Company Name: Capri Holdings
Entry Price: $43.70
Target Price: $65.00
Projected Yield: 48.70%
Time Line: 3 to 6 months
About Capri Holdings
Capri Holdings is a global fashion company manufacturing and selling luxury apparel, footwear, accessories, and perfumes under Michael Kors, Jimmy Choo, and Versace brands. This includes designing, developing, and distributing products around the world.
What's the Idea?
Capitalize on a stocks that may rise with luxury goods demand recovery, strong financial results, and possible acquisition by another company.
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Why Capri Holdings?
Reason 1: Luxury Goods Demand Recovery
Last year, the pandemic and lockdown created significant difficulties for retailers, with most stores around the world closing in the first six months of 2020. This especially affected the luxury clothing sector, which sank by 23% to $262B, as Bain & Co reports. With various factors in mind, such as macroeconomic conditions, further COVID-19 news, and air traffic recovery, Bain sees the market recovery rate in the range of 10% to 19%, with the market expected to reach its previous results by 2022 or 2023.
The main drivers supporting the market are the growing popularity of online retailers and the increasing demand in China. Luxury clothing online stores doubled their market share up to 23%, compared to last year, and this uptrend is going to continue due to changes in consumer behavior.
Despite COVID-19, the luxury goods market in China was not only able to quickly recover to its previous levels, but also went up significantly, which probably can result in 48% growth in late 2021. This means the Chinese market might reach $53 billion, thus increasing its global share from 11% to 20%, with further expansion, too, Bain admits. The luxury goods market growth breakdown is meanwhile as follows: 70% to 80% for leather and jewelry, 40% to 50% for clothes and shoes, and 20% for watches.
Thus, with adjusting to the current situation, US and EU demand recovery, and rapid growth in China should help luxury goods online retails continue growing.
Reason 2: Confident Financial Position
Lockdown had a significant impact on Capri Holdings, as the company's earnings sank by 44% to reach $1.56B in the first six months of FY 2021. The net loss was at $59M, against $118M profit for the same period last year. The main decline in sales occurred in Q1 2020, while in Q2, Capri was able to offset some losses, with $1.11B earnings.
In addition, Capri was able to optimize its operation costs, which resulted in reaching operating and net income of $153M and $122M, respectively. In Q2 2020, Capri sales through ecommerce skyrocketed by 60%, which allowed the company to offset most of the losses coming from the lockdown. Meanwhile, Capri has a moderate level of debt burden, with $1.78 in debt and Net Debt/EBITDA ratio at 2.50x. There are no liquidity issues either, as the company has liquid assets worth $1.17B in cash, including current loans, and $238M in cash.
The company is also generating a positive operating cash flow, which amounted to $137M since early this fiscal year, and while FCF reached $78M. Capri confidently survived the lockdown last year and adapted to the new conditions, so it does have a very good growth potential moving forward.
Reason 3: Potential Acquisition Target
Even in the current economic situation, many large companies in the luxury sector managed to boost their inorganic growth through M&A deals. As such, in 2020, Moet Hennessy Louis Vuitton SE acquired Tiffany & Co for $ 15.80B, with 16x Trailing EBITDA. In December, VF Corporation bought Supreme for $2.10B at 15x Trailing EBITDA, while Moncler SpA paid $1.40B to buy Stone Island at 16.60x Trailing EBITDA. Such deals usually suggest the sellers getting a good premium. McKinsey expects M&A activity in the industry to continue in the midterm.
Capri Holdings might be an excellent target for larger market players, as it is reaching competitive financial results and growth rates. Currently, Capri's Enterprise Value is at $8.04B, while its LTM EBITDA is at $600M, which means the company is trading at 13.40x LTM EBITDA. This does include the earnings drawdown due to the pandemic; however, both the earnings and the industry in general are recovering. In FY 2020, Capri Holdings' EBITDA was at $916M, so in case of reaching the 2020 indicators, the company may reach 8.77x EBITDA. If a major market player decides to add Michael Kors, Jimmy Choo, and Versace brands to its portfolio, Capri Holdings might get a significant premium to its current value.
How to Use the Idea?
- Buy Capri Holdings stock at $43.70.
- Allocate no more than 2% of your portfolio amount. To build a balanced portfolio, you can use recommendations by our analysts.
- Sell the stock when the price is at $65.00 per share.
How to Buy Capri Holdings Shares?
If you don't have an investment account yet, open it now: this can be done online, in just 10 minutes. All you need to do is fill out a short form and verify your account.
After opening an account, you can buy shares in either of the following ways:
Freedom24 Web Platform: Go to the Web Terminal section, type CPRI.US (Capri Holdings ticker in the NASDAQ) in the search box, and select Capri Holdings Ltd in the search results. Open a secure session in the trading window on the right, select the number of shares you want to buy, and click Buy.
Freedom24 iPhone or Android App: Go to the Price screen and tab the search icon in the top right corner. In the search dialog that will show up, type CPRI.US (Capri Holdings ticker in the NASDAQ) and select Capri Holdings Ltd in the results. You will then see the stock in the market watch; tap it and go to the Order tab in the dialog that shows up. Specify the number of shares you want to buy and click Buy.
Buy Capri Holdings shares to capitalize on the luxury goods sector recovery!
Buy Capri Holdings Shares >>
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