Persistent Headwinds Will Suppress Luxury Demand Amid Digital Disruptions

Key Takeaways

• Shifting consumer preferences and rising competition from digital and direct-to-consumer brands threaten Capri's core offerings and compress margins.
  
• Economic uncertainty and sustainability pressures increase costs and risk, challenging Capri's sales growth and long-term market relevance.
  
• Strategic investments in digital, retail, and cost optimization, along with debt reduction, position Capri Holdings for improved growth, margins, and shareholder value.

Catalysts

Engages in the design, marketing, distribution, and retail of branded women’s and men’s apparel, footwear, and accessories in the United States, Canada, Latin America, Europe, the Middle East, Africa, Asia, and the Oceania.

• Ongoing economic uncertainty and a potential slowdown in global growth, combined with rising inequality, is likely to erode demand for accessible luxury, particularly in Capri Holdings' key segments and mature markets, leading to sustained pressure on overall sales volumes and revenue growth.
  
• Accelerating consumer preference for experiences over material goods, especially among younger generations, threatens the long-term relevance of traditional designer accessories and apparel-the cornerstone of Capri's offering-resulting in weaker volume growth and increased inventory risk.
  
• The persistent rise of digital-native direct-to-consumer and secondhand luxury platforms is shrinking the pricing power and brand cachet of legacy players like Capri, especially as the company struggles to fully transform its digital and omnichannel presence, which will likely compress gross and operating margins over time.
  
• Heightened regulatory and consumer scrutiny around sustainability and ethical sourcing continues to increase compliance costs and potential reputational risk, forcing Capri to absorb higher expenses in its supply chain and potentially weakening net earnings and margin expansion efforts.
  
• Increasing competitive pressure from agile direct-to-consumer luxury brands and advances in counterfeit goods are expected to erode Capri's market share, while the company's inconsistent international expansion and store rationalization could stall revenue momentum and jeopardize long-term earnings growth.

Capri Holdings Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Capri Holdings compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Capri Holdings's revenue will decrease by 7.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -25.7% today to 11.7% in 3 years time.
• The bearish analysts expect earnings to reach $410.7 million (and earnings per share of $3.77) by about September 2028, up from $-1.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 7.2x on those 2028 earnings, up from -2.3x today. This future PE is lower than the current PE for the US Luxury industry at 20.5x.
• Analysts expect the number of shares outstanding to grow by 0.98% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.43%, as per the Simply Wall St company report.

Capri Holdings Future Earnings Per Share Growth

Risks

• Capri Holdings is seeing sequential improvements in both revenue and earnings at Michael Kors and Jimmy Choo, alongside rising average unit retail prices and stronger full-price sell-throughs, suggesting that successful strategic initiatives could drive a return to top-line and EPS growth in the coming years.
  
• The company is investing heavily in data analytics, digital marketing, direct-to-consumer channels, and influencer partnerships, which have yielded a 9% year-over-year increase in both Michael Kors' and Jimmy Choo's global consumer databases, potentially supporting sustained revenue growth and higher profit margins.
  
• Ongoing fleet optimization, including store renovations covering approximately 50% of the store fleet in the next three years and the introduction of experiential retail concepts, is showing early signs of boosting store productivity, which could elevate revenue per store and long-term operating margins.
  
• Capri's structured approach to mitigate tariff headwinds through diversified sourcing, cost efficiencies with manufacturing partners, and targeted price increases is expected to largely offset increased costs by fiscal 2027, supporting the potential for gross margin expansion and healthier net earnings.
  
• Proceeds from the anticipated Versace sale will be used to significantly reduce debt and free up capital for strategic investments in the core brands, putting Capri Holdings in a stronger financial position to fuel growth initiatives and improve free cash flow, which could ultimately increase shareholder value and share price.

Valuation

• The assumed bearish price target for Capri Holdings is $17.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Capri Holdings's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $45.0, and the most bearish reporting a price target of just $17.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $3.5 billion, earnings will come to $410.7 million, and it would be trading on a PE ratio of 7.2x, assuming you use a discount rate of 12.4%.
  
• Given the current share price of $21.76, the bearish analyst price target of $17.0 is 28.0% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.