Humor me and try to poke a hole in this CPRI quarter. The company came in at $1.42 vs our Street-high $1.10, guidance of $0.75 and consensus of $0.80. Pure revenue and margin strength. CPRI is no stranger to beating numbers, but it will almost always guide down the upcoming quarter to give the company a pad to beat yet again (the good ol’ sandbag game – it’ll catch up with ‘em one day, but not this year). But this is one of the first times in years where the company took up the upcoming quarter, and flowed through the 1Q beat to the full year – which was $3.80, and now stands at $4.50. We’ve been at $5.20 for the year all along, and with the 1Q upside are taking up our estimate to $5.50 for this year.
Do I like being that far out on the risk curve with my estimates for a company versus the guide/consensus? Absoutely! But the research call needs to be iron clad for me to have that level of confidence. And in this case it is. The earnings juice is real at this company…first (mid COVID) it was driven by pricing, margins and quality of sale initiatives at MK, then last quarter Versace turned the corner, and now this quarter Versace sales and margins accelerated materially, and even Jimmy Choo actually contributed to the upside. The portfolio is humming, which we by no means think is a one-quarter or even one-year occurrence.
The earnings power of this company continues to be underestimated by both sides of the Street, and I’m comfortable being the outlier – by a long shot.
There’s no shortage of John Idol (CEO) haters out there. But let’s put something into perspective…he bought Versace for $2.1bn. By next year, that asset alone should be worth $4bn, and by year 5 of our model, giving Versace an appropriate multiple should make it worth over $10bn (see our SOP model below). That’s a 5-bagger on a deal. Hate the guy all you want, but he’s been a fantastic steward of capital, and has transformed this company from a late-stage single branded company worth 8x EBITDA on a good day, to a multi-brand fashion powerhouse that we think will put up steady multiple expansion on higher sales, margins and EBITDA – and an Equity Value of $20bn by year 5 – that compares to under $9bn today. That’s $160 compared to today’s $56.
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. The long-only community has been scared away by the debt on the balance sheet -- but the reality is that within a year this company should be debt-free and is likely to generate $5-$6bn in free cash over the next five years.
My sense is that by the end of year 2, when its sitting on a $2bn cash balance with no debt and buying back stock over $100 – we’re likely to see CPRI use its higher multiple as a currency to add to its portfolio. Sentiment for this would have been ‘no way in hell’ just two years ago, but with the value of Versace and Choo equating $50 alone by year three (that’s 90% of the share price today), its going to be difficult to be intellectually honest and at the same time challenge this team’s plan to build the fashion house out such that it resembles something closer to LVMH than TPR.
We’re taking up our near-term value of the business to $65 today, $81 in a year, and near $100 per share in two years. My sense is that the Street discounts that value well ahead of the two-year time frame.
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. 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 $56 stock. The downside support here is outstanding. We’re buyers even after Friday’s strength. Best Idea Long.
-- McGough
Some callouts from the quarter/call
- Versace is continuing to explode. Management said on the CPRI analyst day a few weeks ago that Versace would be the biggest growth driver for the overall portfolio, and this quarter validated that statement/strategy. Revenue growth was extraordinary in the quarter, up 158% from last year and 16% from 2019, led by the margin-accretive accessories category which management called out as growing at a faster clip than anticipated. Other categories called out in the quarter were footwear and ready-to-wear. Another tailwind for the Versace brand that was highlighted during the call was the return of red carpet events with multiple celebrities wearing Versace styles on the red carpet. As these events come back, and international pop star Dua Lipa adorns the Versace fall advertising campaign, the brand will stay relevant, drive impressions and ultimately continue to grow its customer database.
- America continues to lead the way for all three brands. This theme has been consistent with all the foreign luxury powerhouses that have reported earnings already (Kering, LVMH, Moncler, etc.) and it held true for Capri. Revenue in the region was up 304% vs last year and down 2% vs 2019 levels for the entire portfolio. However breaking it down by brand more clearly demonstrates the acceleration that management is communicating with Versace Americas revenue growing 480% year over year and 98% vs 2 years ago, Choo Americas revenue up 533% year over year and 26% vs 2 years ago and Kors up 278% year over year but down 9% vs 2 years ago as management continues to trim that business in favor of a dramatically higher margin structure. While these trends are great, they also show that Asia and EMEA will get this company into overdrive when the regions return to full potential.
- Even when management takes up guidance it still is a sandbag. I give the company props for taking up guidance for the quarter and year. But if our model is right the raise simply is not enough. Management guided to a revenue number in line with Q1 revenue despite the fact that this business always ticks higher in Q2. Additionally management took up operating margin guidance for the year by 200bps, but also took up Q2 operating margins by 200bps implying the back half to be the same as before the raise. At the end of the day management is keeping the street happy with a raise but keeping street numbers at a point where the numbers can be beaten. And, as noted above, we think it will beat by a solid buck per share this year.
- The Q&A section was mostly highlighted by questions surrounding the improving margin profile of the Versace and Michael Kors businesses to which management responded in a bullish manner to where margins could go. There were a few questions on brand trends to which the highlights were management calling out that the Versace brand designs and celebrity partners are being received incredibly well by consumers and that the company is continuing to hold firm on its decisions to not chase promotions no matter what competitors do. Absent from the Q&A is what management will do with all the cash.
