through department stores, company-owned retail stores, and e-commerce platforms.

Revenue Distribution:

  • The company operates across three main geographical regions: the Americas (North America, Canada, Latin America), EMEA (Europe, Middle East and Africa), and Asia. Each region offers unique growth opportunities. The Americas is their major market.
  • The Company’s retail channel generates the majority of revenue, followed by the wholesale channel and licensing revenue.

Industry Trends

  • The global luxury goods market continues to experience growth, driven by increased consumer spending in both emerging and developed countries. Emerging markets, such as China and India, are playing an increasingly prominent role in driving future industry growth.
  • E-commerce continues to increase in prominence, with luxury brands focusing on online sales channels to engage customers digitally.
  • Sustainability practices are becoming increasingly important. Brands that are transparent and environmentally conscious are getting preferred by consumers.
  • The luxury market is experiencing intense competition, necessitating strategic focus on pricing, brand identity, product innovation, and customer satisfaction.

Competitive Landscape The fashion luxury market is intensely competitive, featuring many well-established brands and new market entrants. Capri’s main competitors include other established luxury brands, such as LVMH and Kering, as well as players in accessible luxury like Tapestry.

What differentiates Capri from others is that they have three completely different brands that operate in their own niches. Each brand has its own loyal consumers. While this provides diversity, it also requires a wide array of resources to cater to all of these brands.

Financial Analysis

  • The company has experienced a significant increase in revenue, rising from $4,062 million in FY2021 to $5,927 million in FY2023.
  • Over the past 10 years (2013-2023), the company’s overall revenues have risen at 10.3%. 2020 and 2021 were negatively affected due to pandemic and saw a negative growth, but growth started to recover after that.
  • The operating margin has fluctuated over the years, and was at 12.6%, 20.7%, 16.0%, 12.9% and 12.1% for 2019, 2020, 2021, 2022, and 2023 respectively, meaning some instability in profitability.
  • The net income followed a similar pattern, dropping in 2020 and 2021, before going back to higher levels. It has generally been above 500 million in net income, except for 2020 and 2021.
  • In Q1 2024 earnings call, they saw a 10.2% YoY revenue growth, but they do expect a full-year revenue decline as per management.
  • In Q1 2024 gross profit margin of 69.6% was stable with last year, but operating profit margin decreased due to sales deleverage and strategic investments.
  • They expect that over the coming quarters that operating expenses will decline as they achieve more leverage with respect to revenues and they see an improvement in gross margins as they take pricing actions.
  • They do face some difficulty from China due to the economic downturn and a weaker Chinese Yuan. They are hoping for a recovery in mainland China after their Zero-COVID policy.

They have reduced capital expenditures from 475 million in 2022 to 232 million in 2023. They plan to keep capex within 250-300 million dollars for the foreseeable future.

Moat Rating: 2/5 Capri has some elements of a moat:

  • Brand Recognition: Versace, Jimmy Choo, and Michael Kors each enjoy strong brand recognition, which drives customer loyalty and some pricing power. However, this advantage is also susceptible to rapid changes in trends.
  • Customer Captivity: The luxury and accessible luxury sectors are somewhat less vulnerable to pure price competition. However, switching costs are low, so this can not be called as a strong moat.
  • Geographic Diversity: Their business benefits from a diversified presence across North America, Europe, and Asia. However, many other high-end fashion companies have the same strategy, so this is not truly a differentiating point.

However, the moat is narrow because the fashion industry is highly competitive, with trends and preferences changing rapidly. Strong brands can also easily fall out of favor or get over-saturated and lose market share to new competitors. The need for consistent investment in marketing and product development also limits profitability.

Legitimate Risks that Could Harm the Moat and Business Resilience

  • Fashion Trends: This is the greatest risk. Changes in consumer tastes can weaken brand power and lead to revenue decline.
  • Intense Competition: New entrants or a rival company coming with new innovations, and at better prices, could significantly erode their market share.
  • Economic Downturns: Global economic downturns affect consumer discretionary spending, thereby hurting demand for luxury goods. This is very important because of the high end nature of Capri’s products and the consumer base.
  • Macroeconomic Factors: Fluctuations in exchange rates, tariffs, and other geopolitical factors can negatively affect the company’s revenues and profitability.
  • Acquisition Integration: Past acquisitions show that not all of them can be easily and successfully integrated into a parent company. They must always account for high overhead and new issues.
  • Supply chain issues: If there are problems with suppliers, or shipping in certain areas, their profits could suffer significantly.
  • Executive turnover: This is a possibility that can negatively affect the company if the top management leaves the company.

Business Resilience

  • Capri has managed to grow in various cycles.
  • Their revenue has grown considerably in recent years.
  • They have been focusing on cost management to maximize profitability.
  • They have a diversified portfolio in different brands, which helps lower risk if one brand falls out of favor.

Understandability: 3/5 The business model is relatively straightforward:

  • It has a clear distinction between the three brands. However, the underlying financial metrics, revenue sources, capital investments, and cost structures for each individual brand is complex and hard to get a complete overview of.
  • The competitive landscape is well-defined, but they are competing in a tough industry.
  • The company’s financials have some complexity in them which makes analysis and valuation moderately difficult.

Balance Sheet Health: 3 / 5 The balance sheet shows the following:

  • The company has a good level of cash on hand.
  • Debt is not that significant (11.5 B total liability with a 7.3 B equity on the latest report) and they are focused on reducing leverage (management guidance).
  • The company has goodwill at around 1.6 B, which is manageable.
  • Their short-term financial health is sound, with enough liquidity for near-term operations.
  • But like in many consumer discretionary companies, their inventories and receivables do add to the liability side and are hard to accurately predict.

Overall, the balance sheet is not the most healthy, but it is stable enough to give investors confidence.