Capri Holdings Going to $44? Goldman Sachs Says It Can Happen

Capri Holdings Limited (CPRI) is a global fashion luxury group that specializes in men’s and women’s ready-to-wear apparel, accessories, and footwear. With an iconic brand portfolio that includes Michael Kors, Jimmy Choo, and Versace, the company operated a total of 1,261 retail stores in the United States and internationally, at the end of September 2020.

Since the coronavirus crisis swept across the globe, retailers have been forced to close their stores and, hence, consumer spending on discretionary items tanked. However, analysts at Goldman Sachs (GS) expect that the apparel space will rebound next year as people once again venture from their homes to shop. The firm has upgraded the stock from “Neutral” to “Buy” and raised its price target to $44 per share.

Despite the challenges posed by the pandemic, a steady recovery in consumer spending has taken place. CPRI delivered a better-than-expected earnings report for its fiscal second quarter ended September 30, 2020. The company generated $1.1 billion in revenues, surging 146% sequentially, driven by positive sales in Mainland China across all luxury houses. However, this represents a 23% year-over-year decline. Jimmy Choo was the best performing brands, with revenue down only 2.4%. EPS for the quarter came in at $0.81, rising 72% year-over-year.

With recovering global discretionary spending trends, CPRI stock has soared 155% in the last six months. This impressive performance, along with the recent GS rating upgrade and a few other factors, has helped it earn a “Strong Buy” rating in our proprietary rating system.

Here is how our proprietary POWR Ratings system evaluates CPRI:

Trade Grade: A

CPRI is currently trading higher than its 50-day and 200-day moving averages of $29.59 and $19.15, respectively, indicating that the stock is in an uptrend. In fact, the stock’s 97.5% return over the past three months reflects encouraging short-term momentum.

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E-commerce sales have improved 60% year-over-year in the last reported quarter. Website traffic data for October increased 38% month-on-month for Michael Kors and 16% for Versace. Additionally, the company is attracting new consumers to each of its luxury houses through digitization, as evidenced by the double digit increase in its consumer database.

Total inventory at the end of the second quarter was $930 million, down 13% year-over-year. This reflects the aggressive inventory reduction the company implemented at the beginning of the pandemic that included repurposing inventory for coming seasons.

Buy & Hold Grade: A

The stock has appreciated 17.4% in the past two years due to the country’s expanding middle class and their increasing purchasing power. This is resulting in robust demand for luxury products. In terms of proximity to its 52-week high, which is a key factor that our Buy & Hold Grade considers, CPRI is well positioned. The stock had hit its all-time high of $42.88 in yesterday’s trading session.

CPRI has continued to expand Michael Kors all these years. However, it has closed 22 Michael Kors stores in the past year, primarily due to overexposure, declining store tariff and decreasing total revenue share. As a result, the management plans to permanently close to 170 stores, mostly Michael Kors, over the next two years and cut capital expenditures by about $150 million in fiscal 2021 to ease the financial pressure.

CPRI has added eight new Versace stores and 11 new Jimmy Choo stores in the past year. Now, as part of the company’s sales growth strategy, CPRI is aggressively expanding in China, which has recovered from the pandemic much faster than the U.S. as a key source to its business. The company believes that both Jimmy Choo and Versace are underpenetrated in China and plans to increase its store count from 200 to 300 in Greater China.

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Peer Grade: A

CPRI is currently rated #9 out of 66 stocks in the Fashion & Luxury industry. Other popular stocks in the group are L Brands, Inc. (LB), Ralph Lauren Corporation (RL) and V.F. Corporation (VFC). CPRI has gained 12% year-to-date. While LB has returned 119% so far this year, RL and VFC have lost 13% and 10.8%, respectively, over the same period.

Industry Rank: B

The StockNews.com Fashion & Luxury industry is ranked #38 of the 123 industries. The companies in this industry design and market branded apparel and accessories. Demand is largely determined by consumer tastes. The pandemic has hit the industry hard. Fading consumer demand, reduced discretionary spending, and stay-at-home orders resulting in stores remaining closed continue to take their toll on the industry. However, as the world continues to emerge from the crisis with effective vaccine deployment expected in coming weeks, the beaten-down industry is expected to bounce back.

Overall POWR Rating: A (Strong Buy)

Overall, CPRI is rated a “Strong Buy” due to its impressive brand appeal, diversified geographical business, digital strength, and solid price momentum, as determined by the four components of our overall POWR Rating.

Bottom Line

CPRI has had an incredible run since the March market correction. A rapid growth in digital commerce has helped CPRI off-set the impact of temporary store closures due to staggered lockdowns in different countries. However, the company’s major stores globally have reopened, which should boost the company’s revenues as mall traffic returns to normal after the mass distribution of the vaccine. Furthermore, CPRI’s revenue growth rate is expected to further rebound as demand for luxury products improves.

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The GS upgrade report said, “We view CPRI as a key beneficiary in our coverage from the shift to direct-to-consumer and believe the company has a long runway ahead to improve its underlying profitability as it moves out of undifferentiated wholesale and scales its ecommerce platform. Additionally, demand for the luxury category has rebounded strongly, allaying initial investor concerns for a slow recovery, and we forecast category growth to remain robust in 2021.”

Analyst sentiment, which gives a good sense of a stock’s future price movement, is good for CPRI. Analysts expect revenues to grow 20.6% next year. The consensus EPS estimate represents a 193.2% rise next year. Hence, CPRI certainly has more room to grow.

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CPRI shares were trading at $41.83 per share on Friday afternoon, down $0.92 (-2.15%). Year-to-date, CPRI has gained 9.65%, versus a 16.34% rise in the benchmark S&P 500 index during the same period.

About the Author: Sidharath Gupta

Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More…

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