Astounding 4Q by Best Idea Long CPRI – though you’d never know it by looking at the muted upside in the stock (up only 1.1% when it should have been up 10%+). The company delivered $1.02 in EPS vs the Street at $0.82 – beat on revenue in every division, put up extremely healthy margins trends, and bought back a mind-numbing 5mm shares during the quarter for $300mm. The company also initiated another $1bn share repo program, which we suspect it will be tapping into aggressively in short order. CPRI took guidance up for FY23(March) to $6.85 vs the Street at $6.50. That’s where the bear case around the quarter creeps in. The revenue guide was on the lighter side for each division, due to a) CPRI’s perennial conservatism and b) the delta between reported currency and local currency as FX goes the wrong way. At the same time, the company is making up for the segment pre-tax income FX hit by better mark-to-market on its swaps/FX hedges below the line, and is also benefitting from a lower tax rate. That’s enough in this tape for bears to call it a ‘low quality guide higher’. From where we sit, we care about a) the sustainability of low-mid single digit growth at Kors at a mid-high 20s margin, b) acceleration/upside in sales and margins at Versace and Jimmy Choo. Based on what we saw this quarter, both of those are squarely on track. Despite the $6.85 guide on FY23, we’re coming out at $7.50, and more importantly, due to outsized growth in top line and margins – particularly at Versace – we’re getting to $9.00 in Mar24. That dwarfs the Street’s $7.30 for that year. Looking another year out (TAIL duration) we’re at $11 with the Street still struggling to break $7.50. In other words, we think that the Street is going to come out of this print two years behind on EPS estimates. This is one of the most mis-modeled companies in Retail today. By our math, this name is trading at just 4.5x EARNINGS three-years out. The biggest question is what gets this stock to finally break out and trade at the multiple it deserves. Ultimately, we think it’s going to be a) the upside to the model while the rest of retail is still dropping like flies – which should play out in the coming quarters, and the b) mix of EBITDA that comes from higher-growth, higher multiple assets like Choo and Versace. In reality, the narrative is likely to change for this name as it tucks in another luxury acquisition – further diluting Kors as a percent of total revs and earnings (and expanding the multiple of the parent). To be clear, the company arguably hasn’t earned the right in the market’s eyes to do another deal today – even though we’d argue that it could sell Versace and Jimmy Choo for 2x what it bought them for over the past 4 years (in other words, we give management props on being EXCELLENT stewards of capital). But in another 12 months we think that narrative will be dramatically different. Our sense is that there are about 5 private luxury brands (like the Dolce & Gabbana’s of the world) that are on CPRI’s short list – and none of them are on the market today. But what is on the market is CPRI’s stock price, and it would much rather invest in its owns stock today than someone else’s. We’re taking our multiples down for the Kors brand in our sum of the parts model, but are taking up Versace and Choo. Our sense is that the market will forever underpay for Kors. We can’t argue with reality, nor do we want to fight it. But consider this, today Kors accounts for 88% of EBITDA. By that TAIL end of our model, the Kors brand (which we ascribe a 5x EBITDA multiple) should be down to 40%, while the more luxury brands (15-20x EBITDA multiples) should be over half of the portfolio – and that’s not even assuming that CPRI adds another brand to the party. This remains one of the most fundamentally mis-modeled and undervalued names in retail – with a clear catalyst calendar for numbers to go higher and the name to be revalued on those earnings. We think there’s 30% upside to fair value to CPRI TODAY, 100% in a year, and 3-5x over a TAIL duration. Needless to say, we’re extremely comfortable with this name as a Best Idea Long.
