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Capri Holdings Ltd (NYSE:CPRI) - Fundamental Short Investment Case

Research

Publication Date: 05 Nov 2019 - By Robert Prather By Robert Prather
Actionable
Differentiated

Equity Fundamental Equity Global Consumer Discretionary

Capri Holdings Limited operates as a holding company designing apparel and accessories through three brands - Michael Kors, Jimmy Choo, and Versace. Jimmy Choo and Versace were purchased in 2017 and 2018, respectively. 

Vision believes now is an opportune time to short Capri as the onus is on a retailer to improve once operations deteriorate, much less when it is a leveraged firm. Retail examples where the valuation looked cheap, yet stocks fell further include Hugo Boss, Macy's, Tapestry, and Tailored Brands. We think rising inventories, declining wholesale doors paired with DTC store closures/impairments, the resale market gaining in materiality, a structural shift in the handbag market, and Google trends preclude a rebound in operations. 

 

Qualitative Concerns:

  • Handbag industry sales are down and facing increased brand fragmentation. Accounts for >50% of firm revenues
  • Resale market is 7% of personal luxury sales and growing nearly twice as quickly as the market (with online growing even faster)
  • Google trends do not suggest a reacceleration in Capri's brands' popularity. Important as luxury brand sites rely on search engines for 50%+ of traffic
  • Estimates look optimistic with revenue, margins, and EPS all growing next year

 

Fundamental Concerns:

  • Inventories are rising in excess of revenues, even adjusted for transactions
  • Acquisitions have supported revenue growth. Organic revenue is down. The company will materially trend how Kors performs at 74% pro forma sales
  • Wholesale remains weak and it's not as simple as shifting more to DTC with ongoing impairments/store closures
  • Gross and operating margins have contracted for multiple periods
  • Cash flow generation is declining at an accelerating pace
  • A heavy debt load is an overhang to the stock
  • Valuation is in-line with other accessible luxury firms along with its historical average based on NTM EV/EBITDA

The report comes with a 1 hour call with the advisor.

Capri Holdings Ltd NYSE:CPRI - Fundamental Investment Case

Source: Vision Research Fundamental

Pages: 50

Released: 05 Nov 2019

Unlock for 35 credits

The Author

Robert Prather

Equity Analyst

Technology, Consumer, Industrials, Telecom & Media

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