No-Moat Capri’s Dismal Outlook Is a Shock, but We See Long-Term Value in Its Shares

Capri’s holiday season lacked joy as profitability in its (December-ended) fiscal 2023 third quarter fell short of plan on disappointing sales and orders from the wholesale channel and impact from COVID-19 in mainland China (where sales dropped nearly 40%). Moreover, as these trends have continued, its guidance for both the current quarter and the next fiscal year is below our forecast. Specifically, the firm guided to EPS of $0.90-$0.95 and $6.40 for the fourth quarter and fiscal 2024, respectively, versus our estimates of $1.39 and $7.23. Given this disappointing outlook, we expect to reduce our per-share $63 fair value estimate by a mid-single-digit percentage. Even so, we now view Capri’s shares, trading at a high-single-digit P/E, as undervalued after a 24% plunge on the report. While we think the firm lacks the brand strength of some peers and rate it as no-moat, we believe it has strengths, including the favorable economics of Michael Kors handbags and the growth potential of Versace, one of the best-known luxury apparel brands.