Shares of luxury goods company Capri Holdings (CPRI -3.04%) are bucking the broader market trend and have raced to a 31% gain over the past quarter.
Capri is the parent company of a trio of luxury brands: Versace, Jimmy Choo, and Michael Kors. The company reported strong second-quarter results in which revenue increased 9% year over year (and 18% on a constant-currency basis). Capri brushed aside economic challenges to post record adjusted earnings per share of $1.79.
While the stock has been on fire during the latter part of 2022, the good news for investors is that it's not too late to buy in. Here's why.
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Discount rack valuation
While the stock has been performing well, it should be noted that the company did slightly trim its full-year revenue guidance during the last quarterly earnings call based on the "increasingly uncertain economic environment, foreign currency headwinds, and the ongoing impact of COVID-related restrictions in China."
But these challenges seem like they are already priced into the stock. Even after this strong run over the last few months, shares of Capri still look cheap. The stock trades at just under 11 times earnings and an even more attractive 8 times forward earnings. This is a steep discount to the average multiple for the broader market (the average multiple for the S&P 500 is currently about 20) and gives investors some margin of safety when investing in Capri.
Returning $1 billion to shareholders
In addition to its undemanding valuation, Capri looks like an appealing investment due to its ability to return capital to shareholders. While Capri does not pay a dividend, this doesn't mean that it doesn't engage in returns to shareholders. During the most recent quarter, Capri bought back about 7.1 million shares for $350 million, and since the quarter ended, it has bought another 2.3 million shares for about $100 million.
But Capri isn't finished buying back it's own shares yet. Capri's Board recently unveiled a new share repurchase program that will allow it to buy back up to $1 billion worth of shares over the next two years. This is a significant amount for a company with a $7.8 billion market cap. These share repurchases can benefit existing shareholders because they reduce the number of shares outstanding and increase earnings per share. They can also convey confidence to the market as a sign that management believes its stock is undervalued.
A surprisingly resilient sector
The luxury sector looks like an appealing place for investors to hide out during a time of economic turbulence. While this may sound counterintuitive, note that these brands have significant pricing power and that they boast strong gross margins. Their core customers usually have higher incomes and thus have more room for discretionary spending in their budgets, and inflation doesn't eat into their buying power as much as it does for consumers at the lower end of the economic ladder.
You can see this in the year's results in which many stocks in the luxury sector have outperformed the broader market. The S&P 500 is down 19% year to date, and the Nasdaq Composite is down 32%. Meanwhile, Capri is only down about 10% year to date. Tapestry (TPR 1.50%), the parent company of Coach and a closely comparable peer for Capri, is only down 8%.
This is an enormous and growing opportunity. Euromonitor calls it a $370 billion market and forecasts a 6% to 8% compound annual growth rate (CAGR) between now and 2025. Meanwhile, Statista estimates the market at $312 billion and forecasts 5% growth over the same time frame. While the numbers are slightly different, overall it paints a picture of a large and resilient market that should keep blossoming in spite of the economic challenges around the world.
Based on this attractive valuation, resilient growth through a challenging market environment, and propensity for returning capital to shareholders, Capri Holdings looks like a solid buy for the year ahead.
