Updated 5:03 p.m. ET Feb. 3
Capri Holdings inched past Wall Street’s earnings estimates in the third quarter and matched on revenues, but the real action was in the company’s balance sheet.
The roughly $1.5 billion sale of Versace to Prada last year utterly transformed Capri’s debt load, giving it much more space to build at its Michael Kors and Jimmy Choo divisions.
As was expected, Capri cut its net debt to $80 million down from $1.6 billion at the end of September.
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With the balance sheet cleaned up, investors can now have a closer look at operations, which investors are still trying to get comfortable with.
Shares of the company fell 13.2 percent to $20.08 on Tuesday.
But chairman and chief executive officer John Idol — who built Capri off the back of Michael Kors’ small designer business, took it public, tried to sell it to Tapestry and is now working the turnaround — said the company would return to growth in fiscal 2027, which starts at the end of March.
“Our strategies remain anchored in strengthening brand desirability through delivering compelling storytelling and creating fashion luxury products that excite and inspire consumers,” Idol told analysts on a conference call. “Together with our advanced data analytics and deep consumer insights, these initiatives are designed to strengthen consumer engagement and reinforce the long-term equity of our brands.”
Capri’s net income totaled $57 million, but adjusted profits — the figure analysts look at — rose 32 percent to $79 million, or 81 cents a share. That’s 3 cents better than the 78 cents analysts projected, according to Yahoo Finance.
Adjusted operating margins decreased to 7.7 percent from 9.1 percent a year earlier.
And revenues for the three months ended Dec. 27 fell 4 percent to $1 billion, with a decrease of 5.9 percent in constant currencies.
Michael Kors’ revenues decreased 5.6 percent to $858 million, with a 7.3 percent decline in constant currencies. The smaller Jimmy Choo fared better, with revenues up 5 percent to $167 million, or 1.9 percent in constant currencies.
Idol acknowledged that some of the company’s efforts were “creating near-term pressure on revenue,” but maintained “they are deliberate steps toward building a stronger, more resilient foundation for our business.”
Sales in the brand’s full-price stores have taken a hit from a reduction in price promotions, but Idol said momentum is building and average unit retail prices are rising.
“Throughout the third quarter, we further amplified Hotel Stories with immersive experiences and local activations globally that reflected the brand’s Jet Set spirit,” the CEO said of Michael Kors’ marketing push. “We also celebrated the reopening of two of our flagship locations. Rockefeller Center in New York City and Regent Street in London, with high-profile events.”
Capri has increased its marketing spend to just more than 8 percent of sales and has ramped up with influencer-driven content.
But the brand has more work to do to draw in shoppers.
Neil Saunders, managing director of GlobalData, said the company would continue to have to exert “a lot of effort” to “course correct Michael Kors.”
“This quarter, the brand saw sales decline by 5.6 percent — a dip that came off the back of a very sharp 12.1 percent decline in the prior year,” he said. “So, on a two-year basis, revenue is down by over a fifth, which represents a very considerable loss of market share.”
Saunders attributed some of that to the brand’s efforts to be less promotional, but said there were also “other factors that continue to drag down the numbers.”
“Foremost among them is the still awkward position of Michael Kors,” Saunders said. “While it is supposed to sit alongside the likes of Coach, Ralph Lauren and even Burberry, it lacks the refinement of any of those brands. As far as a lot of consumers are concerned, it is a premium-priced label with too many attributes of a mass-market one. This deters a lot of people from buying and means Michael Kors has seen consideration progressively deteriorate — especially so in a luxury market that has become softer and more considered.”
But Idol and crew are working along several fronts. For instance, Michael Kors is also planning to renovate half of its store fleet and key department store shops over the next three years.
And it sounds like Saks Global is still very much in the mix, despite its bankruptcy last month, which left Capri owed $33 million.
“We’re excited about the new management team [under CEO Geoffroy van Raemdonck] that’s leading Saks Global now,” Idol said. “They’ve been through this before with Neiman Marcus. And we have a lot of confidence in what their strategy is. We also think that a leaner Saks Global will be one that will be successful and very focused. And so we intend on being very, very supportive of their strategies and to help them succeed. We think that’s good for the industry and ultimately, good for the consumer as well.”
The company’s projections for the full year have it at or near Wall Street’s estimates. Capri expects earnings per share to range from $1.30 to $1.40 while revenues come in at $3.45 billion to $3.475 billion.