Tapestry Inc.’s mixed first quarter results–the company beat Wall Street’s consensus estimate on earnings per share, but missed on revenue projections–plus continued execution issues at its Kate Spade and Stuart Weitzman brand, has new CEO Jide Zeitlin conducting a comprehensive business review.
In a Nutshell: The quarter’s results weren’t as bad as some analysts feared, but topline declines at Kate Spade and Stuart Weitzman are still a concern, as are decreases in operating margins for both brands. The company, however, is maintaining its annual outlook.
“Fiscal first quarter revenue was consistent with our expectations,” Zeitlin said. “Our business internationally was stronger than in North America where we managed continued industry headwinds.”
Where operations are concerned, Zeitlin, who is also Tapestry’s chairman, said the company has started an “in-depth, comprehensive and efficient review of our business to address both near-term and long-term opportunities to drive organic growth and profitability across the portfolio.” Part of this includes looking at how to improve productivity and speed-to-market.
Net Sales: For the quarter ended Sept. 28, net sales slipped 1.7 percent to $1.36 billion from $1.38 billion. Non-GAAP gross margin slipped slightly to 67.6 percent from 67.8 percent a year ago. The decrease was just 20 basis points, versus the consensus estimate in the range of down 50 or so basis points.
By business segment, the Coach brand posted a 1 percent increase in sales to $966 million, while global comparable store sales were up 1 percent. Non-GAAP operating margin inched up 30 basis points to 25 percent from 24.7 percent a year ago.
Coach posted its eighth consecutive quarter of positive comps growth led by digital and international channels. “Comps in Europe, Japan and Mainland China were strong, offsetting weakness in Hong Kong, while North America was even with prior year,” Zeitlin said.
At Kate Spade, sales fell 6 percent to $306 million, while global comps dropped 16 percent. Non-GAAP operating margin dropped 810 basis points to 6.3 percent from 14.4 percent a year ago.
The Stuart Weitzman brand saw sales fall 8.4 percent to $87 million. Non-GAAP operating margin fell 490 basis points to 11.5 percent, compared with down 6.6 percent a year ago.
“Kate Spade’s comparable store sales declined in line with expectations, reflecting the product and merchandising challenges we’ve previously identified, while Stuart Weitzman sales were negatively impacted by softer wholesale demand and continued operational challenges,” Zeitlin said.
Earnings: Net income fell to $20 million, or 7 cents a diluted share, from $122.3 million, or 42 cents, in the year-ago quarter. On an adjusted basis, diluted earnings per share was 40 cents for the quarter. Wall Street was expecting adjusted diluted earnings of 37 cents on revenue of $1.37 billion.
Tapestry expects revenues for Fiscal 2020 to increase in the low-single-digit rate from Fiscal 2019. The company also guided earnings per diluted share to be even with the prior year.
Dana Telsey of Telsey Advisory Group said EPS at even to last year would be $2.57, which is slightly better than the current consensus estimate of $2.55.
“The total sales outlook was also maintained [while the] consensus estimate currently looks for a 1.9 percent increase,” Telsey said.
CEO’s Take: Zeitlin said, “Our imperative is to fuel desire for our brands and make investment decisions through a consumer-centric lens. We are focused on becoming more agile, continuously leveraging data and technology, to increase our productivity and speed to market. These improvements will enable us to fund additional brand-building initiatives and to return capital to shareholders.”