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Investors Punish Tapestry Shares on Q2 Miss, Lowered Guidance

Investors weren’t happy with Tapestry’s second-quarter earnings results, which missed Wall Street’s adjusted earnings per share and revenue expectations.

While Tapestry’s results may not have been what Wall Street expected, it wasn’t a total disaster either, given the return to sales growth of the Stuart Weitzman brand after working through its supply chain issues, and the expected merchandise transition to a new design team led by Nicola Glass for the Kate Spade business.

And although the Coach brand posted a comparable-store sales gain on top of last year’s positive comps growth, it did underperform in the quarter. Moreover, investors were not thrilled with the revision in adjusted diluted earnings per share for fiscal 2019, which resulted in a lowering of guidance for the year.

Shares of Tapestry fell 17.1 percent to $32.58 in mid-morning trading Thursday on the Big Board at 10:44 a.m.

For the three months ended Dec. 29, net income more than doubled to $254.8 million, or 88 cents a diluted share, from $63.2 million, or 22 cents, a year ago. On an adjusted basis, diluted EPS was $1.07, flat to adjusted diluted EPS in the year-ago quarter. Net sales inched up 0.9 percent to $1.80 billion from $1.79 billion.

Wall Street was expecting adjusted EPS of $1.11 on revenues of $1.86 billion.

Victor Luis, chief executive officer, said, “During the second quarter, our sales and gross profit rose, successfully anniversarying the strong holiday results of the prior year. That said, this performance fell short of our expectations in the face of an increasingly volatile macroeconomic and geopolitical backdrop.”

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He explained that the company was able to generate “meaningful synergies from the integration of Kate Spade, and made material systems and strategic brand investments across our portfolio.”

On a GAAP basis, the consolidated balance sheet showed that gross profit was $1.20 billion, while gross margin was 66.8 percent, higher than the $1.18 billion in gross profit and 65.9 percent in gross margin from the year-ago period. Selling, general and administrative expenses were $823 million, or 45.7 percent of sales, down from $830 million, or 46.5 percent of sales, a year ago. Operating income totaled $381 million, while operating margin was 21.1 percent. That’s compared with $346 million in operating income a year ago, and 19.4 percent operating margin.

At Coach, the brand posted a 1.6 percent gain in net sales. Gross profit was $860 million, while gross margin came in at 68.9 percent. That’s compared with $846 million in gross profit for the year ago period, and 68.8 percent margin.

Luis said of the brand, “We drove outperformance in our international markets and across our e-commerce platforms. Further, we achieved operating income growth through an increase in gross margin and expense leverage.” He noted that Coach hosted its first runway show in Shanghai, which was well received and garnered “over one billion impressions.” He said the brand saw “increased traction with Chinese consumers globally driven by domestic demand, partially offset by a decline in tourist spend.”

As for Kate Spade, the brand saw a net sales decline of 1.6 percent to $428 million, while comps fell 11 percent. Gross profit was $272 million compared to $257 million the prior year, and gross margin was 63.9 percent compared with 59.1 percent a year ago. Kate Spade & Co. was acquired in 2017 for $2.4 billion by Coach Inc. Later that year, Coach renamed itself Tapestry Inc. to reflect the new holding structure for its three brands.

Luis said the company has progressed on its integration efforts, including the deliberate pullback in wholesale disposition. While store comps were below company expectations, that was impacted by the “lack of distinctive newness in the final collections” from the prior design team. He said initial reads to the inaugural collection from [creative director] Nicola Glass have been strong, “underscoring our confidence in achieving a significant inflection in the business with a return to positive comps.”

At the Stuart Weitzman brand net sales rose 2.5 percent to $124 million. Gross profit was $71 million, while gross margin was 57.3 percent. That’s compared with $73 million in gross profit a year ago, and 60.8 percent gross margin.

Luis said trends have been improving in the business, and the company “achieved our objective of returning to topline growth. Looking ahead, we will focus on the brand’s core attributes and values of fusing fashion, function and fit, supported by a bold new marketing campaign, and the relaunch of our Stuart Weitzman Essentials offering.”

Given second-quarter results, and with an eye to the “uncertain global environment,” Luis said the company was revising adjusted diluted EPS for fiscal year 2019 to between $2.55 and $2.60. That’s lower than the prior estimate of between $2.75 to $2.80 in October when the company posted first-quarter results. Revenues were guided to an increase at a low-to-mid-single digit rate from fiscal 2018.

“Importantly, we remain confident in our long-term roadmap. We are focused on harnessing the power of our multi-brand model, unlocking the full potential of our strategic investments in our brands and operating platform, to drive a return to double-digit operating income and earnings per diluted share growth in fiscal 2020,” the CEO said.