Capri Holdings Cuts Outlook on Inventory, Middle East Concerns

Shares of Capri Holdings were under pressure in early trading on Wednesday as lower inventory and weakness stemming from the U.S. war with Iran hit the Michael Kors business and pushed down the company's revenue outlook for the year, even after a stronger-than-expected first quarter.

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Shares of Capri, which also owns Jimmy Choo, fell 3 percent to $16.02 as investors weighed the new outlook on Wednesday. That left the firm with a market capitalization of $1.8 billion.

John D. Idol, chairman and chief executive officer, told analysts on a conference call: "While we remain focused on executing against our strategic initiatives, certain headwinds, including lower-than-anticipated inventory levels at Michael Kors in the second quarter, softer trends in [Europe, the Middle East and Africa] and updated foreign currency exchange rate assumptions are having an impact on our revenue outlook. As a result, we now anticipate fiscal 2027 revenue of approximately $3.4 billion.

"Based on our revised revenue expectations, we are taking actions to reduce operating expenses, which are enabling us to maintain our fiscal 2027 earnings per share outlook of approximately $2.15, representing a 40 percent growth over the prior year," he said.

That shaves about $125 million in revenues off the guidance the company gave in May.

On Wednesday, Capri said it expected roughly $50 million in reduced sales due to inventory delays, $50 million from softer trends in EMEA and $35 million from currency headwinds.

Congestion at ports in Asia led to delayed receipts at the end of the first quarter, prompting the company to selectively fly goods in as the situation normalizes over the course of the second quarter.

While the logistics snafus did cause some pain, Idol stressed that the Michael Kors business is also intentionally resetting and that that is also impacting sales.

"We've decided to be less promotional-facing to the customer," the CEO said. "And that's everything from the types of promotions we're doing to the amount of discount we're offering and then to the amount of product and [stock keeping units] available for the customer.

"There have been other companies that have gone through this process," Idol said, possibly referring to Tapestry Inc.'s Coach rejuvenation and Ralph Lauren Corp.'s strong run in. "It takes time and you have to be patient. And we think it's important that we started on a journey and that we don't all of a sudden start to change that vision of where we want to be long-term."

The CEO described the third quarter as "a pretty significant inflection point for the company."

That lays the groundwork for another tough go of it for Capri in second quarter, leaving a lot riding on the fall and holiday.

The outlook for the year amounted to a splash of cold water after a better run for the first quarter ended June 27.

Net income rose to $69 million from $53 million and adjusted earnings per share came in at 67 cents, well above the 40 cents analysts forecast, according to Yahoo Finance.

Gross profit margins stood at 65 percent, up 200 basis points from a year earlier due to higher full-price sell-throughs and lower tariff rates.

Revenues for the first quarter tallied $769 million, down 4.1 percent in constant currencies, better than the $752.6 million analysts had penciled in. Michael Kors' revenues fell 7.6 percent in constant currencies, while Jimmy Choo increased 9.3 percent.

Inventories at the end of the quarter were down 20 percent from a year earlier.

Neil Saunders, managing director of GlobalData, said, "In the case of Michael Kors, a lot of finessing is required to repair years of bloated assortments, scattergun distribution and a generally confused position. That's a tall order and there is no doubt that major surgery is needed to restore the brand to health — meaning things may get worse before they get better. To some extent, we see this in the current numbers.

"All that said, it is far too early to use the word 'turnaround' alongside Michael Kors," he said. "While Capri is taking corrective action, some of the decline is still down to the brand being seen unfavorably by consumers. Overall, the luxury and premium segments performed well this quarter, especially in the U.S. However, Michael Kors remains weak on our brand radar of aspirational brands people want to invest in or spend their money on."

Saunders said Michael Kors' "catwalk collections are sophisticated and interesting — with, for example, appropriate nods to soft tailoring and relaxed elegance this season — but this is not what comes through in stores, including Michael Kors' own shops."

Capri expects the Michael Kors business to return to growth in the second half.

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