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Coach Owner’s China Sales Plunge 32%

Tapestry, the luxury fashion house home to Coach, Kate Spade and Stuart Weitzman, brought in $1.62 billion in sales in its fourth quarter, up less than 1 percent from the prior year and 3 percent on a constant-currency basis.

Although sales climbed 7 percent when excluding the 14th week in last year’s fourth quarter, the results still came up short of initial Refinitiv projections of $1.64 billion.

Sales were held back by the Covid-19 disruptions in China, which comprised 15 percent of Tapestry’s total sales in fiscal year 2022. The market saw year-over-year sales decline 32 percent in the final quarter, despite China’s e-commerce sales increasing 10 percent.

The company’s net income was $188.8 million, on earnings per diluted share of 75 cents.

In a Nutshell: Tapestry CEO Joanne Crevoiserat highlighted the luxury firm’s global average unit retail (AUR) gains across Coach, Kate Spade and Stuart Weitzman in an earnings call, saying they reflect the company’s pricing power and the increasing traction of its product offering.

“This growth was also supported by a 40 to 50 percent reduction in SKU count and a significant pullback in promotions, as we used data and analytics to enhance our go-to-market strategies,” Crevoiserat said.

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While AUR for Coach handbags in North America declined slightly in the quarter, global handbag AUR for Kate Spade saw a low-double digit increase in the period, Crevoiserat said. For the full year, Stuart Weitzman products saw an approximate 20 percent gain in AUR.

Across all brands, Tapestry realized gross run-rate savings of approximately $300 million in the 2022 fiscal year as part of its Acceleration Program, which was designed so the company could sharpen its focus on the consumer, lead with a digital-first mindset and transform into a leaner, more responsive organization.

The savings has allowed Tapestry to increase its marketing budget to 8 percent of sales, more than doubling the 3 to 4 percent of sales marketing comprised in 2019.

Inventory at year-end was up 35 percent to $994.2 million versus ending inventory of $734.8 million a year ago. In-transit inventory was 50 percent higher, leading to longer lead times, representing the largest driver of the year-over-year increase.

According to Scott Roe, chief financial officer and chief operations officer at Tapestry, the Coach owner expects inventory to level off next year, with single-digit increases to close 2023.

Gross margin was 68.9 percent, negatively impacted by incremental freight expenses, which totaled $36 million or 215 basis points (2.15 percentage points. The prior year quarter’s gross margin was 72.2 percent. On an adjusted and 13-week comparable basis, gross margin in the prior year period was 71.7 percent.

Cash, cash equivalents and short-term investments totaled $953 million and total borrowings outstanding were $1.69 billion.

Free cash flow for the fiscal year was an inflow of $759 million, including capital expenditures and cloud computing implementation costs were $162 million versus $116 million in fiscal 2021.

Tapestry expects full-year 2023 revenue to come in at approximately $6.9 billion, which would represent an increase of 3 percent to 4 percent on a reported basis, which includes roughly 300 basis points (3 percentage points) of foreign exchange pressure. On a constant-currency basis, revenue growth is expected to be approximately 6 percent to 7 percent.

Additionally, the luxury fashion house expects earnings per diluted share of $3.80 to $3.90, representing double-digit growth compared to 2022.

For the first quarter, the company expects revenue to increase mid-single-digits in constant currency, which includes a 15 percent decline in China. On a reported basis, sales will increase “slightly,” Roe said. Earnings per diluted share are forecasted at 75 cents.

The Coach X Tom Wesselmann Collection
The Coach X Tom Wesselmann Collection Coach

Tapestry still expects 150 basis points (1.5 percentage points) of margin headwinds from the freight expenses in the first quarter, but anticipates these headwinds subsiding by the second quarter.

Net Sales: Net sales across Tapestry totaled $1.62 billion for the fourth quarter, up 0.6 percent compared to $1.62 billion in the prior year when accounting for the 2021 quarter’s added 14th week. On a comparable 13-week basis and excluding a two-percentage-point headwind from currency due to the appreciation of the U.S. dollar, revenue rose 9 percent against last year, the company said.

Coach had $1.21 billion in net sales in the fourth quarter, up 2 percent from $1.19 billion in the year-ago period and up 4 percent on a constant currency basis. When excluding the 14th week of the 2021 fourth quarter, Coach’s sales went up 8 percent.

Kate Spade generated $344.1 million, up 1 percent from $341.6 billion and up 2 percent on a constant currency basis. On a comparable 13-week basis, the brand’s sales jumped 8 percent.

Stuart Weitzman saw a 15 percent sales decline to $71.8 percent from $84.9 percent in the 2021 fourth quarter. Constant-currency sales also dipped 15 percent, while sales excluding week 14 of the 2021 fourth quarter declined 12 percent.

By region, Europe saw the largest year-over-year sales growth at 65 percent, while Japan had more than 25 percent growth. North America generated a 12 percent increase, while Greater China saw sales plummet 32 percent due to Covid-related disruptions.

The fashion company also saw high-single-digit year-over-year digital revenue gains. Direct-to-consumer sales make up 89 percent of Tapestry’s total sales, while wholesale represents 11 percent.

Tapestry’s net sales totaled $6.68 billion for the full year as compared to $5.75 billion in the prior year, representing a year-over-year increase of 16 percent on a reported basis. On a 52-week comparable basis and excluding a 50-basis-point headwind from currency, revenue rose 19 percent against last year. Compared to pre-pandemic 2019 levels, sales rose 11 percent.

Full-year e-commerce sales were approximately $2 billion, more than tripling the 2019 pre-pandemic numbers and accounting for 30 percent of total revenue.

Coach saw full-year sales of $4.92 billion, up 16 percent from $4.25 billion in the year-ago period and increasing 18 percent on an adjusted bases when excluding 2021’s 53rd week.

Kate Spade drove $1.45 billion in sales, soaring 20 percent from $1.21 billion in 2021, while adjusted sales bumped up 22 percent.

Stuart Weitzman’s full-year sales jumped 12 percent to $317.7 million from $283.2 million last year. On an adjusted basis, sales increased 13 percent.

Net Earnings: Net income was $188.8 million on a reported basis, with earnings per diluted share of 75 cents, which compares to net income of $199.8 million and earnings per diluted share of 69 cents in the prior-year period.

Adjusted net income in the quarter for the Kate Spade parent was $197.2 million with earnings per diluted share of 78 cent, up from adjusted and 13-week net income of $187 million with earnings per diluted share of 65 cents in the prior year period.

For the full year, reported net income was $856.3 million, with earnings per diluted share of $3.17. This compared to net income of $834.2 million and earnings per diluted share of $2.95 in the prior year.

On an adjusted basis, net income for the year was $936.5 million with earnings per diluted share of $3.47. This compared to adjusted net income of $816 million with earnings per diluted share of $2.88 in the prior year on a 52-week comparable basis.

CEO’s Take: “Even as we’ve come through the pandemic and all its traffic pressures, our store fleet is more profitable today than it was pre-pandemic,” Crevoiserat said. “We see opportunities to continue to improve the experience we’re delivering to consumers in that physical touch point…we’ll continue to test and learn omnichannel capabilities for our stores to deliver that experience.”