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Tapestry Shuts China Stores, Expects ‘Minimal’ Coronavirus Supply Chain Impact

Tapestry Inc. is the latest fashion firm to quantify what it expects the coronavirus outbreak in China might mean for its accessories business, even as the company posted a second-quarter earnings report that bested Wall Street’s estimates.

In a Nutshell: The company is expecting a negative impact of between $200 million to $250 million in sales, or between 35 cents to 45 cents in earnings per diluted share, reflecting current trends in China. That also prompted the company to lower full-year guidance.

The company on Dec. 29 entered its third fiscal quarter with strong underlying trends, particularly from the Coach brand as sales growth accelerated from the holiday selling period. “Therefore, we had originally anticipated maintaining our fiscal year 2020 guidance despite continuing headwinds in Hong Kong and challenges at Stuart Weitzman,” chairman and CEO Jide Zeitlin told Wall Street analysts during a conference call Thursday.

“However, the escalating coronavirus outbreak in China is now impacting our business, resulting in both significant traffic declines and the closure of the majority of our stores on the Mainland,” Zeitlin said.

The impact could be worse, should the situation further deteriorate or affect demand outside of the country, Zeitlin cautioned, noting the company has weathered difficulties in the past.

“We are confident in our ability to effectively operate through this period of uncertainty. It is worth noting that during our 20 years as a public company, we’ve successfully faced myriad macro and geopolitical dislocations from the Great Recession in 2009 to 9/11 to SARS and to the Fukushima earthquake, and tsunami in 2011. We have consistently emerged from such turbulent periods a stronger company,” Zeitlin said.

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Tapestry’s strong balance sheet, cash position and “diversified sourcing base and supply chain affords us a flexibility to operate the company for the long term,” Zeitlin said, noting that China remains a long-term opportunity for Tapestry’s three brands.

Currently, Tapestry has a low-to-mid teens percent of its business in Mainland China across all brands, mostly dominated by Coach, and where the expectation is for a “70 percent to 80 percent decrease in those sales through the rest of the year,” chief financial officer Joanne Crevoiserat said during the call.

China’s health crisis also has a far lower impact on Tapestry’s supply chain. “We’ve already migrated the vast majority of our production outside of the country, less than 10 percent of our finished goods production is in Mainland China across all brands. More broadly, we’re looking at different scenarios, as you can imagine, as well as mitigating actions to drive top line and control or reduce expenses in light of this news,” Crevoiserat added.

In addition to the earnings report, the company also disclosed on Thursday three key executive appointments.

Liz Fraser has been named as CEO and brand president for Kate Spade; Giorgio Sarné was named CEO and brand president for Stuart Weitzman, succeeding Eraldo Poletto; and Yann Bozec was named president, Tapestry Asia Pacific.

Net Sales: For the three months ended Dec. 28, sales inched up 0.8 percent to $1.82 billion from $1.80 billion. Gross margin for the quarter was essentially flat at 66.6 percent versus 66.8 percent in the same year-ago period.

By brand, sales at Coach rose 2 percent to $1.27 billion, with global comparable store sales also up 2 percent, helped by an increase in global e-commerce sales. The comps increase represented the brand’s ninth consecutive quarter of positive comparable store sales growth. North America led the global comp gain. “In aggregate, our international business was even with the prior year with strong comp growth in Other Asia, Europe and Mainland China offsetting continued weakness in Hong Kong [and a slight sales decline] in Japan, reflecting the impact of the consumption tax increase,” Zeitlin said.

Kate Spade sales rose 0.5 percent to $430 million, although global comparable store sales fell 4 percent. Kate Spade’s comp store sales improved sequentially as the company “implemented key product and merchandising actions to strengthen the assortment and enhance the brand’s novelty offering, while also moving through excess inventory,” Zeitlin said.

Stuart Weitzman sales fell 6.5 percent to $116 million in the quarter. The footwear brand was hurt by softer demand across channels because newness was lacking in its heritage boot offering. “We have built on these learnings and are reinvigorating our footwear icons, while injecting innovation into the overall assortment in keeping with market trends,” Zeitlin said.

Earnings: Net income grew 17.3 percent to $298.8 million, or $1.08 a diluted share, from $254.8 million, or 88 cents, in the year-ago quarter. On an adjusted basis, net income was $304 million, or $1.10.

Wall Street was expecting adjusted EPS of 99 cents on sales of $1.81 billion.

For fiscal year 2020, the company expects revenues to be $5.9 billion, with diluted EPS in the range of $2.15 to $2.25. The outlook includes the estimated negative impact of the coronavirus outbreak in China. The updated guidance does not anticipate what the impact might be on the Chinese tourist in North America.

“Given the dynamic nature of the situation, the potential financial impact to our business could be materially different,” the company said.

CEO’s Take: “Our strategic intent to drive organic growth and profitability is unwavering [and there] is an opportunity to accelerate long-term growth in all three of our brands. To realize this potential, we need to become more responsive to changing consumer demands. This requires data analytics and consumer insights in all aspects of the business, from design to product development to planning and allocation to marketing,” Zeitlin said. “We bring a sense of urgency to this work and are dedicating resources to formulate and implement our strategy to drive value and shareholder returns.”

Being more responsive to consumer needs includes adopting a “very rapid test and learn set of processes that feed real-time insights back into our business to inform decision-making and to inform results, Zeitlin added. “Our objective is to leverage data and insights and anticipate where consumers are traveling and to be there when they arrive.”