Tough to poke holes in this CPRI print. The company completely eviscerated the consensus, coming in at $1.65 vs the Street at $0.98. CPRI even beat our Street-high $1.25 – by a long shot. The big upside was margins at the Michael Kors Brand, and both revenue and margin at Versace. Kors put up a simply stunning 28.5% margin. Anyone that says this brand is not a luxury brand forgot to tell the margin structure. Versace’s revenue was flat vs last year despite broad-based retail closures in Europe, but margin accelerated by 760bps – exactly what we wanted to see. Jimmy Choo was the only disappointment, as the company did not bring a holiday assortment to market, which cost $41mm in revenue and 1100bps in margin. In all, the portfolio worked. Cash flow is accelerating, and the company paid off another $370mm in debt. Probably not the first line of the financials that people look at, but the reality is that at this rate the entire debt burden will be gone in 2-years time.
But then, of course, during the call the company actually said, and I quote “We now expect to generate a slight loss per share in the fourth quarter. This outlook does not incorporate any significant additional store closures, extensions of closures or new government restrictions beyond what we see today that could further impact traffic and sales trades.” That’s the part of the call where I literally almost fell out of my chair. For the fourth quarter, I’m modeling $0.55ps for the quarter, which includes a deceleration in margins despite the fact that inventories remain in check and a steep 30% decline in MK comps as the company sticks to its guns in abandoning low quality business to keep pricing integrity and margins near peak. Only modeling a 18% margin for Kors in 4Q – but could easily justify 25% -- which would be an incremental $0.12 per share above our $0.55ps.
All in we’re coming in at $2.08 in the company’s covid year, with earnings more than doubling to $4.37 per share next year – that puts the company at just 10x earnings, which gives tremendous downside support with the stock trading at just $43. The following year we’re at $5.50…a buck ahead of the Street with upside coming from growth and margins at Versace, and to a lesser extent Jimmy Choo. Three years out we’re at $7.00 in earnings power – with zero debt – and a high-teens blended margin profile. That’s easily worth an 18x multiple – or a $125 stock. Not too far off our sum of parts model, which gets us to about $110.
The punchline on this name is that you have deal with the quarterly noise of the sandbags (which will catch up with the company one day) and a volatile earnings stream…but more often than not that volatility will work in the bulls’ favor. In the end, you have a powerful multi-year earnings and cash flow acceleration driven by a transforming portfolio on top of a rapid de-levering story (vs 6x levered today) with upside 2-3x higher than where the stock is today with significant downside support. CPRI sits comfortably at the top of our Best Ideas Long list.
