Capri Holdings Targets Margin-Led EPS Rebound
Capri Holdings ((CPRI)) has held its Q4 earnings call. Read on for the main highlights of the call.
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Capri Holdings’ latest earnings call struck an upbeat tone as management celebrated a return to profitability, a sharp rebound in margins and a far stronger balance sheet. Executives acknowledged near‑term revenue pressure from deliberate “quality of sale” actions and tariff uncertainty, but argued that brand momentum, cost discipline and aggressive buybacks position the company for meaningful EPS growth through fiscal 2027.
Return to Profitability and EPS Recovery
Capri swung back to profit in the fourth quarter, posting net income of $27 million and diluted EPS of $0.22 after a loss a year earlier. Management is targeting diluted EPS of about $2.15 in fiscal 2027, implying roughly 40% growth versus last year and signaling confidence that recent restructuring and brand investments will translate into stronger earnings power.
Revenue and Q4 Top-Line Trends
Fourth‑quarter revenue came in at $796 million, down 3.7% on a reported basis and 7% in constant currency, but management stressed the decline was in line with expectations. The top line remains pressured by reduced off‑price shipments, less promotional activity and store closures, indicating that Capri is prioritizing quality and profitability over chasing near‑term sales growth.
Significant Gross Margin Expansion
Gross margin expanded an impressive 490 basis points to 64.8% in Q4, even including tariff‑related adjustments, reflecting tighter inventory management and an improved sales mix. Looking ahead to fiscal 2027, Capri is guiding to about 200 basis points of full‑year gross margin expansion, with roughly 300 basis points in the first half and further, though smaller, gains in the second half.
Tariff Refund and Accounting Impact
The company recognized a meaningful tariff benefit in the quarter, as $65 million of IEEPA tariffs paid previously were addressed. Of that, $40 million was recognized as a reduction to cost of goods sold in Q4, while $25 million was booked as a reduction to inventory and will flow through cost of goods sold in the first half of fiscal 2027, creating some timing noise in reported margins.
Balance Sheet Strength and Cash Returns
Capri’s balance sheet looks notably stronger, with net debt down to $222 million from about $1.4 billion a year ago, helped by proceeds from the Versace sale. The company returned capital to shareholders via $79 million of share repurchases in Q4 and plans around $200 million of buybacks in fiscal 2027, with $921 million still authorized for future repurchases.
Michael Kors: Improving Brand Fundamentals
Michael Kors showed encouraging brand momentum as full‑price comparable sales turned positive across all regions and average unit retail rose in the low double digits. Management highlighted better full‑price sell‑throughs, an 8% year‑over‑year increase in the customer database and reiterated long‑term potential for Michael Kors to reach $4 billion in revenue with operating margins in the low‑20% range.
Jimmy Choo: Sales Growth Amid Profit Challenges
Jimmy Choo topped expectations with Q4 revenue up 5.3% reported and flat in constant currency, with both retail and wholesale growing mid‑single digits. The brand’s global consumer database grew about 7% year over year, and management sees a path back to profitability in fiscal 2027 and long‑term revenue potential of roughly $800 million with low double‑digit operating margins.
Inventory and Working Capital Discipline
Quarter‑end inventory fell 17% from last year to $581 million, which Capri framed as evidence of disciplined inventory management and a deliberate move away from off‑price channels. This leaner posture supports higher margins and tighter control of brand image, though it also contributed to lower wholesale and off‑price revenue and could limit upside if demand suddenly accelerates.
Capital Expenditure and Store Renovations
Capex totaled $63 million in fiscal 2026 but is expected to nearly double to about $125 million in fiscal 2027 as Capri invests in store renovations and IT and digital capabilities. The company plans roughly 100 Michael Kors store renovations and about 150 department‑store door refreshes in fiscal 2027, noting that about 35 completed Michael Kors remodels are already generating encouraging lifts in traffic and sales.
Top-Line Pressure from Quality-of-Sale Actions
Management’s push to improve “quality of sale” by curbing promotions, reducing third‑party sales and cutting off‑price shipments shaved more than $150 million from fiscal 2026 revenue. These actions are expected to remain a drag into the first half of fiscal 2027, with about a $75 million impact referenced, delaying a return to top‑line growth but aiming to enhance brand equity and margins.
Channel Weakness and Outlet Pressure
Both retail and wholesale revenue declined low single digits in Q4, with Michael Kors Americas retail down about 14% year over year, largely due to quality‑of‑sale initiatives. The outlet channel for Michael Kors remained under pressure with mid‑single‑digit sales declines, although a notable positive was that outlet average unit retail turned positive as the company pulled back on discounting.
Jimmy Choo Margin Pressure and Turnaround Plan
Despite revenue growth, Jimmy Choo’s profitability deteriorated in the quarter, with operating margin at negative 14.3% versus negative 7.5% a year ago and gross margin contracting about 90 basis points excluding tariff effects. Management is rolling out a profit improvement program to address cost structure and mix, but investors should expect Jimmy Choo’s margin recovery to be a multi‑year effort.
Tariff and Trade Policy Risks
Tariff volatility remains a key uncertainty as fiscal 2026 included roughly $65 million of IEEPA tariff payments and related accounting created significant timing swings in reported margins. The fiscal 2027 outlook assumes an incremental 10% tariff on goods entering the U.S., leaving Capri exposed to potential policy changes that could either relieve or intensify near‑term margin pressure.
Operating Expense and FX Headwinds
Operating expenses ran about $7 million higher than expected in Q4, largely due to adverse foreign exchange movements, underscoring how currency swings can crimp profitability. Management expects operating expense dollars to rise modestly in fiscal 2027, which means margin expansion will need to come largely from gross margin gains and revenue growth rather than cost cuts.
Inventory Reduction and Store Closures Weigh on Sales
The 17% inventory reduction, while positive for profitability and brand control, contributed to softer wholesale and off‑price revenue and could restrict sell‑through if demand surprises to the upside. Store closures also hurt retail sales in the low single‑digit range in Q4, and for the first quarter of fiscal 2027 Capri expects revenue of around $750 million, including roughly $30 million of drag from quality‑of‑sale and store closures and about $7 million impact from the Middle East conflict.
Guidance and Forward-Looking Outlook
Capri’s fiscal 2027 guidance calls for low single‑digit revenue growth to roughly $3.525 billion, with about $2.9 billion from Michael Kors and $625 million from Jimmy Choo, alongside around 200 basis points of gross margin expansion and operating income of about $190 million, up 60% year over year. The company projects diluted EPS near $2.15, supported by $200 million of buybacks, with first‑half revenue down low single digits but EPS up about 80% and second‑half revenue accelerating to mid‑single digits with roughly 20% EPS growth.
Capri’s earnings call painted a picture of a company trading short‑term sales headwinds for healthier brands, better margins and stronger cash returns. While tariff risk, outlet softness and Jimmy Choo’s losses remain watch items, management’s focus on quality of sale, store upgrades and disciplined capital allocation suggests a more resilient earnings profile, which could appeal to investors willing to look beyond near‑term volatility.
