Kate Spade Integration Weighs On The Margins For Tapestry

COH: Coach logo
COH
Coach

Tapestry Inc., formerly known as Coach Inc., reported its first quarter earnings (three months ended September 2017), wherein a rise in revenues was seen that came in below expectations, amid a decline in sales of its largest division. The company cited the hurricanes and typhoons in North America and Asia, and a shift in the timing of a Chinese holiday as reasons for the fall. The comparable sales for the Kate Spade brand also fell as the company reduced the number of flash sales and pulled out its merchandise from struggling department stores. The gross margin took a beating as a result of the costs associated with the integration of Kate Spade into Tapestry.

On the positive side, the earnings of the company came in 8 cents per share above expectations, at $0.42. The company also stated that it had returned to growth thus far in the second quarter and maintained its full year guidance, reflecting a 30% growth in revenues, and a 10% to 12% improvement in the earnings. Moreover, the company now expects synergy savings in FY 2019 to come in at $100 to $115 million, higher than the $50 million anticipated earlier.

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We have a $51 price estimate for Tapestry (Coach Inc), which is over 17% higher than the current market price.

Kate Spade Progress

  • Similar to the steps undertaken for its Coach brand, Tapestry is curtailing the number of promotional sales online, as well as reducing its wholesale disposition. This resulted in a 3% fall in brick-and-mortar comps and 9% decline for the brand as a whole.
  • The company has identified Japan, the second largest handbag market in the world, as a key market for the brand. While Kate Spade already has a presence there, it is deemed to be underpenetrated. Furthermore, the initial response to the brand in the UK was positive, with significant growth potential available in China, where steps need to be taken to grow the brand awareness.
  • Tapestry has undertaken a review of its store fleet and in this regard, it opened five new stores and closed four in the first quarter.
  • The company incurred integration costs of $188 million in the first quarter alone. This coupled with some inventory issues and the reduced margins for the Kate Spade brand pressured the margins for Tapestry. For the full-year, the company expects the integration charges to total $230 million. Hence, the margin pressure should ease as the year progresses.

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