How Could 2020 Look For Capri Holdings?

Capri Holdings (NYSE:CPRI) stock is down 60% this year. In comparison, the broader market (S&P 500) has declined only about 1%. And there is a good reason for it. Capri is among several retail chains offering non-essentials and luxury items for which, the demand has plummeted disproportionately. Consumers are staying home and have pulled back discretionary spending in the wake of an economic slowdown, bankruptcies, and layoffs. Needless to say, this is an unprecedented situation for luxury retailers like Capri. However, the company seems to be well prepared from a cash flow stand point. Our dashboard Does Capri Holdings Have Enough Liquidity To Survive Covid-19 Demand Shock examines the company’s cash flow generation ability and operational runway.

Our overall assessment is that Capri is in a good position. While the company is likely to post net losses for the full year 2020, it can still stay out of the red as far as operational cash flow is concerned, even if its revenues shrink as much as 30%. In addition, it also has a reasonable 7 months of operational runway in the complete absence of demand/revenue.

Capri Holdings – 30% Revenue Decline Scenario

Let’s take a quick look at where Capri was in 2019. The company generated revenue of $5.6 billion and a net loss of $-223 million. Compared to this, it is likely that Capri will lose almost 30% of its sales in 2020. The situation is not too different for its peers such as Tapestry, L Brands, Ralph Lauren, and Under Armour. In this scenario, we assume  that Capri will employ at least a 50% cut in its capital expenditure on an annual basis to reign in cash flows. We also assume that it will not spend any cash on share repurchases. In such a scenario, we expect full-year net losses to increase to $-478 million with free cash flow from operations declining to $604 million (with the help of efficient working capital management) vs $859 million in 2019. This gives nearly $492 million in cash flow after capital expenditures. Not bad at all! In addition to this, the company had a cash pile of nearly $0.6 billion at the end of March 2020. This is sufficient to cover any cash burn it might face temporarily.

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