I feel fantastic about our CPRI Best Idea Long call in the wake of today’s analyst meeting. I still think this name is a double over a 1-2-year time period from its current $55. No changes to our estimates as we’re already light years ahead of the consensus. The reality is that Sales and Margins are headed higher across the board, cash flow is accelerating, deleverage is real, and stock buyback is on the docket for next year. Whether management intended to or not, it gave the building blocks for a financial model that is likely to churn out close to $9-$10 per share over a TAIL duration, but it somehow managed to keep the Street fixated on a $5 EPS number. The fact that the market is not recognizing this is frustrating to say the least. CPRI took up earnings per share this year by a measly dime to $3.80, when we think it will get to $5 THIS YEAR (Mar 22) – or two years before the Street thinks it will hit $5. Aside from the current momentum in the business relative to guidance, one of the biggest factors that the Street continues to miss with CPRI (and other retailers/brands) is a) the amount of cash flow and b) what the company does with it. I gotta admit, it was sub-optimal to see that future acquisitions are on the list of capital allocation plans, but the reality is that this comes after debt paydown and share repo – notable given that this company is likely to generate $5-$6bn in free cash over the next five years.
The three biggest levers to the growth and margin improvement are 1) the Versace Brand, where management articulated the key levers to getting an extra $1+bn in revenue at 2x the operating margin it is likely to clock in with this year, 2) continued pricing actions at the Michael Kors brand (its cash cow), which drop directly to the bottom line, and 3) an increased shift to e-comm, which is margin accretive for the entire CPRI portfolio, unlike most retail models. For the portfolio as a whole, we like how it is increasingly driven by a) accessories, b) Asia, and c) DTC as opposed to wholesale – all of which are higher margin (and multiple) than the traditional dinosaur US Wholesale model that was the historical driver for this business. This is a HUGE factor as it relates to the multiple we think people are willing to pay for this business.
We still think the best way to value this name is using a Sum of the Parts Analysis, as it owns three different brands with three different growth, margin, and luxury characteristics – hence each one deserving of its own multiple. When all is said and done, we think that this name is up 50%+ in a year, and is a double over 1-2-years. Looking at the TAIL earnings power, we think Versace is easily worth 15x EBITDA, which alone gets us to $60 per share in value – more than where the stock is trading today. If we had to take the over/under on that multiple, we’d go up as high as 20x, which is $75 per share in value for that asset alone. But the reality is that today you are getting Versace for free, as 8x the Michael Kors business alone gets to a $55 stock. Then add on Versace, while the Value of Jimmy Choo and Corporate wash each other out. You can play with these numbers any way you want, but the reality is that there’s way too much conservatism built into a $55 stock. The downside support here is outstanding.
The next catalyst for the name should be the June quarter (reported in July), where we’re coming in at $1.10 per share vs the Street at $0.76. CPRI still sits on top of our Best Idea Long list – even though it’s more than doubled from when we first went long – we think it’s got that coming down the pike again over 1-2 years.
-- McGough
