Capri: Faces Near-Term Challenges but Continues to Develop Its Three Brands

Capri CPRI is led by Michael Kors (70% of fiscal 2022 sales), a major brand in the attractive midtier handbag market. However, we believe Kors lacks the brand strength to provide an economic moat for the company, rating poorly on the criteria that Morningstar uses to evaluate luxury brands, such as conspicuousness of consumption, pricing power, and control over distribution. Powered by store openings and retail expansion during 2010-15, Michael Kors became one of the largest American handbag producers in sales and units. However, its sales have declined from fiscal 2016′s $4.7 billion peak due to markdowns at third-party retail, store closures, and weakness in some categories. While Capri has reduced distribution of the label to limit discounting of its bags, it now faces challenges such as high shipping costs, inflation, unfavorable currency movement, and virus-related store disruptions in China.

We think Michael Kors has good potential in Asia, the fastest-growing luxury market in the world. Bain projects Asian consumers will compose about 60% of the worldwide luxury market in 2030, up from about 40% in 2022. However, Asia accounted for just 12% ($491 million) of Michael Kors’ fiscal 2022 sales, and we do not expect Capri’s $1 billion Asian sales target for the brand to be reached until after 2032, given its limited tenure there relative to Coach and others.

Capri spent a steep $3.4 billion to purchase Jimmy Choo and Versace to boost its status as a luxury house and reduce its dependence on Michael Kors. Although plans for these two brands are progressing, we do not think these deals have changed Capri’s no-moat status as they have more fashion risk, less profitability, and narrower appeal than Michael Kors. Capri is investing in store remodels, store openings, and expanding the set of accessories for Jimmy Choo and Versace. While Capri has suggested the two brands, when mature, could combine for operating profit of $450 million and account for 30% of its total, we do not expect that to happen until the early part of the next decade.