Capri c’est fini

Well it seems like things are accelerating at Versace. Capri announced a few days ago that Donatella Versace will leave her position as Designer. The end of an era.

Well it seems like things are accelerating at Versace. Capri announced a few days ago that Donatella Versace will leave her position as Designer. The end of an era.

She’ll be replaced by Dario Vitale. His previous position : Design and Image Director. Where? At Miu Miu. And who owns Miu Miu? Prada. Huuuum ok it looks like something is happening behind the scenes.

Versace will be acquired by Prada for 1.5bn€/1.6bn$ according to rumours. It represents 1.8x LTM Sales, closer to 1.5x if you take average sales of FY 2022-24. A tad lower than the 2018 price tag: Capri acquired it for 2.12bn$. M&A creates value, yeah right.

Jimmy Choo will follow: maybe Prada acquires both brands, or another bidder appears.

Exor may be a suitable one : it was interested back when Capri discussed with Tapestry, and they just raised 2bn€ for a new acquisition weeks ago. Their investor presentation is is two weeks. Interestingly it should have taken place in November but was rescheduled the day Capri/Tapestry dropped their merger.

Whatever happens to Jimmy Choo with Prada, it will be sold soon after. John Idol’s strategy to build a mini LVMH/Kering (was it seriously contemplated at one point?!) hasn’t worked. It needs another management to turn it around. Remember, it was acquired for 1.35bn$ in 2017. 3x its sales, seems crazy today. M&A creates value, yeah right (bis).

Even during the crazy post Covid years, Capri hasn’t turned Versace and Jimmy Choo into a real success (max adjusted operating margin of 17% and 6%).

We don’t have the figures for Louboutin but it’s bigger than Jimmy Choo I guess. Exor acquired 24% on a 2.2bn€ valuation in 2021. Must have been close to 3x Sales at the time. But Louboutin is profitable, double digit margin according to J. Elkann (letter to shareholder for 2023).

There’s no way such a multiple is going to be paid for Jimmy Choo. Corriere della Sera mentions a 500m€ price tag (550m$). I find it a bit low, slightly less than 1x Sales. Other luxury brands that suffered recently like Burberry and Ferragamo traded at 1.25x-1.5x Sales at their lowest point.

When it was public 10 years ago Jimmy Choo also earned double digit operating margin. Quick math: 1x Sales with 10% margin, assuming no interest and 25% tax rate, it’s 13x earnings. Its sales have held up during recent years, even when Versace suffered. There’s certainly something to do with Jimmy Choo.

Where does that leave us: assuming rumours about Versace’s price are right, Capri gets 1.6bn$. For Jimmy Choo, it will get at least 600m$ (though I expect slightly more than 700m$). So 2.2bn$ for the package. It amply covers its 1.1bn$ net debt and gives a theoretical EV of 1.4bn$ (1.1bn$ net cash + market cap of 118m shares x 21$ per share).

Question then is: what’s Kors worth? I’ve been hearing for years that the brand is permanently damaged and that it’s losing vs Coach. A quick Google Trends search tends to confirm that. However, Kors keeps on printing money. And when I visit stores and ask clerks and clients, there’s still a certain attraction to the brand. Not as much as a few years ago I admit, but there’s some.

Assuming Kors makes 3bn$ sales and 10% margin (half what it did pre Covid, definitely another time…), we get to 225m$ net earnings. How much would you pay for that stream of cash? 10% yield seems a bit too high given the potential the brand has to grow and improve margin from that low point. At 7.5% or 13x+ earnings, valuation reaches 3.0bn$.

Let’s wrap up: current EV is 3.6bn$. Versace and Jimmy Choo will bring 2.2bn$. Kors is worth 3.0bn$. So total value is 5.2bn$. Minus 1.1bn$ of net debt, we get 4.1bn$ of equity value i.e. 35$ per share.

We’re clearly below the 57$ per share Tapestry was ready to pay not long ago. Joanne Crevoiserat can say a BIG thank you to Lina Khan.

Capri trades at 21$ per share which doesn’t reflect the value of the 3 brands in my opinion. If I’m off by 15%, the price is still 30$. I took a position in Capri and expect it to play quickly.