When I first saw the CPRI print this morning, I slacked my team and said “whew…we dodged a bullet.” The company beat the quarter with $0.97 vs $0.94, and though the consensus was broadly expecting a guide down, the company reiterated $6.40 for the year with the consensus at $6.26. Inventories looked exceptional – down 3.5% yy vs +21% last quarter. And to note the company bought back $400mm in stock, on top of CEO John Idol’s $10mm buy mid quarter. Clearly, my “we dodged a bullet” comment was premature as a 2% decline pre-market ballooned into a 11% walloping. To me, this is way overdone.
The bears are pointing to weak 1Q guidance with the expectation for a hockey stick for the remainder of the year. We’re shaking out at $6.45 for the year – better than the guide, and well above where the consensus is likely to come out this year. The other thing the bears are pointing to is Versace, which was down 13% this quarter (keeping in mind that it reports on a 13 week lag, so China reopening wont show up in the P&L until after competitors). Versace is doing the same strategy as Kors, which is reducing lower tier wholesale exposure, so most of the decline is purposeful. As a reminder CPRI is purposely pulling back on filling wholesale orders at lower tier distribution across all brands to take wholesale closer to 20% of the mix vs ~35% last year. To be 100% clear, the Versace brand is not broken. It remains one of the most relevant luxury brands in the space (not just bc it got lucky, but bc the company is allocating the capital to elevate the brand), and has many product launches and brand extensions ahead of it (like men’s and importantly, ready to wear). I continue to think that over a TAIL duration, this brand doubles in size to $2bn, with EBIT margins near 30% -- currently at 12%. That means that Versace EBITDA quadruples to $500mm-$600mm, and there’s no way CPRI will continue to trade at 5x earnings – below far lesser quality businesses in retail – with Choo and Versace accounting for about 40% of EBITDA. There was nothing, and I repeat NOTHING, in this print that shakes my confidence in those numbers. The company is simply generating the right ‘short supply’ of product and selling it in premium channels. This is a painful multi-quarter process, but we’re half way through.
Do we believe in the hockey stick in FY24 (the company is on a March FY), I’ll rarely say this, but in CPRI’s case, I do. Clearly the Street does not – hence the 5x multiple. But let’s put on our uber-bearish hat and say that Macro continues to get materially worse and the company pulls back to an even greater degree on orders. We think a bear case EPS number is $5.50, which implies that this portfolio is trading at a paltry 6x bear/recession case numbers. Valuation is not a catalyst. But accelerating trends and beating numbers is. And we think you get that with CPRI over two quarters.
With an acceleration in trends across all three brands, higher earnings power than the consensus is modeling we think this stock is nearing the end of a bottoming process. It may take a couple of quarters to work as we expect the bearish retail tape to continue throughout summer. But within 12-months we think people will begin to model TAIL earnings power of $10 (we’re at $12) in 3-4 years. With Choo and Versace accounting for 40% of that earnings number, we think this gets at least a 10x TPR multiple – hardly a stretch for a business with these margin and return characteristics. Let’s also not forget the ‘management multiple discount’ is likely to go away sooner than later, as we think John Idol will announce his retirement within 12 months (and he is absolutely hated by the investment community at large – despite being a good steward of capital for the past 4-years).
The risk/reward with this stock getting slammed down to $35 is simply too great to ignore.
And speaking of ‘ignoring’ the value proposition, we don’t think that a private equity buyer will at these prices. You can buy all of CPRI today at a $5.1bn EV. How we’re doing the math, a PE buyer could immediately turn around and sell Versace and Choo to LVMH, Kering, or Richemont, and have those proceeds fund virtually the entire transaction. Then milk the Michael Kors brand for cash, or better yet, sell it to Tapestry – which needs to diversify away from Coach (95% of its cash flow) and can operate both the Coach and Kors brands under the same umbrella in a far more rational way with better segmentation and little price competition. It’s a slam dunk deal from where we sit.
We continue to think that CPRI is a multi-bagger over a TAIL duration. We’d be buying the hate-selling.
