Why Is Luxury So Hard for Capri Holdings?

Capri Holdings (CPRI -3.97%), the luxury brands giant behind Michael Kors, Jimmy Choo, and Versace, delivered an uninspiring quarterly report this week. It missed on the bottom line and essentially met revenue expectations. The stock this week is up from a low point it struck in August, but considering the long-term track record, that's not worth an excessive amount of applause.

In this segment of the Nov. 6 MarketFoolery podcast, host Chris Hill and Motley Fool senior analyst Abi Malin consider a few questions: Why is it so hard to get it right in luxury fashion? What's the rationale behind players such as LVMH, Tapestry (TPR 0.89%), and Capri and their attempts to roll up multiple names into their empires? Is there an obvious path to growth for Capri? And are these troubled stocks now in value territory?

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This video was recorded on Nov. 6, 2019.

Chris Hill: Let's wrap up with Capri Holdings. Not a household name, even though the brands underneath the Capri Holdings umbrella are household names -- Michael Kors, Jimmy Choo, Versace. Second-quarter profits came in low. Overall sales seemed to be in line with expectations. We were talking right before we started recording here. Holy cow, the name change -- it used to just be Michael Kors -- the name change to Capri Holdings has done nothing to help this business.

Abi Malin: Yeah, I'm actually not sure if it was better or worse it then Coach's name change to Tapestry. Equivalently poor decisions on the management side there.

Hill: [laughs] Whatever you think of the names, I understand at least the rationale of, we've got multiple brands, and sometimes we report earnings, and one of our brands doesn't do well, and that's dragging things down, particularly if it's the namesake brand. So, I understand the rationale. But, unless you actually are performing well in the underlying businesses, then it really just looks like you're rearranging deck chairs on the Titanic.

Malin: Definitely. I would agree with that.

Hill: I guess the best thing I could say about Capri Holdings right now is, the stock hit an all-time low in August, and it's up from that. What do they do here? Two questions, take them in whatever order you want. What do they do here, and why is this so hard? Why is this particular brand of retail so hard to get right? It's not like Tapestry's stock is lighting the world on fire, either.

Malin: Right. You mentioned they own Versace. They bought that in December of 2018. This year, they're expecting flat to comparables same-store sales year over year. I feel like, obviously, they weren't buying that as a growth engine. You're buying that on the back end so you get a little bit of efficiency by owning multiple brands. Probably looking at an LVMH or a Caring Group model. I think the difference is, obviously, fashion is hard to invest in, particularly luxury fashion, because it tends to change with tides. If two out of three of your brands are out of favor -- that would be Versace and Michael Kors is struggling, as well, down 4.2% year over year on revenue, which is in line with expectations. Probably gets to why they changed that namesake. Jimmy Choo is actually a pretty strong brand. Also an acquisition for them. But, not profitable business segment for them. 

I think they're probably looking to become sort of that LVMH or Caring Group that has a flywheel of multitudes of brands that come in and out of favor at different times. I think it is worth noting, LVMH partnered with Rihanna in May, I believe, to launch her fashion line called Fenty. And then they also have recently, within the past month or so, made a bid, or are rumored to be in talks to acquire Tiffany's. So there is something to this rolling up luxury fashion houses. This one is just struggling really hard, and it's hard to see the pathway out here.

Hill: Do you imagine there are any discussions at Capri Holdings -- or Tapestry, for that matter -- of spinning off one of the brands? Selling it outright? Just as a way to raise some money and focus on, maybe, brands that you feel like you can do well with? I don't know, just, knowing very little about fashion, even I know that Jimmy Choo is a respected brand when it comes to luxury footwear. So, it seems like someone would pay some amount of money for that brand. And if that's the one that's a respected brand and it's actually not profitable for them, then maybe the move there is sell off Jimmy Choo so you can focus on brands that maybe you have a chance with.

Malin: Interesting thought. If I was their strategic management sitting around the table, I feel like that's the one that's lifting the group up in terms of clout, which matters a lot in luxury fashion. So, I don't know that, unless you're trying to make a portfolio of lesser desirable fashion names... I don't know that I would get rid of the one that's like your life raft. But, I think this is an interesting time to be Capri Holdings. I don't really know what management's path out here is. How do you turn this around?

Hill: In terms of the stock -- and we can wrap up here -- you look at both Tapestry and Capri Holdings. In the case of Capri Holdings, it's close to an all-time low. Tapestry's close to a five-year low. Do either of them look like value opportunities to you? Or are there just so many questions and so many challenges that they're both facing, in part because these are global brands and you're dealing with international politics, among others? Does either stock interest you?

Malin: Fair question, given that they are -- again, we're talking about turnarounds here. You're hoping that things get better. I personally don't invest that way unless I see a pretty clear path, and I don't see the impetus on the horizon of the catalyst. Even at a very low likelihood, I don't really know what it is for either of these brands. So, I would not invest in either of these, personally.

Hill: Here's hoping for their shareholders that they have a really great holiday season and there are a lot of Jimmy Choos under a lot of different Christmas trees. Abi Malin, thanks for being here!

Malin: Thanks for having me!