What happened

Shares of Capri Holdings (CPRI 0.95%) were taking a dive after the parent of Michael Kors, Jimmy Choo, and Versace posted disappointing third-quarter earnings on Wednesday. The company missed estimates on the top and bottom lines and issued weak guidance, reflecting challenges in the macro environment.

According to data from S&P Global Market Intelligence, the stock was down 27% for the week as of Thursday's close.

So what

Capri said revenue in the quarter fell 6%, or 0.5% in constant currency, to $5.56 billion, which was worse than estimates of $5.72 billion. Management cited weak results in its wholesale business, leading to deleveraging in fixed costs.

Gross margin improved in the quarter from 65.1% to 66.5%, a sign the company has been able to avoid the kinds of markdowns that have plagued other retailers. However, it still finished the quarter with a 21% increase in inventory over the year-ago quarter, though the company said that represents a sequential improvement in inventory and that it expects inventory to be down year over year at the end of the current quarter.

On a reported basis, revenue was down for all three of its brands, though Versace saw an 11.2% increase in constant-currency revenue. Michael Kors, which makes up the majority of revenue, posted a constant-currency decline of 3.6%, and its operating margin shrunk from 28.4% to 22.9%.

On the bottom line, the company finished with an adjusted operating margin of 16.9% and adjusted earnings per share of $1.84, which missed the consensus at $2.22 and was down from $2.22 in the quarter a year ago.

CEO John Idol said, "Overall, our performance in the third quarter was more challenging than anticipated. However, many aspects of our business performed well; in particular, we were pleased with the continued growth in our own retail channel across all three of our luxury houses."

Now what

Looking ahead to the fourth quarter, Capri's full-year guidance also underwhelmed as the company expects revenue of $5.56 billion, which compares to estimates of $5.72 billion and adjusted earnings per share of $6.10, below the consensus at $6.87. Fiscal 2024 guidance also indicated that it expects growth to remain sluggish, calling for just a 4% increase in the top line.

Retail earnings season has not begun yet, but Capri's challenges are likely reflective of broader issues in the retail sector, as consumer spending has shifted to services and others have cut back on spending due to recessionary fears and declining asset values.

The stock looks like a good value at the current price, but investors should expect a turnaround to take some time.