This Capri Holdings Ltd (CPRI) Stock Forecast article was written by Zheman Zhong – Financial Analyst at I Know First.

Highlights

• Tapestry will acquire Capri Holdings Ltd (CPRI) for $8.5 billion, consolidating six luxury brands under one corporate umbrella.
• The acquisition allows Tapestry to diversify its product line and geographic reach, reducing over-reliance on the Americas and accessories.
• Capri Holdings share price jumps 55.7% post-announcement, nearing the acquisition offer of $57.00 per share, signaling investor confidence.
• Capri Holdings shows strong profitability metrics but weaker liquidity ratios, suggesting potential benefits from Tapestry’s financial backing.
• Compared to industry peers, Capri Holdings appears mostly undervalued, although a high Price to Book ratio warrants investor caution.

Overview

Capri Holdings Ltd (CPRI), originally founded as Michael Kors Holdings Limited in 1981, is a multinational fashion conglomerate headquartered in London with operational offices in New York. The company is a powerhouse in the luxury fashion sector, owning three iconic, founder-led brands: Michael Kors, Versace, and Jimmy Choo. Under the stewardship of CEO John Idol since 2003, Capri Holdings has expanded its global footprint to include more than 800 company-owned Michael Kors stores, along with Versace and Jimmy Choo boutiques, reaching a vast audience through wholesale and e-commerce channels as well. Michael Kors, the largest brand in the portfolio, is renowned for its handbags, footwear, and apparel. Versace, acquired in 2018, adds a layer of opulent, ready-to-wear luxury fashion, while Jimmy Choo, acquired in 2017, is celebrated for its high-end women’s footwear. United by a commitment to craftsmanship, glamorous style, and innovation, the group has built a significant reputation, catering to a diverse clientele while making significant contributions to the global luxury fashion market.

Tapestry, Inc. Announces Definitive Agreement to Acquire Capri Holdings Limited

The press release announces a definitive agreement under which Tapestry, Inc. will acquire Capri Holdings Limited for a total enterprise value of approximately $8.5 billion. Under the terms of the deal, shareholders of Capri Holdings will receive $57.00 per share in cash. Tapestry, Inc., which owns iconic brands such as Coach, Kate Spade, and Stuart Weitzman, will be adding Capri Holdings’ brands—Versace, Jimmy Choo, and Michael Kors—to its portfolio. The acquisition brings together six complementary luxury and fashion brands, making the combined entity a global powerhouse with annual sales exceeding $12 billion and a presence in over 75 countries.

Joanne Crevoiserat, CEO of Tapestry, highlighted the company’s data-driven consumer engagement platform as a key asset, expressing enthusiasm for the expansion and the “unique opportunity to drive enhanced value” for various stakeholders. John D. Idol, CEO of Capri Holdings, acknowledged the milestone as a testament to the achievements of his teams, stating that the merger will offer new opportunities for employees and accelerate global expansion.

The acquisition of Capri Holdings by Tapestry, Inc. is set to significantly diversify Tapestry’s revenue streams and geographic reach. The deal boosts Tapestry’s exposure to the EMEA regions from 6% to 16%, reducing its over-reliance on the Americas. On the product side, the acquisition shifts Tapestry’s focus from primarily accessories—which currently make up 80% of its revenue—to a more balanced mix. Post-acquisition, accessories will account for 67% of revenue, while contributions from footwear and apparel will increase to 15% and 10%, respectively.

This strategic move positions Tapestry strongly in the $200+ billion global luxury market and provides greater resilience against market volatility. The diversification allows Tapestry to tap into varying consumer tastes across geographies and broaden its product offerings, creating a more stable revenue base. By blending the strengths of both companies, the acquisition stands to make Tapestry a more versatile and formidable player in the global luxury fashion arena.

Capri Holdings’ Stock Price Surge After Tapestry Acquisition

The sharp increase in Capri Holdings’ share price following the announcement of its acquisition by Tapestry, Inc. reflects the market’s positive reaction to the deal. Closing at $53.90 per share, up 55.7%, indicates strong investor confidence in the strategic merits of the acquisition. The jump suggests that investors anticipate significant value creation from the combined entity, which brings together six iconic brands—Coach, Kate Spade, Stuart Weitzman, Versace, Jimmy Choo, and Michael Kors—under one umbrella. The rise also comes close to the acquisition price of $57.00 per share, showing that investors see the offer as a fair valuation of Capri Holdings’ assets and future potential. This upward movement in share price is a strong indicator that the market believes the merger will benefit both companies, enhancing their competitive positions in the global luxury market and potentially delivering increased shareholder value over the long term.

A Decade of Fluctuating Revenue for Capri Holdings Limited

The revenue trajectory of Capri Holdings Limited (CPRI) over the last decade reveals a mixed bag of vigorous growth and occasional setbacks. After enjoying remarkable Year-over-Year (YoY) growth rates of 51.75% and 32.04% in 2013 and 2014, the company encountered a slowdown, capped by a slight revenue contraction in 2016. Although it bounced back in subsequent years, the most dramatic downturn came in 2020, likely due to the COVID-19 pandemic, with revenues plummeting by 26.86%. However, the company staged an impressive rebound in 2021, posting a growth rate of 39.26%. Despite this strong recovery, 2022 presented a modest decline in revenue by 0.62%, hinting that the company may still face challenges in maintaining consistent growth.

In light of the acquisition by Tapestry, Inc., this financial backdrop becomes particularly significant. One of the key synergies for Tapestry in this deal lies in acquiring Capri’s formidable brands—Versace, Jimmy Choo, and Michael Kors—which offer robust growth potential across diverse markets. In turn, Capri stands to gain from Tapestry’s expansive distribution network and operational efficiencies, potentially offsetting the revenue volatility it experienced in challenging years like 2016 and 2020. Additionally, Tapestry could leverage Capri’s expertise in lifestyle categories such as footwear and apparel, thereby enriching its own product portfolio. This mutual exchange of strengths sets the stage for a partnership that promises to deliver a diversified, resilient, and globally competitive luxury fashion conglomerate, better equipped to navigate the complexities of the modern fashion industry.

Capri Holdings: Profitability Strengths and Liquidity Concerns Pre-Acquisition

The financial metrics for Capri Holdings (CPRI) suggest a robust performance relative to the Retail – Cyclical industry median, especially in terms of profitability and efficiency. The company’s Gross Margin of 66.24% significantly outperforms the industry median of 36.94%, ranking better than 91.09% of companies in the sector. This indicates strong pricing power and cost efficiency. Similar strengths are observed in Operating and Net Margins, as well as in the Return on Equity (ROE), Return on Assets (ROA), and Return on Invested Capital (ROIC) percentages, all of which rank notably higher than industry medians.

However, the liquidity ratios present some concerns. The Current Ratio of 1.33 and Quick Ratio of 0.52 fall below the industry medians of 1.59 and 0.87 respectively, ranking worse than more than 60% of companies. These metrics suggest that CPRI could be more vulnerable to short-term financial obligations compared to its peers. The Cash Ratio, another liquidity indicator, is also below the industry median, indicating that immediate liquidity could be a challenge.

In summary, while CPRI’s profitability and efficiency metrics are strong, indicating solid operational performance and competitive strength, its liquidity metrics suggest room for improvement. The acquisition by Tapestry, Inc. could potentially provide the financial backing to address these liquidity concerns, thereby helping CPRI become a more balanced and resilient entity within a larger, more diversified luxury fashion conglomerate.

A Comparative Analysis of Capri Holdings and Industry Peers

Analyzing these financial ratios among Capri Holdings Limited (CPRI) and its peers in the apparel sector can provide insights into the company’s valuation and operational efficiency.

In terms of valuation, CPRI’s P/E Non-GAAP (TTM) at 9.71 is below the industry median of 11.95 and the average of 11.65, suggesting that it might be undervalued compared to its peers. Similarly, its Price/Sales (TTM) ratio at 1.19 is precisely at the industry median and slightly higher than the average of 1.14, further supporting the notion that the company is reasonably valued in terms of its revenue generation. However, its P/E GAAP (TTM) at 14.27 is closely aligned with the industry median of 14.50 but below the average of 15.73, indicating a mixed picture.

CPRI’s Price to Book (TTM) ratio at 3.32 is above the median of 2.76 and the average of 2.56, which could suggest that the market has high expectations for the company’s future growth or believes its assets have high earning potential. The Price/Cash Flow (TTM) ratio for CPRI stands at 8.93, significantly below both the industry median of 19.45 and the average of 22.26. This could indicate that the company is generating more free cash flow relative to its valuation, a positive sign for investors looking for companies that are effective at converting their sales into cash.

In summary, Capri Holdings appears to be undervalued or reasonably valued in most metrics when compared to industry peers, which could make it an attractive investment opportunity. However, its relatively high Price to Book ratio could warrant caution, possibly reflecting market optimism that may or may not be realized. Overall, these ratios should be considered in the broader context of the company’s financial health, growth prospects, and the recent acquisition by Tapestry, Inc.

Conclusion

In light of the recent acquisition by Tapestry, Inc., Capri Holdings Limited (CPRI) presents an intriguing investment opportunity. The company’s robust profitability metrics contrast with its somewhat weaker liquidity ratios, a balance that Tapestry’s financial backing could help stabilize. From a valuation standpoint, CPRI appears to be mostly undervalued compared to its peers, making it an attractive option for investors who believe in the synergies the merger will create. However, the company’s high Price to Book ratio warrants caution, signaling potential market optimism that may or may not materialize. Overall, investors should consider adding CPRI to their portfolios as a long-term growth prospect but should keep an eye on liquidity metrics and market sentiment following the acquisition.

Worth noting is that the AI-driven stock selection by I Know First indicates a strong bullish signal for CPRI stock on the one-year market trend predictions, aligning with my perspective. The light green for short-term forecasts suggests a mildly bullish stance, while the darker green represents a strong bullish signal for the one-year forecast.

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Please note-for trading decisions use the most recent forecast.