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Capri: Less Sunny for Handbags

Thomas Paulson
Feb 10, 2023
Capri: Less Sunny for Handbags

  • Weaker December-quarter results and 2023 guidance sent Capri Holdings stock price down -30%. Its press release quotes Chairman and CEO John Idol saying, “Our performance in the third quarter was more challenging than anticipated." Idol continued, "we were disappointed with the performance of our global wholesale business in the quarter which resulted in expense deleverage and a lower operating margin. We have begun taking measures to better align operating expenses with the change in revenue by channel. At the same time, we will continue to make strategic investments to drive long-term growth."
  • The guidance reduction to sales was more modest than the reduction to margin which is the consequence of higher discounting and promotions, both in the December-quarter and more significantly in the March-quarter. The shortfall by brand and segment was most substantial at Michael Kors in U.S. wholesale and in Mainland China (down -40%).
  • On brands Jimmy Choo and Versace, and Michael Kors retail business, Idol said, "We were pleased with the continued growth." In contrast, sales of Kors at department stores were down mid-teens, with the sell-in worse (-25%). For its March-end 2023 quarter, management expects these figures to worsen and they are planning for similar declines in the June-end quarter as well. Obviously, this plan is informed by the current orders being placed by U.S. department stores (i.e., down and cautiously, and that likely reflects their own views of their businesses). Large declines in wholesale are expected for Jimmy Choo and Versace as well.
  • Idol went on to say, “We're seeing our partners at multiple levels in the wholesale area be more conservative in their planning given some concerns around the consumer and how they might respond in general. So I think we're taking a very prudent point of view.”
  • Recall, that Capri Holdings also reduced its guidance three months ago due to softer orders from U.S. department stores. We believe the weakness is the result of fewer self-purchases by younger and middle-income aspirational luxury customers – something that Macy’s talked about at the ICR conference in early January. Moreover, this is in-line with our Holiday 2022 & Beyond Outlook and matches the hourglass consumption pattern we discuss.    
  • Idol, “What we did see as a positive in both the North American and the European channels is where we had put our own selling staff back into the stores. We saw a fairly significant delta between the performance in those doors that had our own staffing in it and those doors that did not. And we intend on, as a part of our investment--continued investment in the wholesale channel to take that level of staffing up…and there's clearly been a positive result, especially in top-tier doors. So we intend on continuing to invest in that.” To our eyes, this strongly aligns with what we’ve said in the Outlook, that this is the opportunity for physical retail to invest in service levels, clienteling, and merchandising that surprises and delights.
  • Tapestry, which owns Coach and Kate Spade, and Ralph Lauren also reported Q4 2022 results this week. From Tapestry, we saw Coach sales decrease -10% in North America (with wholesale business likely down more) and Kate Spade down -6%. From Ralph Lauren, we learned that its U.S. wholesale business was softer, but better than aspirational luxury handbags which we suspect reflects “occasion-based, back-to-the-office, and out-on-town/vacation” wear being an outperforming category. (An ongoing trend cited by Macy’s and others.) Ralph Lauren also shared the factory stores had been weaker-than-plan which reflects the pull-back of that consumer; management expects the softer trends among the value-oriented consumer in North America to continue.

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Thomas Paulson

Director of Research and Business Development,

Thomas Paulson spent 20 years as a Wall Street analyst and a member of asset management teams at AllianceBernstein and Cornerstone Capital, representing top-50 ownership positions including Target, Home Depot, Nike, Amazon, Google, and many more. He brings consumer related expertise and knowledge of enterprises in retail, CPG, financial services, telecom, and entertainment.

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