Capri Stock Has Strong Upside When Luxury Spending Rebounds

by Trefis Team
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Capri’s stock (NYSE: CPRI) looks set for near term gains. Capri stock is down 40% YTD while the broader market has gained around 6%. Capri stock is expected to rebound as demand for luxury products improve. Improved demand will have a positive impact on its revenue growth rate – supporting the company’s stock price movement.

Despite a 145% rise since the March 23 lows of this year, at the current price of around $22 per share we believe Capri Holdings stock, a global fashion luxury group, consisting of iconic brands such as Michael Kors, Jimmy Choo, has more room to grow. Capri’s stock has rallied from $9 to $23 off the recent bottom compared to the S&P which moved 55% over the same time period. Gradual store openings, as well as a rebound in demand for the discretionary (luxury) products, has led to the stock beating the overall market. However, the stock is down 64% from levels seen in early 2018, over two years ago, and is well below the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. Despite the steady rise since the March 23 lows, we feel that the company’s stock still has potential as it will see a continuous upswing in demand as the situation normalizes and its valuation implies it has further to go. Our dashboard ‘Why Capri Stock moved -64%?’ provides the key numbers behind our thinking, and we explain more below.

Some of the stock price decline of the last 2 years is justified by the roughly 50% fall seen in Capri’s P/S multiple, which fell from 2x in 2017 to 1x in 2019. This decline was partially offset by a combination of a 1% reduction in share count due to stock repurchases worth $670 million and revenue growth of 17.6% over the same time period. Taken together, this helped Capri’s revenue per share surge by nearly 19% over 2017-2019.

However, these gains were more than offset by a 50% decline in the P/S multiple as stated above. While the company’s P/S has now decreased to 0.6x, it seems to be undervalued when the current P/S is compared to levels seen in the past years – P/S of 2x at the end of 2017 and 1x in 2019. We believe the stock is currently undervalued and is likely to see a decent upside despite the recent rally and the potential weakness from a recession-driven by the Covid outbreak.

How Is Coronavirus Impacting Capri’s Stock?

The Coronavirus crisis has hit the apparel 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 apparel industry. The effects of Covid-19 were clearly evident in the company’s Q1 2021 (ending June) earnings, with the company’s revenues plunging by 66% y-o-y to $451 million. However, the company has three of the most recognized luxury brands in the apparel industry in name of Versace, Jimmy Choo, and Michael Kors. Capri’s brand appeal and a diversified geographical business should help the company’s revenue to recover. Furthermore, the company’s stores have re-opened which should provide a boost to the company’s revenues as mall traffic returns to normal. Despite the recent store openings, Capri’s revenues are likely to remain suppressed for at least a couple more quarters. To sum things up, although Capri’s revenues are likely to be lower in FY’21, the company’s stock currently seems undervalued due to its strong underlying fundamentals and brand appeal.

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again. 

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