Adding CPRI to our Best Ideas list is the most hotly contested debate on our team right now. On one hand the tail EPS numbers are screaming buy, but the market isn’t paying anything for no growth companies with fundamentals going the wrong way on rate of change. Ultimately our positioning is the same today as it was yesterday, the stock sits near the top of our long bench as we de-risk some core concerns of the next 3-6 months and look for more visibility into brand performance. If you have a 2-3 year duration this is a long, but if near term performance matters, we think patience is the prudent play here.
There’s nothing in this CPRI print to either bust the bear case or validate the bull case. We highlighted in our Black Book on TPR & CPRI from last week (LINK: CLICK HERE) that the market is giving multiples only to revenue growers within consumer discretionary, so a revenue guide down for CPRI is not going to be multiple bullish. We’d argue Capri shares shouldn’t be trading at 6x EPS estimates, but the fact that this print brought no “bad news” and the stock is barely up on the day is perhaps bearish. If valuation was a catalyst on its own this would have to be a best idea long for us, but it’s not. 1Q20 didn’t bring anything that materially changes our mind on the model both near term and long term, which is a perhaps positive at this multiple. Our estimate for this year is slightly above consensus, and with relatively high conviction the company can deliver the EPS it’s surprising the stock sits at a trough multiple. At a minimum we’d like to see Michael Kors stabilize before this becomes a best idea. A flat 2H comp is not going to drive a return of the multiple, but helps to bring more visibility to the downside. Before we can see some big upside in CPRI stock we likely need to see at least one brand really performing, or multiple brands showing clear rate of change improvement so the market can start to believe in the tail numbers (which are VERY compelling).
- While the outlook for Michael Kors stores reflects an improvement in the 2H as the drag from watches lessens, the outlook for US department stores has weakened. I estimate the US wholesale business at retail (end consumer purchases) to be similarly sized to the owned store business. So a flat comp outlook in the 2H is offset by lower wholesale orders. There are also greater risks that this holiday season is more promotional and demand is hit from tariffs for the wholesale channel. I still believe the biggest challenge to the Michael Kors business is a distribution one, not a brand one. However, right sizing the distribution from less wholesale doors will lower operating margins.
- Jimmy Choo SSS trends have weakened from MSD% to flat sequentially. Footwear is still comping positively, but accessories has weakened from flat to negative sequentially. Management is confident that as it gets better inventories of the sneakers that are selling comps will inflect. That’s always the case in a fashion business though and I have some incremental concerns about Jimmy Choo’s UK business and operating margins being cut in half to 7%.
- Versace had an adjusted operating margin of +1.4% and not negative as guided. Without having history in modeling Versace I thought guidance was low-balled, but couldn’t have a lot of conviction. However, I don’t think the market is paying for low-ball Versace contribution guidance.
- Capri announced a new $500mm share repurchase authorization, but at 1.5x leverage the company probably shouldn’t be that aggressive with the buyback.
