Following second-quarter results that exceeded expectations, an uptick in gross margins and a growing younger customer base, Tapestry Inc. was in a position to raise its guidance for Fiscal Year 2023.
In a Nutshell: “We outperformed expectations,” Tapestry CEO Joanne Crevoiserat told Wall Street analysts during a Thursday call.
Fashion innovation helped drive handbag AUR (average unit retail) gains at constant currency, including growth in North America, supported by pricing actions. Crevoiserat said there’s opportunity for Tapestry to raise prices, and grow AURs.
Gross margin expanded in the quarter to 68.6 percent from 68.1 percent a year ago, helped by lower freight expense of 130 basis points. And while Covid pressured results in Greater China, double digit sales increases in Europe, Japan and other parts of Asia offset those declines. Traffic trends in Greater China began improving at the start of the third quarter.
“We are seeing some green shoots with respect to domestic travel including in Macau and in Henan, which are important destinations,” Crevoiserat said, adding that international travel is still down.
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Results in North America were down slightly, but the company achieved a “higher gross margin, operating margin and profit dollars compared to both prior year and pre-pandemic levels, underscoring our commitment to brand building and operating discipline,” she said.
In addition to improved gross margins, Crevoiserat said the company “acquired nearly 2.6 million new customers in North America alone,” with nearly half of those millennial and Gen Z consumers who tend to buy more expensive product.
Tapestry’s direct-to-consumer business model now represents 90 percent of total volume. While the wholesale channel at 10 percent remains important, Crevoiserat said the DTC focus gives the company greater control in shaping its future.
Crevoiserat said Coach is focused on leather goods. In handbags, the Willow, Tabby and Rogue collections continue to perform well, while smaller bags such as the micro and mini, including the Studio Baguette and mini Tabby, resonated with Gen Z customers.
The first “Courage To Be Real” campaign video with global ambassador rapper Lil Nas X of Satan shoe fame, launched last September, has 350 million views. Coach is also using short clips on YouTube to deliver high impact brand and product stories, which has helped Coach acquire nearly 1.5 million new customers just in North America, Crevoiserat said.
“We’re also connecting with new customer segments through immersive online environments and high impact content to allow Coach’s physical world to have greater reach. This included partnerships with digital artists, 3D installations and high profile physical retail locations, and hyperlocal mobile games,” she said.
Kate Spade’s second quarter outperformed thanks to strong peak selling periods, including Thanksgiving Week and Cyber Monday in North America. The brand aims to be “more emotional, more lifestyle and more global,” Crevoiserat said. It amplified its novelty lines, offering a differentiating assortment that allowed for brand storytelling.
While the North American consumer was more value-driven during the holiday period, the brand delivered on gross margin improvement and on inventory management.
Festive sweaters and skirts for holiday and outerwear pieces focused on lifestyle, helping to fuel mid-single digit sales growth in the quarter. Evergreen styles in footwear such as boots and booties led the quarter’s performance.
“From a digital perspective we continue to diversify across social platforms, notably TikTok and YouTube, where we focused on engaging with the younger consumer,” Crevoiserat said, noting 1 million new customers in North America.
At Stuart Weitzman, a focus on tight inventory management resulted in lower off-price shipments during the quarter. Occasion wear and casual styles formed the backbone of offerings to engage a wider set of customers, while its SoHo collection, featuring the trending lug sole, saw success among younger customers.
Crevoiserat said the company was “pleased” with the consumer response to its new handbag assortment. While still small to start, top handle styles featuring AUR of over $700 resonated with both new and existing clients.
The footwear brand debuted Kim Kardashian as its new global brand ambassador, helping to “drive an improvement in customer trends, driving growth and new customers including outsized gains with millennials.”
Inventory at the end of the quarter was $976 million, up 30 percent and consistent with expectations, from $750 million a year ago. Tapestry said it remains on track to end the fiscal year with inventory up single digits versus the prior year.
Net Sales: Net sales for the three months ended Dec. 31 fell 5 percent to $2.03 billion from $2.14 billion in the year-ago quarter.
By brand, sales at its largest division Coach fell 5 percent to $1.45 billion, while Kate Spade sales were down 2 percent to $490.3 million. Significant disruptions in China due to Covid hurt sales at Stuart Weitzman, which were down 26 percent to $85.4 million.
For the six months, net sales were down 2 percent to $3.53 billion from $3.62 billion.
Earnings: Net income rose 4 percent to $329.9 million, or $1.36 a diluted share, from $317.9 million, or $1.15, in the same year-ago period. Adjusted diluted earnings per share (EPS) was $1.33.
Wall Street was expecting adjusted diluted EPS of $1.27 on revenue of $2.03 billion.
The company raised Fiscal 2023 guidance, expecting $6.6 billion of revenue on diluted EPS at between $3.70 to $3.75. Prior guidance in November when the company posted first quarter results pegged the revenue range at $6.5 billion to $6.6 billion, with EPS between $3.60 and $3.70. The new guidance, in part, presumes continued recovery in Greater China from Covid-related disruptions.
For the six months, net income was decreased 4 percent to $525.2 million, or $2.14 a diluted share, from $544.8 million, or $1.94, a year ago.
CEO’s Take: “This marks the first holiday season that all our brands were on our digital enterprise platform, which was designed to enhance engagement and simplify the customer journey,” she said. “In addition we leveraged new data analytics capabilities to optimize our product allocation processes, such as utilizing artificial intelligence to forecast customer demand and better position inventory in stores. This led to an increase of inventory availability and help to ensure our product was in the right place at the right time.”