Luxury brand Versace is known for its pricy wares, ranging from sunglasses and swimwear to sandals and slippers. It even sells $550 robes. But the stock of its parent company, Capri Holdings (NYSE:CPRI), isn’t quite as conspicuous when it comes to its price tag. Shares are currently on the clearance rack.
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After falling 37% so far in 2023 and 47% from its 52-week high, the beaten-down stock is currently trading near a 52-week low. So, let’s see why shares of Capri look like a tempting bargain today.
What is Capri Holdings?
Capri was founded in 1981 by designer Michael Kors, and his namesake brand is one of the three brands in Capri’s portfolio today. The company went public in 2011, and there wasn’t much more to it than Michael Kors for quite a while until the company acquired Jimmy Choo in 2017 and followed it up by purchasing Versace in 2018, transforming the company into a fashion conglomerate. It changed its name to Capri Holdings in 2018 to reflect the fact that there was now more to the company than Michael Kors. Today, it is a $4.3 billion company with worldwide operations.
Bargain-Bin Valuation
The market certainly isn’t giving Capri much credit for growing into the global luxury conglomerate that it is today. In fact, it’s among the cheaper stocks you’ll come across in the market, trading at a paltry 6 times earnings and an even cheaper 5.5 times consensus 2025 earnings estimates.
It goes without saying that this is a steep discount to the broader market — the S&P 500 (SPX) has a forward P/E multiple approaching 20. Not only that, but CPRI also trades at a big discount to luxury peers. For example, LVMH Moet Hennessey Louis Vuitton SE (OTC:LVMUY), which is widely seen as the leader in the space, trades at roughly 30 times earnings.
Now, LVMH is essentially the consensus best-in-class company in the luxury goods market, and its brands like Louis Vuitton, Loro Piana, and Dior are certainly a cut above those of Capri’s brands in terms of prestige. So, Capri likely doesn’t deserve quite as lofty a multiple, but this is still a massive gulf in valuation.
For a company closer to Capri’s image, let’s take a look at Tapestry (NYSE:TPR). Tapestry is the parent company of Coach, Kate Spade, and Stuart Weitzman, and these brands certainly aren’t above Capri’s in terms of perception within the luxury market, making it a fair analog to Capri.
However, believe it or not, shares of Tapestry enjoy a valuation roughly twice that of Capri, trading at 11 times earnings and 10 times forward earnings. If Capri were to attain the same multiple as Tapestry, arguably its closest peer, shares would double from their current level. Ralph Lauren (NYSE:RL), another company that swims in this lane, enjoys a multiple of 13 times consensus 2024 earnings and 11.6 times consensus 2025 earnings. Again, a discount to the broader market but a steep premium to Capri.
To be fair, there are reasons why CPRI’s stock price has declined, creating this cheap valuation. Revenue declined by 10.5% in the most recent quarter (although just 3% on a constant currency basis), and the company cut its sales guidance.
Capri is dealing with a challenging environment in North America, where customers are dealing with an increasing cost of living. CEO John Idol says that he expects demand in North America to remain “soft” through this summer, and the company has previously warned that wholesale demand will be softer in the first half of 2024 as department stores trim their orders.
But it’s not all bad — the company posted high-single-digit revenue growth for the full year and achieved record full-year revenue for its Versace and Jimmy Choo brands. Capri is also anticipating $6.40 in adjusted earnings per share in 2023.
Additionally, while weaker wholesale demand might hurt right now, being less reliant on wholesale distributors and selling more to customers directly could benefit Capri and boost margins in the long run. The issues seem to be priced into the stock, and patient, long-term investors could be rewarded for seeing beyond the next quarter or two.
The stock is cheap based on this outlook, and if it can execute, it seems feasible that it could climb to a valuation more in line with that of Tapestry over time. Remember, it wasn’t long ago that this stock was trading at close to $70 per share.
Furthermore, if the market doesn’t eventually recognize the stock’s value, it could eventually be an interesting acquisition target based on its inexpensive valuation and the attractive brands in its portfolio. Its market cap of “just” $4.3 billion means that there are plenty of other luxury goods companies or even private equity companies that would be interested and have the capability to acquire it.
Returns to Shareholders
While Capri doesn’t pay a dividend, that doesn’t mean that it doesn’t return capital to shareholders. In fact, Capri returned $1.35 billion to shareholders in Fiscal 2022 through share buybacks. Further, the firm bought back an eye-popping $400 million worth of shares during the fourth quarter and is still authorized to buy back another $400 million worth of shares under its current share repurchase program.
Share repurchases are beneficial to investors because they reduce the number of shares outstanding and increase the ownership stake of the remaining shareholders while helping to increase earnings per share thanks to the reduced share count.
They can also serve as a signal to the market that the company feels its stock is undervalued, which seems to be the case here as Capri management is wisely using share repurchases while the stock is trading at a cheap valuation.
Is CPRI Stock a Buy, According to Analysts?
Turning to Wall Street, Capri Holdings has a Moderate Buy consensus rating based on 10 Buys, six Holds, and zero Sell ratings assigned in the past three months. At $50.69, the average Capri Holdings stock price target implies 39.3% upside potential.
The highest analyst price target, $68, is nearly double the stock’s current price. Interestingly, even the lowest analyst price target, $37, is a hair above Capri’s current price, implying that downside could be limited from here.
The Takeaway: An Intriguing Opportunity
While the company has gone through some challenges over the past year, shares are decidedly cheap, and Capri owns a strong portfolio of luxury brands. The company trades at a steep discount to both the broader market and its closest peers. I believe the market should begin to recognize this value as Capri executes in the new fiscal year. However, if the value isn’t recognized, then Capri would be an interesting acquisition target for a bigger luxury house or a private equity player.
Saving the best for last, one final thought is that longtime CEO John Idol recently bought $10 million worth of stock at $41.57, a level considerably above today’s share price. It’s hard to not like a CEO putting his money where his mouth is, and Idol clearly thinks the stock is worth more than it is today.
