Capri Holdings (CPRI -1.67%), which owns Versace, Jimmy Choo, and Michael Kors, reported record adjusted earnings per share in the second quarter of its fiscal 2023. That comes after it reported record earnings in the first quarter as well. But there's an underlying current that isn't quite so positive. Here's why you should be at least a little worried.
From the broadest perspective
If you were doing a surface scan of Capri Holdings' financial results, you would have likely been impressed by its fiscal Q2 numbers. Revenues increased 8.6% year over year, and adjusted earnings hit a record $1.79 per share. Moreover, the company held firm to its full-year adjusted earnings target of $6.85 per share despite the headwinds of inflation and the possibility of economic weakness thanks to rising interest rates and geopolitical tensions.
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In fact, if you don't dig into the numbers, it looks like this high-end retailer did quite well for itself and its shareholders. In some ways it did, but there are still some problems lurking in the company's earnings statement and outlook.
For example, the strong revenue advance was able to offset increases in both the cost of goods sold and operating expenses. Those cost increases aren't shocking, and they may ameliorate to some degree, but they also aren't likely to be going away anytime soon. At this point, part of the company's full-year outlook calls for an improvement in operating margin to 18.3%. That's up from 18% at the start of the year, a figure that was held constant in the fiscal first quarter.
There's no reason why the company can't use cost cutting to improve its operating margin, but it seems like it needs to do so if it wants to meet its earnings guidance at this point. This should be watched closely.
Down and down again
On the top line, meanwhile, Capri Holdings has lowered its sales outlook. It now expects revenue of $5.7 billion for the year. That was down from a full-year call of $5.85 billion in fiscal Q1 and $5.95 billion when the year began. That sales trend isn't good, and it makes the cost-cutting effort all the more important.
The big number here, however, is the share count. In fact, that's really where the earnings strength is coming from now. At the end of fiscal Q2, the company estimated that it would have 136 million shares outstanding at the end of the year. When the fiscal year started, that number was 144 million. Once again, there's nothing inherently wrong with a company buying back stock to help support earnings, but it is perhaps covering over other problems at Capri -- for example, falling sales.
High-end retailers are generally expected to hold up well during economic downturns, because the wealthy customers to whom they cater can usually maintain their spending habits even in tough times. But when you look at the weakening top line here, investors should probably step back and start watching more closely and, perhaps, more cynically.
Ongoing coronavirus issues in China, inflation, the strong dollar, and geopolitical tensions could all upend Capri Holdings' plans. And since sales are likely heading lower, it seems like economic weakness is already expected to be a problem despite the financial strength of the company's customers.
Tread with caution
Capri Holdings is not a bad company, and its brands have clearly proven they have staying power with consumers over time. However, while the company report of record results is nice to see, there are other factors that investors need to consider. At this point, prudent investors will want to take a cautious approach with Capri Holdings since falling short of its earnings guidance for any reason would likely lead investors to reevaluate the shares in a negative way.
