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21 February 2023

Optimism is a rare occurrence around here, I know.

But I'll try to put it to good use.

Over the past week, we've initiated several positions in our portfolio, and today I want to talk about one in particular: CAPRI Holdings (currently representing 1% of the fund).

While the name of the company might not immediately ring a bell, I'm confident that our female readers will be well acquainted with the group's brands. As for our male audience, they're likely familiar with these labels through their wives, daughters, or significant others (or even just friends!).

CAPRI owns Versace, Jimmy Choo, and Michael Kors—three entities that have merged under the CAPRI umbrella. Previously, Michael Kors stood on its own until the acquisitions of Jimmy Choo in 2017 and Versace in 2018 led to the consolidation under CAPRI Holdings.

Since 2003, the company has been managed by John D. Idol. This is crucial, as Idol is an excellent CEO - with a quality track record - and was notably behind LVMH's takeover of Donna Karan in 2001 (he was CEO at the time) when the iconic brand was in dire financial straits. So he's no stranger to complex situations, and has a proven ability to turn businesses around when the going gets tough.

Let's take a leap back in time to last week, precisely February 8th – the day of the earnings release. CAPRI's stock plummeted by 25% on the New York Stock Exchange for a simple reason: operating margins fell well below what was announced by management and anticipated by the market (from 21% to 16% year-over-year, primarily due to lower-than-expected performance in the wholesale segment).

At first glance, it might not seem like an opportunity, but in our eyes, it's an excellent investment opportunity. By breaking down the three divisions, here's what we found for the past 12 months:

Versace : Sales of $1.1 billion, operating profit of $190 million

Jimmy Choo : Sales of $650 million, operating profit of $30 million

Michael Kors : Sales of $3.9 billion, operating profit of $900 million

Applying luxury valuation metrics to Versace and Jimmy Choo (around 3.5x sales and 20x operating profit), these two brands are valued at between $4 billion and $6 billion, independently of Michael Kors. At the current stock price, this implies a valuation of only $2 billion to $3 billion for the Michael Kors brand alone (approximately 0.75x sales for the past 12 months and only 3x operating profit).

This strikes us as an extremely low price to pay, especially in view of the company's announced transition to a more direct-to-consumer (DTC) business model with higher margins. With an exceptional CEO and already factored-in negative expectations, it presents an excellent investment opportunity according to our criteria at Monocle.

It just goes to show that in these sentiment-driven markets, some gems can emerge. All you have to do is take a stroll in Paris during Fashion Week to find them!

Have a great week,

Max


Market and portfolio focus

Behaviour:

In the past week (from 2/10 to 2/17), there haven't been any significant changes in the fund or the markets.

Lines:

Capri: Initiated a 1% position in the portfolio (as mentioned above).

Alphabet: Initiated a 5% position in the portfolio. Following the recent decline in stock price, the company is trading at 20X its earnings (which historically seems quite cheap) and should offer a credible alternative to Microsoft's ChatGPT in the future. Furthermore, its dominant position in search engines provides an excellent valuation cushion.

Activision: Sold the entire position (previously representing 3.5% of the fund) following Berkshire Hathaway's sales of the stock.

Disclaimer

This presentation is a promotional document. The content of this document is communicated by and is the property of Monocle Asset Management. Monocle Asset Management is a portfolio management company approved by the Autorité des Marchés Financiers under number GP-20000040 and registered with the ORIAS as an insurance broker under number 10058146. No information contained in this document should be construed as having any contractual value. This document is produced for information purposes only. The prospects mentioned are subject to change and do not constitute a commitment or a guarantee. Access to the products and services presented here may be subject to restrictions for certain persons or countries. Tax treatment depends on individual circumstances. The fund mentioned in this document (Monocle Fund SICAV) is authorized for marketing in France and possibly in other countries where the law permits. Before making any investment, it is advisable to check whether the investor is legally entitled to subscribe to the fund. The risks, costs and recommended investment period of the funds presented are described in the KIDD (key investor information documents) and the prospectus, available free of charge from Monocle Asset Management and on the website. The KIDD must be given to the subscribers before the subscription. Past performances are not a reliable indicator of future performances. Monocle Asset Management cannot be held responsible for any decision taken or not taken on the basis of information contained in this document, nor for the use that could be made by a third party. The investor may lose all or part of the amount of capital invested, as the funds are not capital guaranteed.

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