Capri Earnings: Expected Sale to Tapestry Overshadows Slight First-Quarter Beat

Capri CPRI published results for its (June-ended) first quarter of 2024 that were slightly better than its guidance and our forecast. As the company has agreed to be sold to Tapestry for $57 per share, it provided limited information on its results, did not hold an earnings call, and rescinded previous guidance. We anticipate that the sale of Capri will be completed at the offered price in calendar 2024, so we have adjusted our fair value estimate downward by 8% to $57 from $62. We view shares as fully valued on a risk-adjusted basis as upside to the takeover price is just 6% based on the Aug. 10 close.

Capri’s first-quarter sales were affected by low wholesale orders, but its 10% sales decline was modestly better than our forecast for a 12% drop. Michael Kors (64% of total sales) suffered a 14% sales decline, but this was slightly better than our estimate for a 15% drop. One of Tapestry’s biggest challenges after the acquisition will be to expand Michael Kors’ sales and profit margins. The difference in our moat ratings between the two firms (none for Capri, narrow for Tapestry) is largely based on our belief that Coach is a stronger brand than Michael Kors.

Meanwhile, sales of Jimmy Choo (15% of total) increased 6% and those of Versace (21% of total) fell 6%, outperforming our respective estimates of 4% and negative 11%. In the long run, we estimate sales growth rates of 2%, 4%, and 8% for Michael Kors, Jimmy Choo, and Versace, respectively.

Capri’s 9.0% adjusted operating margin in the quarter beat our forecast by 50 basis points. We forecast midteens operating margins for the (standalone) firm in the long run. This forecast is based on segment operating margins of 22%, 16%, and 12% for Michael Kors, Versace, and Jimmy Choo, respectively. These operating margins are relatively modest for luxury brands, so there could be upside if they are properly managed by Tapestry, which achieves operating margins of about 30% for Coach.