What happened
Shares of luxury fashion company Capri Holdings (NYSE: CPRI) dropped like a rock on Wednesday after the company delivered quarterly results and financial guidance that fell short of Wall Street's expectations. As of 10:30 a.m. ET, Capri Holdings stock was down by a whopping 25%, pushing it below where it was trading exactly 10 years ago.
So what
Wall Street's reaction to Capri Holdings' results for its fiscal 2023 third quarter looks a little extreme when considering its top-line figure. For the period, which ended Dec. 31, the company had guided for revenue of $1.53 billion. In fact, it generated revenue of $1.51 billion -- underperforming guidance by about 1%.
The market, however, appears more concerned about Capri Holdings' deteriorating profit margins. In its fiscal second quarter, its operating margin was almost 18%, and management had guided for margins to rise to greater than 20% in fiscal Q3. In reality, its operating margin fell to 15.6% because of problems with its wholesale business.
Therefore, while revenue only marginally underperformed guidance, Capri Holdings' Q3 income from operations of $236 million was $78 million below what management's outlook had previously implied.
Now what
Capri Holdings lowered its full-year fiscal 2023 guidance Wednesday, decreasing its revenue outlook from $5.7 billion to $5.56 billion. And management said it expects the problems pressuring its operating margins to worsen in the fiscal fourth quarter, and for its operating margin to drop to 8.5%.
Capri Holdings management also provided fiscal 2024 guidance, calling for revenue of $5.8 billion and for its operating margin to rebound to 16.5%.
Given that Capri Holdings expects modest growth and improving margins in the not-so-distant future, some may feel that makes the stock look like a bargain after its sharp decline Wednesday morning. However, investors should keep in mind that this stock has almost always traded at cheap valuations over the past decade -- but the stock price is still down over that time period.
For me, I'd stay on the sidelines with Capri Holdings stock until management puts a more compelling plan in place to create shareholder value.
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Jon Quast has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
