John Idol was already cautious heading into the holiday season, cutting Capri Holdings’ outlook and warning of weakness — but it turns out that consumers were feeling even more bearish.
Shares of the parent to Versace, Michael Kors and Jimmy Choo fell 23.5 percent to $50.71 on Wednesday after its third-quarter results missed the mark and Idol, who is chairman and chief executive officer, sent up another warning flare — particularly on wholesale.
The stock decline reverberated across fashion to other companies that rely on buying and selling wholesale. Among the other decliners were Fossil Group Inc., down 15.5 percent to $4.59; G-III Apparel Group, 9.7 percent to $14.93; PVH Corp., 9.7 percent to $80.29, and Macy’s Inc., 7.7 percent to $22.14.
Idol told analysts on a conference call, “Our performance in the third quarter was more challenging than we anticipated.”
While Capri’s own retail channel continued to grow, the CEO said: “We were disappointed with the performance of our global wholesale revenue in the quarter. Additionally, revenue in mainland China declined significantly due to the surge in COVID-19 cases as the country reopened.”
Capri’s third-quarter net income fell 30.1 percent to $225 million, or $1.72 a diluted share, from $322 million, or $2.11, a year ago. Adjusted earnings of $1.84 came in well below the $2.22 analysts projected.
Revenues for the three months ended Dec. 31 decreased 6 percent to $1.5 billion from $1.6 billion. In constant currency, the topline grew by 0.5 percent.
Michael Kors, the company’s biggest brand, also turned in the weakest performance with sales down 3.6 percent in constant currencies. Jimmy Choo’s sales increased 3.4 percent while Versace jumped 11.2 percent, in constant currencies.
While Michael Kors’ retail sales rose by low-double digits in constant currencies, the brand’s wholesale business fell 25 percent during the quarter.
And as consumers spent less on Michael Kors at outside retailers, the brand reduced shipments into the channel.
“We do not want to put additional inventory into the channel to cause markdowns, which we think will cause brand erosion,” Idol said. “We’ve worked too hard to get ourselves to this point. We’ve said we would suffer the inventory declines…if that meant preserving the brand, and I think we’re going to continue to do that.
“We know that we’re on the right track with elevating Michael Kors,” Idol said. “We know we’re on the right track with Versace. And I think you’re going to see some very powerful things happen at Versace here momentarily. We’ve announced our fashion show on March 10 out in California, in Los Angeles. Our new CEO, Emmanuel Gintzburger, is hard at work, and he’s making some incredible strides along with Donatella [Versace, the brand’s artistic director]. And I think you’re going to see a real step change in terms of what the product looks like, where we’re going marketing-wise. So we’re extremely enthusiastic about what’s happening there.
“If you’re going to believe in a luxury company and long-term brand health, then you’ve got to stay committed to what your strategy is,” he said. “And I think ourselves and our management team are committed to that.”
That commitment might well require some more work in repositioning Michael Kors.
Neil Saunders, managing director of GlobalData, said Capri was set up to have a challenging holiday season given tough comparisons with 2021 and “a long period of growth.”
While the company’s weakness in Asia was seen as a function of COVID-19, Saunders chalked up the trouble in North America to a consumer pullback.
“As a lot of luxury is relatively immune to this trend, we feel that some of the issues are with Capri rather than being entirely down to wider economic factors,” said Saunders, noting that Michael Kors is the group’s laggard.
“As the weakest brand in the portfolio — and one that is most exposed to a more price-sensitive, relatively lower income profile — it is not surprising that it has been most battered by the slowdown,” he said. “Unfortunately, it is also the largest part of group revenue so [it] has a disproportionate impact on overall results. Although direct sales for Michael Kors held up better, wholesale has been an issue as retailers have cut orders as their own sales have dropped. This underlines the fact that Capri needs to take back more control over distribution as it refreshes and clarifies the brand over the year ahead.”
In the near term, Capri seems to be in for some more pain.
Thomas Edwards, chief financial and chief operating officer, said fourth-quarter revenues would fall 15 percent on a reported basis, with wholesale forecast to be down 35 percent.
Accordingly, Capri cut its annual outlook and is now looking for earnings per share of $6.10, from the $6.85 projected in November. Revenues are now slated to weigh in at $5.6 billion, less than the $5.7 billion previously forecast.
Given the big changes at wholesale, Capri also laid out its early expectations for the next fiscal year, which starts this spring.
Capri is looking for revenues to increase 4 percent to $5.8 billion in fiscal 2024, with its retail revenues increasing by low-double digits and being driven by growth in Asia. Wholesale sales are expected to decline in the mid-teens, with weakness concentrated in the first half.
“We now anticipate wholesale penetration will decline from 27 percent of revenue in fiscal 2023 to approximately 23 percent of revenue in fiscal 2024,” Edwards said.
That says something about the year ahead for Capri — and department stores.