Does Capri (NYSE: CPRI) Have More Upside?

Capri NYSE: CPRI, a luxury fashion retailer that operates Michael Kors, Jimmy Choo, and Versace, had one of the deepest V-shaped moves in the market last year. CPRI started the year at $38.15, before plummeting all the way down to $5.42 a share in March. Capri came all the way back, and a little more, closing the year at $42 a share.

With shares currently sitting at $44.78, 17.4% higher than they were at the beginning of 2020, the question is:

Has the Capri rally gone too far?

Back in August, Capri shares were changing hands at around $17 a pop. We noted that improving retail numbers, lower COVID-19 cases, and the FDA approval of a vaccine could give shares upside momentum. Well, we certainly haven’t gotten the lower COVID-19 cases and retail sales haven’t improved much, but there is (more than one) FDA approved vaccine.

Though the retail outlook hasn’t improved much, Capri did report excellent (relatively speaking) Q2 2021 earnings (the period ending September 30, 2020).

Capri Blew Away Expectations on the Top and Bottom-Line Last Quarter

 Last quarter, revenue declined 23% yoy to $1.11 billion, beating expectations of $924.9 million. Adjusted EPS beat by an even larger margin; it was 90 cents a share vs. expectations of 4 cents a share. That was, however, still down considerably from the $1.16 a share reported in the year-ago period.

The company’s e-commerce performance was a bright spot; sales grew 60% yoy and were higher than Q1 2021. Capri’s overall sales increased in China, unsurprising given the country’s fast economic recovery.

Turning our attention to Capri’s brands, all three of them saw overall sales decline:

• Michael Kors’ $793 million of revenue was down 27% yoy.
• Versace recorded $195 million in revenue, down 14% compared to the same period a year ago.
• Jimmy Choo’s revenue was down 2% yoy to $122 million.

On the Q2 call, CEO John D. Idol made two interesting statements:

1. “Overall, we believe our strategy to build accessories as a cornerstone of Jimmy Choo's already solid luxury foundation, along with the additional emphasis on off-duty footwear, will enable us to grow revenue by approximately $500 million in the coming years.” 
2. “Versace continues to represent the largest growth opportunity for Capri Holdings, where we believe revenue will increase by over $1 billion in the coming years.”

Jimmy Choo’s second-quarter revenue would work out to $488 million over a full year. Versace’s would work out to $780 million. Idol is suggesting that each brand will more than double its revenue in the coming years.

Is that pie-in-the-sky company speak or could this actually happen?

It would be unfair to judge Capri based on its Q2 2021 performance because of COVID-19, but we can look back to see how its brands performed in Q2 2020. In the year-ago quarter, Versace’s comparable store sales were flat and Jimmy Choo’s revenues were up by 8% yoy.

It is certainly possible that growth is going to pick up from pre-pandemic levels after the vaccine is widely distributed. But Idol may have gotten ahead of himself.

Then there’s the elephant in the room: Michael Kors. It is by far the company’s largest brand, but its sales dipped 27% yoy in Q2 2021. Its revenue also dropped in Q2 2020. Though it was only a 4% decline, you don’t want to see a company’s largest brand declining.

But Capri is a Solid Value

Michael Kors may be trending in the wrong direction and the CEO may be over-optimistic about Versace and Jimmy Choo, but Capri shares are actually trading at a very reasonable valuation. At least according to Wall Street estimates.

Analysts are projecting fiscal 2022 earnings to be $3.48 a share and fiscal 2023 earnings to come in at $4.20 a share. So, Capri is trading at 12.9x projected 2022 earnings and 10.7x projected 2023 earnings. Granted, the expectations may be a little too high – you can thank Idol for that – but not terribly so.

How Should You Play Capri?

CPRI has gone on quite a run since March. Shares could justifiably trade higher than current levels, but there isn’t a ton of upside left. Moreover, CPRI traded between $40 and $70 a share for much of 2017, 2018, and 2019.

While there are a lot of investors that have made a killing in Capri over the past nine months, there are also countless shareholders that are just starting to approach breakeven after a hellish year. We could see some downward pressure on CPRI.

All things considered: it’s likely best to hold off on Capri for now. But if there’s a 20% pullback, shares would look appealing.