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Moving ahead as an independent luxury fashion designer following the termination of its merger with Tapestry (TPR), Capri Holdings (CPRI +7%) has been hanging on by a few threads lately. Shares were sliced in half after a judge blocked TPR's takeover of CPRI in late October, citing anti-competitive concerns within the luxury apparel and accessories industry. Since then, CPRI has traded sideways, continuing to hover around late 2020 levels.

However, there might be some signs of life. After the close on Friday, reports broke that CPRI was mulling the divestiture of its Versace and Jimmy Choo brands, retaining only its Michael Kors line, which comprised around 68% of FY24 (Mar) sales. Michael Kors was also CPRI's core brand before it acquired Jimmy Choo and Versace for $1.35 bln and $2.12 bln, respectively, over six years ago.

Even though Versace and Jimmy Choo brought in a combined $1.6 bln in FY24, well below what CPRI paid for the two brands, the company may be able to fetch a decent price for these banners, given their global name recognition and combined 470 retail stores. A cash injection could help CPRI pay down its debt and allow it to focus solely on one brand.

• After CPRI announced it would terminate its merger with TPR in mid-November, the company outlined its turnaround strategy, including potentially selling Versace and Jimmy Choo. Management conceded that the last year and a half were disappointing as demand for fashion luxury goods softened considerably worldwide, with a notable decline in China. Meanwhile, management ignored the long term due to its confidence in closing on the TPR merger, leading to several missteps in its efforts to reposition its brands, particularly Michael Kors and Versace.
• Within Michael Kors, CPRI tried implementing a broad transformation strategy, aiming to appeal to younger audiences but elevated prices too quickly. At the same time, CPRI reduced its signature product offerings and inventories through promotions, which greatly impacted its average selling price.
• However, CPRI commented that it has learned from its past blunders and is enacting many new initiatives to reenergize the Michael Kors banner. First, management will be deploying a new marketing plan beginning in the spring of next year while also upping its marketing investments. Furthermore, CPRI will be rebuilding its core and signature assortments, focusing on a more balanced product mix. Lastly, Michael Kors stores will be closing over the next two years; CPRI is aiming to shutter around 75 locations while renovating approximately 150.

CPRI was firmly confident that its merger with TPR would close, given the heightened competition within the luxury apparel space. Unfortunately for the company, the deal fell through. Now, CPRI must shift its priorities, potentially focusing exclusively on revitalizing its core Michael Kors brand following the news of a possible sale of Versace and Jimmy Choo. While going back to its roots might be the best way forward, plenty of uncertainty remains. Further developments may need to shake out before investors have a firmer picture of how CPRI may look moving forward.