Literally no holes to poke in this one. The company printed $1.53 vs the Street at $0.95 and our estimate of $1.35. Revenue beat, and margins came in at a staggering 18.5% vs the Street at 13%. This is a company that guides more conservatively than almost any other retail name, which was the risk heading into this print. But the company came out and took up the year up to $5.30 from $4.50 despite supply chain pressures – which is a very uncharacteristic move for this management team, and speaks to its bullishness towards its portfolio. The ‘conspiracy theorist base case’ is that CEO John Idol just released the kraken on guidance and showed all his cards as he transitions out of his CEO role into the Executive Chairman role (focused on portfolio strategy) and leaves it up to new CEO Josh Schulman to drive the upside from here. But we think that’s a punk argument. We were at $5.53 for the year – a full buck above the consensus, and are now modeling an even $6.00 EPS number for the year. In the end, we think that guidance of $5.30 undercuts the real strength of the top line and margins as the Kors/Versace/Choo portfolio gels. Next year, we’re coming in at $7.06 – with the Street likely to come in close to $6.
While the whole portfolio was strong, the real upside to our model – both in the quarter and going forward – is in the profitability of Versace. It just put up a 19.5% margin, which compares to 10.3% last year and 3.9% in 2019. As the company scales this business up, its approaching the luxury margins that a brand like Versace should be putting up. In fact, over a TAIL duration we have Versace margins hitting 30% -- which is hardly a stretch when you’re looking at $2,500 for a dress or $1,500 for a handbag. It’s funny, Idol caught so much slack when he bought Versace in 2018 for $2.1bn. At that point in time the brand was losing money and was a quarter of the size it is today. How we’re doing the math, Versace is worth about $5bn today, and is on track to be worth $15bn, or ~$100 per share by year 5 of our model. That sounds aggressive, but the math is simple -- $2.6bn in sales vs $1bn today, and margins of 30%. That’s likely worth 15x EBITDA – in line with luxury peers. If you’ve got duration on your side, you can buy CPRI today, have the stock appreciate 60% and you’d still be getting Kors and Jimmy Choo for free.
The punchline here is that when you ascribe the appropriate multiples to the pieces of the portfolio, the numbers simply don’t gel with a stock trading at $64. The table below spells out the math…
That brings us to the use of cash and portfolio composition. Pre-COVID, this company was sitting at 4x net debt to EBITDA. By the end of this year, that should be cut in half due to the sharp rebound in cash flow, but also a higher cash balance and lower absolute debt levels (in fact, paid off $189mm this quarter and repo'd $100mm in stock). The point here is that on paper, leverage should be below 1x over the course of 18 months, which is hugely bullish. The reason why we say ‘on paper’ is because while the company will be buying back stock and lowering debt, it will also likely add to its portfolio. We’re thinking something around the size of Versace and Choo at the time of acquisition ($2.1bn and $1.35bn, respectively). While the company got dinged for doing deals in the past, the reality is that it has gained serious cred as a solid steward of capital given how well Versace is performing. To be fair, Choo isn’t exactly knocking the cover off the ball, but our sum of parts model still has the value doubling from $7 per share to about $15 over a TAIL duration. We’d expect any future deals to look expensive on day 1, but if you use Versace as a proxy, in hindsight, it bought the company for 6x next year’s EBITDA (and less than 3x TAIL EBITDA, if our model is right) – which is an outright steal.
So while we’re modeling $3.5bn in repo over the next four years, the reality is that we’re likely to see closer to $1.5bn, and will see the addition of another $2bn brand at the ultra high-end. Even if we apply a blend of ROIC on that deal-related capital spend somewhere between Versace and Choo – we still get to a double over 12-18 months from today’s price, and a 3-bagger (with $12-$13 in EPS power) over a TAIL duration. It goes without saying that CPRI remains one of our favorite long-term plays in retail. Best Idea Long.
