The coronavirus pandemic upended the retail sector in unexpected ways, given the government-mandated business shutdowns. Capri Holdings (CPRI -0.98%), which owns a trio of luxury brands, has managed to get through the massive upheaval in one piece, with sales now above where they were prior to the pandemic. Only investors shouldn't get too excited about that fact, since a deeper dive shows there's still a lot of work to be done here.
A good quarter
Capri Holdings posted revenue of $1.6 billion in its 2022 fiscal third quarter (ended Dec. 31, 2021), which is basically the retailer's single most important period of the year given that it encompasses the holiday selling season. That performance was up from $1.3 billion in the same quarter of fiscal 2021, a very healthy sales increase but also was really just the recovery from the pandemic. What's more notable is that the fiscal third quarter of 2020, prior to the pandemic, saw revenue of about $1.6 billion. In other words, Capri Holdings' top line has now fully recovered from the coronavirus hit.
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The earnings story is even better. For this latest quarter, Capri Holdings posted adjusted earnings per share of $1.66. vs. $2.22 in the year-ago period. That's pretty strong performance given that the retailer's sales didn't increase by huge amounts over that span. Notably, operating margins increased from 16.8% in the third quarter of 2020 to 22.3% in the same period of fiscal 2022.
This is very good news for the luxury retailer and its investors. In fact, the stock is now around 40% above where it was at the start of 2020. And it's up nearly 300% from the depths of the 2020 pandemic-driven bear market.
Digging a little deeper
Although Capri Holdings clearly had a solid holiday season last year, all of its brands aren't of the same caliber. From a size perspective, Michael Kors is the company's most important nameplate with $1.18 billion in sales in the fiscal third quarter of 2022. That's just shy of 75% of the company's top line. Versace is up next with revenues of $251 million, followed closely by Jimmy Choo at $178 million. Clearly, Michael Kors is the driving force of the company.
Michael Kors' operating margins are also well above those of the two smaller brands that Capri Holdings owns. To put some numbers on that, in the fiscal third quarter of 2022 Michael Kors' operating margin was 28.4% compared to 12.7% for Versace and just 9% for Jimmy Choo. The company's overall operating margin was basically dragged down by the smaller brands.
And that's really the big story that investors need to look at here, because Capri Holdings ended the quarter with less inventory on hand than expected because of supply-chain issues. Although it has inventory on the way to its stores, it missed the biggest selling season with merchandise that is highly dependent on fashion trends. According to management, the inventory problems "constrained the company's ability to deliver higher revenue in the quarter."
If that sales opportunity is gone, Capri may have to reduce prices to move old merchandise. And the supply-chain situation is lingering, so there's a potential future impact if the company continues to struggle to get the goods it needs.
Here's the thing: Michael Kors can probably handle some headwinds given its wide margins. But Versace and Jimmy Choo don't look like they have the same financial leeway. Although relatively small compared to Michael Kors, they are still around 25% of revenues combined. So these two nameplates are important businesses to watch in a retail industry that's not quite out of the woods yet. And don't forget that inflation has been rearing its ugly head as well, which will put further pressure on the company's costs.
Watch the small fry
Capri Holdings has largely recovered from the pandemic, but the company's biggest brand was really the driving force. As the company continues to face retail headwinds from supply-chain and inflation issues, investors will want to pay close attention to the performance of this company's smaller brands. Sure, Michael Kors will probably be just fine, but the other two nameplates the retailer owns could end up being a major drag, particularly if timely delivery of products remains a problem for this fashion-conscious company.
