Wall Street often seems dominated by cold, hard financial metrics: profit margins, revenue growth, price-to-earnings ratios, and other indicators. But those numbers don’t tell the whole story, Evan Clark says in his analysis for WWD. Investor sentiment plays an equally powerful role in stock market performance.

For Capri Holdings, the parent company of Michael Kors, Versace and Jimmy Choo, investor sentiment has been anything but favourable, however. The company has been through a tumultuous period as it awaited the completion of a buyout by Tapestry Inc., a deal that ultimately fell through. Reflecting that uncertainty, Capri’s stock price has plummeted. But a recent shift in investor sentiment may be a turning point.

Capri shares rose 7.9 percent on Monday, closing at 21.88 dollars, bringing its market cap to 2.6 billion dollars. The rally follows an upgrade from BMO analyst Simeon Siegel, who rated the stock as “outperform” with a 31 dollars price target. That outlook, which is much more optimistic than what has been seen so far, suggests that Capri’s potential is undervalued, especially after its share price has fallen 60 percent over the past year, in stark contrast to the S&P 500’s 24.7 percent gain.

A change of feeling

Unlike most rating upgrades, Siegel’s optimism isn’t driven by immediate improvements in Capri’s performance, Yahoo Finance notes. Rather, it reflects untapped potential and a belief that market pessimism has been excessive. “Capri deserves the attention of management and investors,” Siegel said. “It has regained the attention of the former; the latter should follow.”

Capri CEO John Idol has been proactive in addressing the challenges. Following the failed acquisition, Idol outlined strategies to revitalise the company’s three flagship brands and even took over as CEO of Michael Kors. Additionally, Capri reportedly hired Barclays to explore selling Versace and Jimmy Choo, signaling a strategic pivot.

Straighten the bar

Although Capri’s finances remain under pressure — revenue fell 16.4 percent to 1.1 billion dollars in the fiscal second quarter — Siegel pointed to unique circumstances behind the decline. He attributed the drop to post-deal distractions rather than brand saturation, a common problem in the industry. “Turning the lights back on,” Siegel noted metaphorically, could unlock significant opportunities.

For example, Capri's inventory levels have been significantly reduced, avoiding the inventory overhang issues that often plague overstocked brands. This positions the company to rebound as soon as focus and effort are fully restored.

Reduce debt and reveal value

One of Capri’s most pressing challenges is its debt load, with net debt representing about 62 percent of the company’s market capitalisation, or 12 to 13 dollars per share. By the end of the fiscal year, Capri plans to reduce its net debt from 1.5 billion to 1.2 billion dollars. Siegel noted that reducing that burden, whether through asset sales or improved cash flow, could significantly boost the company’s stock market value.

A segmented analysis of Capri’s business reveals hidden value. Even under conservative projections, Michael Kors, Capri’s largest brand, could generate EBITDA (earnings before interest, taxes, depreciation and amortization) of 500 million to 550 million dollars next year, despite an anticipated decline in revenue to three billion dollars. If Michael Kors were valued at six times its EBITDA, the brand alone could be worth 2.5 billion dollars.

Surprisingly, this valuation implies that Capri shareholders currently assign a combined value of just 740 million dollars to Versace and Jimmy Choo, brands the company acquired for 2.1 billion dollars and 1.2 billion dollars, respectively. Selling these luxury brands could not only help Capri reduce its debt, but also allow it to focus more on reviving Michael Kors, offering shareholders significant upside potential.

A way forward

While Capri's transformation is far from complete, Siegel's analysis highlights the company's potential. Just like financials, sentiment can change — and Capri's recent stock performance suggests investors are finally starting to take notice.

This article originally appeared on FashionUnited.FR. It was translated to English using an AI tool called Genesis and edited by Rachel Douglass..