Tapestry (TPR; Baa2/BBB; double Neg) Capri 1Q Results

Capri has reported poor 1Q (to June) results. It has now seen 6-straight quarters of falling sales, 3 of them leading to operating losses. Reminder Tapestry agreed to acquire this co at $57/share valuing it at a EV of $8.5b. At the time it was paying 9x LTM EBITDA with expectations for Capri stand-alone to see a modest decline in headline over near term before LSD growth. Through that it assumed mid-teens EBIT margin. What we have actually seen is HSD to LDD headline falls and EBIT margin in the single digits. Poor performance & expectations has elevated the purchase price to 13x (on NTM EBITDA).

Hard to know who TPR equity holders are rooting for here; the FTC or their own mgmt. Longs in credit obviously want this closed to remove the 101 call risk. The mover for the bonds is still the prob. of deal closing, not CPRI results/stand-alone performance (moves FV on close but smaller impact). On that point Capri mgmt has reiterated the normal commitment to closing the deal (as you would expect for the troubled co). TPR earnings next week, we don't expect it to waver in public either but we are keen to see how it is doing on standalone.

• 3m to June sales was $1.07b (-12%), gross margin was 64.6% (-150bps) and adj. EBIT was $16m (-86%) at a 1.5% margin (-750bps). It's given the normal reasons for EBIT fall; gross margin pressure and SG&A deleveraging on headline fall.
• Inventory was $902m (-23%) as it does "diligent inventory management". It's somewhat reflected in positive cash trends (FCF +$40m vs. -$10m last year).
• On BS it has cash & eqv's of $213m against financial borrowings of $1.7b leaving reported net debt at $1.5b. It has another in $1.8b in lease liabilities to leave actual net debt at $3.3b.
• Co has a single $450m Nov 24 line (KORS) rated (Ba1 CW Pos, BBB- CW Pos, BBB- CW Pos) - all on CW Pos. given TPR higher rated. Falling earnings leaves leverage on consensus NTM EBITDA at 5.4x; well into HY.
• By brand largest Michael Kors (63% of group sales this qtr) fell 13% with Americas down -10%, EMEA -21% & Asia -23%. EBIT was at 11.1% margin vs. 16.5% last yr - one of the better performers on bottom line and it says margin dragged on by lower full price sell-throughs.
• Versace (20%) fell -14% driven by US & EMEA while Asia was -3%. It fell into a operating loss of -$17m. Jimmy Choo (16%) fell -4% with US up +6%, EMA down -5% and Asia a heavy -17%. EBIT margin was 2.3% down from 8.7% last year. It's saying higher store costs contributed to that.
• Again no outlook given pending Tapestry acquisition. On FTC block the normal; "Capri intends to vigorously defend this case alongside Tapestry and we look forward to the successful completion of the pending acquisition"

Equities only -3.5% in pre-market; true moves being hidden by the M&A arb's; upside on close is +84%. Hereare the prob. priced on Tuesday. We will give that a update later today (our TPR FV's will change on above).