Analyst Note| David Swartz |
No-moat Capri’s profit margins outperformed our estimates in fiscal 2021’s third quarter even as store and wholesale operations in North America and, especially, Europe were disrupted by virus-related closures. The firm matched our forecast with a sales decline of 17%, but low wholesale sales, targeted price increases, and expense cuts allowed for adjusted gross and operating margins of 64.7% and 19.7%, respectively, versus our estimates of 61.1% and 14.0%. However, the near-term outlook is murky due to the resurgence of the virus in some areas and the slow rollout of vaccines. International travel remains low, and about half of Capri’s stores in Europe are currently closed. The firm did not offer formal guidance but warned of a double-digit sales drop and a possible loss in the fourth quarter, suggesting it will fall short of our prior estimates for the period of a 6% sales decline and adjusted EPS of $0.38. Still, we see signs of underlying improving sales and profitability at Versace and Michael Kors. We expect to lift our per share fair value estimate on Capri of $42 by a mid-single-digit percentage but view shares as fully valued.