The Ratings Game: Michael Kors, Versace parent Capri lowers revenue guidance by $100 million due to coronavirus

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Analysts say Capri still has work to do to grow its brands, including new acquisition Versace

Capri Holdings Ltd. says 150 of its 225 stores in China are closed due to the coronavirus outbreak and it’s having a major impact on guidance for the coming months.

“Based on our current visibility into the situation in China, we are reducing revenue by approximately $100 million and earnings per share by 40 cents to 45 cents for the fourth quarter and full year,” said John Idol, chief executive of Capri, on the earnings call, according to a FactSet transcript.

Capri’s CPRI, -3.78%   portfolio of luxury brands includes Michael Kors, Versace and Jimmy Choo.

Capri expects fourth-quarter revenue of $1.3 billion and EPS of 68 cents to 73 cents. The FactSet guidance is for revenue of $1.4 billion and EPS of $1.01.

For fiscal 2020, Capri is guiding for revenue of $5.65 billion and EPS of $4.45 to $4.50. The FactSet outlook is for revenue of $5.84 billion and EPS of $5.03.

“This estimate could materially change of the severity of the virus worsens including potential broader impact on our business outside of China, its outbound travel and tourist traffic is further restricted from China to other countries,” Idol said.

Capri reported fiscal third-quarter earnings and revenue that beat expectations, but UBS analysts don’t think that indicates that a turnaround of the fundamentals of the business have changed.

“Capri’s Q3 report does not have many positive surprises,” analysts led by Jay Sole wrote. “However, we think the stock’s current valuation already incorporates a significant amount of bad news. We do not believe that over time Capri will stabilize Michael Kors and generate value from its recently acquired brands – Jimmy Choo and Versace.”

UBS rates Capri stock buy with a $43 price target.

Read: Starbucks would’ve raised its guidance if not for the coronavirus

Cowen analysts led by Oliver Chen say they’re “encouraged” by trends in Michael Kors men’s, shoes and jewelry.

“However, we view that investors will need to see consistent positive comps performance at Michael Kors to become more constructive on the stock,” analysts said.

Michael Kors revenue fell 5.1% to $1.211 billion during the quarter with comparable store sales falling in the low-single digits.

With respect to the China, Cowen notes that the quarter ending in March usually gets a bump from Chinese New Year.

“Further, Asia carries higher margins than other regions, and therefore, this will affect consolidated gross margin rate, as well as operating margins, given the immediacy of store closures leading to low flexibility on reducing costs,” analysts said.

See: Ralph Lauren has closed about half of its stores in China due to the coronavirus

“We also think e-commerce sales will be pressured, given logistical challenges with shipping.”

Cowen rates Capri stock market perform with a $42 price target.

Capri closed Wednesday up 8.3%, but the stock has pulled back 2.5% in Thursday trading. For the past year, Capri shares have sunk 33% while the S&P 500 index SPX, +0.29%   has gained 22.2%.

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