Updated 4:05 P.M. E.T. Jan. 6
Wall Street can give that impression that it’s all about numbers — margin multiples, revenue growth, PE ratios and all the other metrics that add up to a stock price.
But that’s only half of it.
The other half is how investors feel about all those numbers.
For Michael Kors-parent Capri Holdings — which struggled as it waited at the altar for the Tapestry Inc. buyout and then saw its stock price collapse along with the deal — sentiment has ranged from bad to very bad.
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That might now be starting to change.
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Shares of Capri increased 7.9 percent to $21.88 on Monday after BMO analyst Simeon Siegel upgraded the stock to outperform with a target price of $31. That gave the company a market capitalization of $2.6 billion.
An outperform rating means that an analyst thinks a company is stronger than the market is giving it credit for. And Siegel said the Capri bears have gone too far and are too “negative” or “uninterested” on the stock, which has fallen about 60 percent over the past years while the S&P 500 rose 24.7 percent.
While upgrades are most often based on some sign of better performance at the company, Siegel’s is based more on vibes and the underappreciated base Capri is working from as it builds back from a tough stretch as it waited for the deal with Tapestry, at $57 a share.
“Capri deserves management and investor focus,” Siegel said. “It’s regained the former; the latter should follow.”
Since the buyout was dropped, John Idol, chief executive of Capri, has been busy.
In November, he laid out plans to rev up the company’s three brands — Michael Kors, Versace and Jimmy Choo — and then stepped in to personally take the reins of Michael Kors as CEO of the brand.
And last month, WWD reported that Versace and Jimmy Choo have been put up for sale in a process managed by Barclays.
Even though the turnaround at Michael Kors, the company’s largest brand, will take time, Siegel said Capri has multiple ways to start turning sentiment and its stock price around.
“While we don’t see clear signs of strength/inflection — yet — we see potential upside as sales, margins and debt pressures turn ‘less-bad,’” Siegel wrote in his research note.
Capri’s revenues fell 16.4 percent to $1.1 billion in its fiscal second quarter.
But that’s a decline with some peculiarities.
“Unlike most large brand oversaturation issues — something Michael Kors knows well — Capri’s recent revenue drop appears more a function of distraction/lack of effort post-transaction announcement than of an overstretched logo,” Siegel said. “To wit, inventory is [down by a percentage in the double digits]; typically, overstretched brands first need to address inventory gluts. Metaphorically — maybe literally too? — turning the lights back on should prove a powerful opportunity.”
But Siegel argued that the shortest path to upside for the stock is a reduction in the company’s debt load as net debt is high at about 62 percent of the companies’ market cap, equivalent to $12 to $13 a share.
Net debt stood at $1.5 billion at the end of the second quarter in September and is on track to be about $1.2 billion by the end of the fiscal year.
“Whether via asset sales or cash flow from business improvement, shrinking the market cap-to-enterprise value gap could represent meaningful and underappreciated upside to shares,” Siegal said.
The analysis looked at the various pieces of the business separately and found hidden value.
Siegel estimated that even if Michael Kors continued to decline next year with sales dropping to $3 billion, that should still produce earnings before interest, taxes, depreciation and amortization of $500 million to $550 million.
With that math — if Michael Kors were valued at 6-times EBITDA, or about $2.5 billion — Capri shareholders have been valuing Versace and Jimmy Choo at about $740 million combined.
That would be a bargain basement price considering Capri bought Versace for $2.1 billion in 2018 and Jimmy Choo for $1.2 billion in 2017.
Selling the luxury brands could help Capri pay down debt and speed along Michael Kors, while shareholders, under Siegel’s reasoning, see a nice bump up.