By Capri Holdings (CPRI) stock price has suffered a harsh reversal and is on track for the third consecutive week of decline after its acquisition bid failed. It dropped to a low of $19.45, its lowest level since October 2020, and 73% below its highest level in 2023.
Tapestry and Capri Holdings deal
The main reason why the Capri Holdings stock price has imploded is that the FTC won a legal challenge for its proposed merger with Tapestry, the parent company of Coach, Kate Spade, and Stuart Weitzman.
In a filing, Capri said that it would file the court ruling to the Court of Appeals after a court gave a preliminary injunction to block the merger transaction. When blocking the merger, Judge Rochon said:
“The evidence reflects that Tapestry perceived the acquisition of Michael Kors to be an opportunity to decrease Michael Kors’s discounting and increase Michael Kors’s prices.”
I believe that the FTC has made a strong case for blocking the merger because it demonstrated that the two companies offer “affordable luxury” products to their customers. As such, a merger could create an American monopoly in that area.
However, the companies could demonstrate that the industry is much bigger and that it is dominated by European brands like LVMH and Burberry.
My view is that Tapestry will ultimately give up on the bid and focus on building its business. Besides, the odds are significantly against the deal because of their impact on higher handbag prices.
Read more: Capri stock soars 55% on a merger agreement with Tapestry
So, what next for Capri Holdings?
Therefore, assuming that the Capri Holdings and Tapestry fails, what will happen to the former?
A look at Capri’s financials shows why it is very committed to the deal. Its annual revenues have been relatively volatile in the past few years. It brought in $5.5 billion in 2019, a figure that dropped to $4.06 billion in 2021.
Capri’s revenue then rose to $5.61 billion in 2022 and dropped to $5.16 billion in the last financial year as consumer spending eased.
Worse, its profits have also been moving in the wrong direction. It made a net profit of $822 million in 2021, followed by $616 million in 2022, and a net loss of $229 million in the last financial year.
The most recent financial results showed that its revenue continued moving in the wrong direction. It dropped by 13% to $1.07 billion, which the management blamed on soft consumer spending.
In all fairness, other big players in the luxury space like Burberry, Kering, and LVMH have reported weak financial results recently, citing softening demand in China. However, Capri’s business seems to be doing much worse than other luxury brands.
Consequently, Capri’s gross profit fell to $689 million, while its loss from operations came in at $14 million, worse than the previous profit of $48 million.
All three brands are not doing well. Versace’s revenue fell by 15.4% to $219 million, while Jimmy Choo and Michael Kors fell by 5.5% and 14.2%, respectively.
The other big issue that Capri faces is that its balance sheet is not all that good. It ended the last quarter with over $461 million in short-term debt, $374 million in lease liabilities, $1.2 billion in long-term debt, and $1.3 billion in long-term lease liabilities.
These substantially high liabilities are backed by $213 million in cash and equivalents and $902 million in inventories.
Capri stock price analysis
Capri chart by TradingView
So, what next for the Capri Holdings share price? The weekly chart shows that the CPRI share price has been in a strong bearish trend in the past few months. It recently crossed below the key support at $29.30, its lowest point on August 12.
The stock has formed a death cross pattern as the 50-week and 200-week moving averages have crossed each other.
Capri has also invalidated the inverse head and shoulders pattern, a popular bullish sign. It has also moved below the key support at $37, its lowest point in May 2022. In most periods, a double-top pattern is one of the most bearish signs.
Therefore, the stock will likely continue falling as sellers target the key support at $5.50, its lowest point on March 16. This drop implies a 73% drop from the current level.
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