EUR 850.00 For Business Accounts Only

Morningstar | Initiating Coverage of Capri Holdings With a $52 FVE and No-Moat Rating; Shares Attractive. See Updated Analyst Note from 24 Jul 2019

We are initiating coverage on Capri at a fair value estimate of $52 and with a no-moat rating. We view Capri, owner of accessories and apparel brands Michael Kors, Jimmy Choo, and Versace, as undervalued at current levels. Capri has implemented a restructuring plan, which we believe has stabilized Michael Kors. While the brand has suffered four years of declining same-store sales due to competition and markdowns of handbags, Capri has reduced distribution and closed 100 underperforming stores. Michael Kors generated $4.5 billion in revenue in fiscal 2019 and remains a share leader in the attractive accessories market. We forecast Capri’s Michael Kors segment will produce an operating margin of 22% in fiscal 2020. Meanwhile, we think the acquisitions of Jimmy Choo and Versace have raised Capri’s profile in the luxury space but increased risks. Both brands achieve premium price points but also have fashion risk and do not meaningfully contribute to profits at present.

We do not think Capri has built a competitive advantage based on a brand intangible asset or any other factor. We rate it as having no moat despite our view that the shares are attractive. Our moat rating is based solely on Michael Kors, which we forecast will produce more than 90% of Capri’s operating income through fiscal 2021. While we believe Michael Kors is a well-known brand in North America, we think it rates poorly on most of the criteria in the Morningstar Luxury Brand Power Framework. We think it lacks the brand strength or differentiated product for sustainable premium pricing. As evidence, Michael Kors bags consistently achieve lower retail prices than similar bags from narrow-moat Tapestry’s Coach and others. Further, we think Michael Kors trails Coach and other rivals in China, the fastest-growing luxury goods market.

We assign a Poor stewardship rating to Capri based, in part, on the risks of the Versace and Jimmy Choo deals. We do not think they provide a competitive advantage.

We assign a stable moat trend to Capri. As the firm is implementing reforms to stabilize Michael Kors, we do not expect a significant change in its competitive position over the next five years. Michael Kors is very dependent on women’s handbags (65% of fiscal 2019 sales), a very competitive market. Aware that heavy exposure to this one category poses a risk, Capri plans to change Michael Kors’ product mix. Moreover, Capri plans to increase marketing for Michael Kors and its other two brands to support their competitive positioning. Capri has already made some efforts in this area, having increased marketing as a percentage of sales to 3.0% from just 2.0% between fiscal 2014 and fiscal 2019. We expect Capri’s marketing will gradually rise to 4.0% of sales by fiscal 2024.

We think both Versace and Jimmy Choo have stable competitive positions. However, as we do not expect either to be a significant contributor to profits for some time, we do not view them as additive to Capri’s overall competitive position or moat trend.