This article presents a valuation of Capri Holdings (formerly Michael Kors, NYSE:CPRI) based on the present value of its future free cash flows (FCF). While recent headlines have focused on weaker-than-expected guidance and the overall performance of the luxury goods sector, a deep dive into Capri Holdings' free cash flow reveals a compelling narrative that warrants careful consideration. We will examine the company's financial performance, dissect its FCF generation capabilities, and ultimately assess whether the current market valuation accurately reflects its intrinsic value.
My Michael Kors Valuation (NYSE:CPRI)
My valuation hinges on the discounted cash flow (DCF) model, specifically employing the free cash flow to the firm (FCFF) method. This approach focuses on the cash flows available to all providers of capital – debt and equity holders. The core of the valuation lies in forecasting future FCFF, discounting them back to their present value using an appropriate discount rate, and summing these present values to arrive at an intrinsic value for the firm.
The accuracy of this valuation rests heavily on the accuracy of the FCFF projections. These projections, in turn, depend on several key assumptions, including revenue growth rates, operating margins, capital expenditures, and working capital requirements. We will delve into these assumptions later in the analysis, acknowledging the inherent uncertainties involved in long-term forecasting. The discount rate, typically the weighted average cost of capital (WACC), reflects the risk associated with the investment in Capri Holdings. A higher WACC implies a higher discount rate, leading to a lower present value and a lower intrinsic value.
Capri Holdings (ex Michael Kors)
It's crucial to acknowledge that Capri Holdings is more than just Michael Kors. The company also owns Versace and Jimmy Choo, diversifying its portfolio and impacting its overall free cash flow generation. While Michael Kors remains the largest contributor, the performance of Versace and Jimmy Choo significantly influences the company's overall financial health and future prospects. Therefore, a comprehensive valuation must consider the synergies and individual performance of each brand within the Capri Holdings umbrella. Analyzing the individual free cash flow contribution of each brand allows for a more nuanced understanding of the overall company's FCF profile. This segmentation will help us understand potential risks and opportunities associated with each brand and their respective impact on the overall valuation.
Michael Kors (CPRI) Financial Ratios
Analyzing key financial ratios provides crucial insights into Capri Holdings' financial health and its capacity to generate free cash flow. Key ratios to consider include:
* Free Cash Flow Margin: This ratio (FCF/Revenue) indicates the efficiency of the company in converting revenue into free cash flow. A higher margin suggests better operational efficiency and stronger FCF generation. Trends in this ratio over time are particularly informative, revealing whether the company is improving or deteriorating its FCF generation capabilities.
* Return on Invested Capital (ROIC): ROIC measures the return generated on the capital invested in the business. A higher ROIC suggests efficient capital allocation and superior profitability. Analyzing the relationship between ROIC and FCF generation highlights the effectiveness of the company's investment strategies.
* Debt-to-Equity Ratio: This ratio reflects the company's financial leverage. A high debt-to-equity ratio can increase financial risk, potentially impacting the company's ability to generate and maintain consistent free cash flows. The interest expense associated with high debt levels can significantly reduce FCF.
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