Tapestry Inc.’s Strong Performance Continues In The First Quarter Aided By International Expansion Of Kate Spade

by Trefis Team
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Tapestry Inc. (NYSE:TPR) posted its first quarter results on October 30, wherein a 7% improvement in revenues and a 14% increase in earnings was reported, with the metrics exceeding consensus expectations. The 4% sales growth at Coach was driven by its digital efforts, while its 21% improvement at Kate Spade was a result of new store openings and the consolidation of its China business. Moreover, a pullback on flash sales, and hence, an increased sale of full-price items, together with a reduced exposure to the wholesale channel for Coach and Kate Spade, eased the pressure on the margins, and consequently, improved profitability. This, together with the lowering of the corporate tax rate, resulted in a significant improvement of the EPS. The company achieved its synergy guidance target (from the merger with Kate Spade) of $45 million in FY 2018, and anticipates synergies of $100 to $115 million in FY 2019. For the full year, Tapestry is projecting sales to increase by a mid-single-digit rate to $6.1 billion to $6.2 billion, including low single-digit growth at Coach and double-digit improvement at Kate Spade. The retailer has upped its EPS guidance range to $2.75 to $2.80 from $2.70 to $2.80.

We have a $59 price estimate for Tapestry (Coach Inc), which is significantly higher than the current market price. The charts have been made using our new, interactive platform. You can click here for our interactive dashboard on Tapestry Inc.’s Performance In Q1 2019 And Estimating Its Fair Price to modify the different drivers to see their impact on Tapestry’s price estimate.

Factors That May Impact Performance

1. Problems at Stuart Weitzman: While the company reported a rise in sales in the segment in Q3 2018, it was noted that the brand’s supply chain in Spain was unable to handle “the level of complexity and new development.” Consequently, the company is in the process of adding infrastructure and capacity to support the brand and ensure quality on-time deliveries. As a result of this, the segment continued to face a slight disruption in the first quarter, with a return to growth projected in the second quarter of FY ’19, faster than Q3 expected earlier. The company is also aiming to increase its offerings and expand internationally, with a focus on the Chinese consumer.

2. Pullback from Wholesale Channel and Flash Sales: Tapestry has been curtailing the number of surprise sales and pulling back on its wholesale channel for the Kate Spade brand, similar to the steps it has taken for Coach, to ease the pressure on the margins. While the company will continue to hold back on the discounting in FY 2019, easier comparisons and increased full-price sales should result in double-digit growth for the brand. In the quarter, Kate Spade’s gross margin expanded 270 basis points versus the prior year, reflecting the realization of COGS synergies.

3. Acquisition of Businesses: Tapestry took operational control of the Kate Spade joint venture from Mainland China, Hong Kong, Macau, and Taiwan, an area which has been generating strong results. This step would give Kate Spade an additional 50 stores. The success of Coach in the region gives the company an immense opportunity to leverage its relationship with suppliers and distributors for the Kate Spade brand. The company also completed the buybacks of Kate Spade’s operations in Singapore, Malaysia, and Australia, as well as Stuart Weitzman’s business in Southern China. In addition, Tapestry acquired its Stuart Weitzman business from its distributor in Northern China in mid-February and completed the buyback of the Coach business in Australia and New Zealand from its distributor in early March. By controlling these businesses directly, TPR will be able to accelerate its international expansion.

4. New Initiatives: Tapestry launched its platform called Coach Create in the second quarter of 2018, which has now been extended to over 250 stores, resulting in increased volume and traction by millennials. Moreover, the brand has its monogramming service in about 50% of its global direct retail fleets. The retailer has also recruited Selena Gomez to be the new face of the Coach brand, in order to appeal to the younger shoppers. The collaboration has also been extended to ready-to-wear, which was launched in the fall.

5. International Expansion: Tapestry is aiming for expansion into areas where it feels it is underpenetrated such as Greater China, South East Asia, and Europe. To this end, TPR expects to add 60 to 70 Kate Spade stores globally in FY 2019, including those that will be acquired in Australia, Malaysia, and Singapore.

6. Return of the Logo Trend: The trend for logos had fallen out of fashion in the recent past, but this seems to be reversing now, benefiting a brand like Coach. Keeping this in mind, the company successfully relaunched its Signature pattern in Q3 2018. Coach has plans to build upon this, including an expanded range of small leather goods, which should ensure growth for the brand.

7. Industry Growth: Tapestry estimates the men’s and women’s premium handbag and accessories market, which is now over $45 billion, grew at a high single-digit rate globally in the September quarter on an organic basis, similar to the June quarter. In U.S. dollars, the growth rate was also a high single digit, although it was a slight deceleration from the prior period given the appreciation of the dollar. Moreover, the global men’s and women’s premium footwear (market size of roughly $30 billion) and the premium outerwear category ($12 billion) is also expected to have remained strong. Positive global macroeconomic factors, including strong consumer confidence, low unemployment, rising consumer spending, and stock markets near all-time highs, drove consumer demand, benefiting Tapestry’s performance. With these trends expected to continue in the near term, it may continue to aid Tapestry’s performance.

8. Lower Tax Rate: As a result of the lowering of the corporate tax rate in the U.S., from 35% to 21%, Tapestry’s tax rate in FY 2019 is expected to be about 19% to 20%, as opposed to over 33% in FY 2018. This should help in considerably improving the net income margin, and consequently, the earnings.

See our complete analysis for Tapestry here


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