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Capri Holdings Ltd: Company Overview and Growth Potential Summary

Learn about Capri Holdings Ltd, a luxury fashion company with a history of M&A activity and strong financial performance. Discover its revenue drivers, challenges, and strategies for future growth.

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Capri Holdings Ltd: Company Overview and Growth Potential Summary

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  1. Equity Research Presentation Chun-Hao (Jeremy) Tseng, Yang Yu, and Lu Zhang 2019/4/25

  2. Summary • Company profile & recommendation-BUY Company Profile Recommendation BUY 100 shares at current price Two M&A can boost their revenue within 3 years. The managers of Capri exactly know the problems of company and they have plan to deal with it. Has better financial performance comparing to its peers.

  3. 01| Summary 02| Company Overview 03| Industry & Macro Overview 04| Selected Financial Data 05| Projection an Valuation 06| Recommendation

  4. COMPANY OVERVIEW

  5. Company Overview • The brand history and recent M&A of MK Michael Kors Founded 1981 MK bought luxury shoemaker Jimmy Choo PLC in a deal worth $1.2 billion 2017.11.1 The CFDA awarded Kors the Lifetime Achievement Award; he is its youngest ever recipient. 2010 Sportwear Holdings Limited bought 85% stock of MK 2003 • 1999 • LVMH bought 33% of stock of MK • CFDA named Kors Womenswear Designer of the Year.. 2018.12.31 MK bought top luxury brand Versace in a deal worth $2.005 billion 2011.12.12 MK went public in NYSE 2006 MK opened its first retail stores • Sources: The annual report of Capri holdings Ltd. , and Michael Kors official website CFDA: The Council of Fashion Designers of America

  6. Company Overview • Company snapshot, supply chain, customers and global penetration Company Snapshot Total revenue bybrand Versace Jimmy Choo MK Retail MK wholesale MK Licensing Kors Global Market Penetration Suppliers & Customers Distribution & Marketing ~15% ~67% Design EMEA ~23% • Sources: 2018 annual report and 2019 3rd Quarter 10Q of Capri . Ltd

  7. Company Overview • Two main problems and business model Capri Total Revenue Growth +8% vs +236% ? ? Revenue Profit margain • The revenue growth of Capri is slow down in recent years. Which is because: • The business model has already pass its fast growth stage and enter a relatively mature stage in US. • The revenue of “ light luxury” brand is strongly related to the retail and wholesale system, but this system has been passively impact by the e-commerce, which is a cheaper and much straight forward distribution channel for customers. • The behavior of its competitor Coach : • Coach acquire STUART in 2015 and Kate in 2017 and then change its name into Tapestry, Inc. • Tapestry want to build the first big luxury group like LWMH and Kering in US. • Which give MK strong incentive to build its own group by acquiring Jimmy Choo and Versace in 2017 and 2018 for resistance. • Source : Annual report from 2012-2018 of Capri . Ltd

  8. Company Overview • External Company Driver-boost short term revenue Future Growth Versace Jimmy Choo Pro Forma Michael Kors REVENUE 890 mil 4.5 bil 6.0 bil 580 mil 8.0 +5% STORE +33% 6.0 206 870 195 1271 SALES BY GEOGRAPHY 2019 ~2025 Americas Europe Asia Jimmy Choo Versace Michael Kors We think the external driver will boost the revenue of the company in the short term, this means this company has highly growth potential within 3 years, but we still have doubt about this external expend method and feel concern about its long term growth opportunity. • Source : Management presentation slides of Capri . Ltd in March 2019

  9. Company Overview • Internal Company Drive –Improve long term revenue Production Innovation -40% product overall “Runway 2020” plan Newness penetration from 20% 2017 to 65-75% 2018 Promotional pullback Decrease promotional day in its N. American retail location by 40% in order to raise AUR (Averageunitretail) by10% Asia driver We think the external driver will be the key influence in the short term and internal driver will have a positive influence to company growth especially long term growth but whether these plans work out are still uncertain now. • Source : 2016,2017, 2018 annual report and 2019 3rd Quarter 10Q of Capri . Ltd

  10. Company Overview • SWOT Analysis; Potential Risk S W • The weakness of MK growth leave concern about the long term growth of the whole Group. • Over-rely on traditional retail and whole sale distribution channel • Too many promotional lower the brand internal value • Already form a Group through acquisition, higher risk tolerance. • Manager know where problems are and have clear and operative growth strategy to deal with them. • Short term revenue boost through M&A. T O • The challenge from Tapestry and other competitors. • The potential problems come with M&A. • The uncertainty of the future global economy • Uncertainty of customers taste • Synergy & market share get from M&A. • Brand Recognition and value improve through M&A. • Take advantage of E-commerce and other technology like VR. • Potential growth in Asian market

  11. INDUSTRY OVERVIEW

  12. Industry overview Broad view of Textiles, Apparel & Luxury Goods industry history Textiles, Apparel & Luxury Goods Industry in the Consumer Discretionary Sector includes manufactures and sales of Apparel, Accessories, Luxury Goods, Footwear, and Textiles. Market Cap: 510B P/E ratio: 24 Revenue Growth: 8% 2019 consensus estimate: Revenue: high single digit growth Profit: Low double digit growth Trade war CHN anti corruption Crisis • Source: Bloomberg Intelligence

  13. Industry overview Key data of Textiles, Apparel & Luxury Goods industry Last 3-year CAGR of top 100 Aggerate sales of top 100 ($ in bil) Revenue 2015 2016 2017 2018 Return on assets of top 100 Industrial concentration 100% ROA 2015 2016 2017 2018 Top 10 brand • Source: Deloitte luxury goods report Others

  14. External factors • Macro trends that affect the whole industry US/CHN Consumer Confidence Demographic Structure (2019/age) China American <15/>45 15<x<45 2004 2006 2008 2010 2012 2014 2016 2018 2020 • Demographic structure will affect the industry fundamentally. • Different generations have different shopping habits and fashion preference. • Consumers’ comfort with their current income and confidence of their future income will affect sales of luxury apparels greatly.

  15. External factors • Macro trends that affect the whole industry Prosperous Emerging Market Traveler shopping trend Traveler shopping trend is a comprehensive reflection of many factors, like tariffs, exchange rates, GDP growth, etc. Many luxury brands have over 40% sales in Asia and is projected to reach 50% in the future.

  16. Future opportunities • Where Future Growth Comes From E-commerce Boosting emerging market • Older Millennial spenders near 40—Peak earning year • Generation Zs—Near twenties • Those two groups make up most of the luxury demand • China makes one third of global luxury purchase • Projected to increase to 50% in 2025 • 9% global growth VS 15% Asia-Pacific growth • Weaker Yuan makes it more reasonable for Chinese not to buy luxury goods overseas • China’s government are stimulating high-end consumption at home by cutting tariffs • Make up 10% of 400 billion luxury goods market • Grow at 12% per year to reach 25% at 2025 • 42% of advertising fee are spent on digital media • 70% of the advertisements are viewed on mobiles • Source: Bloomberg Intelligence

  17. Industry value chain • Identify the attractiveness of the industry Industry Rivalry(High) Fierce competition in gaining existing customers in mature US and Europe market. Even more fierce in attracting new customers from internet and emerging markets. Supplier’s Bargain Power(low) Low switching cost to find another contract manufacturer. Take Capri as an example, their gross margin are steady at 60%. Buyer’s Bargain Power(High) Many huge players in the market, best described as monopolistic competition. Growing online shopping habits make it easier for customers to compare and choose. Entry Barriers(High) Building up brands & training fashion designers take lots of time & money, including holding shows, hiring models, decorating stores & high promotion costs. Threat of Substitutes(Low) You cannot imagine a wealth woman who use Gucci bag turn to use a plastic bag.

  18. FINANCIAL ANALYSIS

  19. Financial Analysis • CPRI scales at the industry average Market Cap. (million) Revenue (million) Ø 6,064 Ø 11 CPRI RL OXM VFC GIII TPR PVH CPRI RL OXM VFC GIII TPR PVH Capital structure SG&A / Sales Ø 42 Ø 27 CPRI RL OXM VFC GIII TPR PVH CPRI RL OXM VFC GIII TPR PVH • Source : 2018 annual report of all these companies, data gathered from Capital IQ

  20. Financial Analysis • Capri scales at the industry average Sales growth Adjusted EBIT margin CPRI GIII RL TPR OXM PVH Inventory turnover ROE VFC • Source : 2014-2018 annual report of all these companies, data gathered from Capital IQ

  21. Financial Analysis • M&A leaves issues on margin and efficiency 5 Components Dupont Analysis • ROE decreased from Year 2016 • Acquire MK(HK) deteriorate the margin • M&A activities lower the asset efficiency • Synergies from M&A is the key issues • Expect the ROE growth in the future • Source : 2015-2018 annual report of Capri holding Ltd., data gathered from Capital IQ

  22. Financial Analysis • CPRI outperformed competitors in operation Tangible asset efficiency CFROI (%) Ø 42 CPRI RL OXM VFC GIII TPR PVH (EBIT/(PP&E + Working capital) Asset growth rate (%) Capital efficiency Ø 8 CPRI RL OXM VFC GIII TPR PVH (EBIT/(Market Cap. + Debt) • Source : 2011-2018 annual report of Capri holding Ltd. And all its comparable, data gathered from Holt Lens

  23. VALUATION

  24. Comparable Valuation • From peers multiple valuation, the stock price is $51 Market Cap P/E EV/EBITDA 6.9B 12.5 8.2 8.9B 12.26 7.8 9.9B 13.57 9.6 2.0B 15.41 8.8 10.4B 24.45 9.3 1.38B 20.18 9.9 37.42B 22.90 20.3

  25. DCF Assumption • Revenue will remain midsingle digit in next five years < 5% $5B $4.5B $1B >0.33X $600M TODAY TODAY FUTURE

  26. DCF Assumption • Our assumptions are based on our industry and company insight Other assumptions • Tax rate = 20% • Outstanding shares = 1.55M • Debt = 874.4 million • Perpetual growth rate = 3%

  27. Discount Rate • The discount rate is 13%

  28. DCF Analysis • From DCF valuation, the stock price is $54

  29. Scenario analysis • The expected price ranges $60 • MK grows faster than the expected • M&A deals generate excess synergies • Margin performs beyond expectation $51 Expected price Current price $46 • MK grows slower than the expected • There is no synergy in M&A deal • Runway strategy does not work $44

  30. Summary • Recommendations BUY 100 shares at current price Industry • Luxury E Commerce and prosperous emerging markets have room to grow. • Price target: $54/share • Current price: $46/share • Recommend to buy 100 shares at current price. • When it reaches $54/share, do further analysis to decide whether to hold or sell. Company • Recent M&A deals will boost sales in next 3 years. • Management is clear about the opportunities and challenges and know how to deal with it. Valuation • Capri’s operating outcome is superior to its peers.

  31. Equity Research Presentation Thank you for listening! Q&A

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