Tapestry Inc. swung to the red in the third quarter, hemorrhaging $677.1 million after widespread COVID-19 store closures choked off much of its revenue stream. The owner of the Kate Spade, Coach and Stuart Weitzman brands is also slashing jobs at corporate and at stores, an attempt to help stem the bleeding.
In a Nutshell: It was not a good quarter for the accessories firm as the coronavirus pandemic spread to North America and forced temporary store closures, separate from the impact it already felt from traffic declines globally that began in early February as virus outbreaks began first surfacing overseas. The accessible luxury firm began taking actions last month to mitigate the impact, such as reducing its capital expenditures by delaying or canceling new store openings. It also drew down $700 million from its $900 million revolving credit facility, and the company suspended its quarterly dividend and share repurchase programs. And while the firm attempted to keep store associates on payroll through May 30, which is longer than many other firms, that strategy might not suffice. Associates at stores that don’t reopen June 1 will be furloughed.
Tapestry will be “substantially” reducing its corporate payroll with cuts affecting corporate and retail store roles, chairman and CEO Jide Zeitlin said during a conference call to Wall Street analysts Thursday morning. The firm expects to take a fourth-quarter charge of between $55 million and $70 million, mostly due to cash severance costs.
The CEO said 90 percent of its Mainland China stores were reopened by mid-March and that all remaining locations in the region are now operating, on top of five brick and mortars in Germany and Austria. In North America, Zeitlin said Tapestry plans to reopen 40 stores Friday with contactless curbside delivery or storefront pickup service only, depending on mall configuration. Store reopenings will occur on a location-by-location basis, Zeitlin added.
Tapestry is following a reopening “playbook” similar to what its retail peers are doing, and groups like NRF recommend. Dressing rooms will be retrofitted to ensure sufficient spacing between shoppers, new signage encourages social distancing, and in-store traffic limitations will be enforced. The company will also distribute masks for use in the stores and offer contactless payment technologies.
Zeitlin said the company’s supply chain, a globally diversified manufacturing and sourcing base that includes its raw materials and service providers such as Spanish tanneries, is “in good order.”
The quarterly results marked Tapestry’s “first adjusted earnings loss in 20 years as a public company,” Zeitlin said, noting the company has “never experienced [a period] when 90 percent of the store fleet was closed or [operated under] limited hours.”
E-commerce was a bright spot during a rough period and “we leaned into it,” Zeitlin said, adding that the Kate Spade team made a bigger push in digital, including testing “Zoom shopping parties.”
Net Sales: Net sales dropped 19.4 percent to $1.07 billion from $1.33 billion. The company declined to provide comparable store sales, as those figures at U.S. retail doors were impacted by the temporary store closures that began in mid-March. Gross margin for the quarter was 57.4 percent, down from 68.8 percent in the year-ago quarter.
The company said it is “tightly managing inventories by reflowing late spring and early summer product introductions and canceling inventory receipts for late summer/early fall 2020,” a move that saves more than $500 million in working capital.
At Coach, net sales fell 20 percent to $772 million. China still represents the brand’s largest growth opportunity. Tapestry is assessing its global store fleet and holding individual stores to a higher level of profitability.
For Kate Spade, net sales were down 11 percent to $250 million. The focus on novelty and color remains central to the brand as the leadership team continues to focus on community and the customer.
Tapestry still believes in Stuart Weitzman’s long-term potential, despite the 37 percent drops in net sales to $51 million. The brand’s team is now focused on three key areas for its assortment mix: boots, espadrilles and sandals. The team is also evaluating buy online and pickup in store services.
Earnings: The company swung to a significant $677.1 million loss, or $2.45 a diluted share, from earnings of $117.4 million, or 40 cents, a year ago. On an adjusted basis, the net loss was $76 million, or 27 cents a diluted share. The consensus estimate among Wall Street analysts was a loss of 11 cents a diluted share, according to Yahoo Finance.
The company did not provide a fiscal 2020 outlook, nor one for the fourth quarter, citing the inability to accurately project estimates due to the nature of the COVID-19 crisis and lack of visibility.
Tapestry is also in negotiations over rent concessions with major U.S. landlords.
CEO’s Take: “We are fast tracking the [collections] already underway prior to COVID-19… We do not know how long this pandemic will impact us, but the world will be different on the other side,” Zeitlin said. He noted that consumer trends are changing, along with their digital experiences. Looking ahead, Tapestry expects “the brick-and-mortar share versus digital to move to greater parity,” he added.
Zeitlin ended the conference call by noting the loss of one of Tapestry’s craftsman, an etching expert in the Coach leather goods workshop. “He was described to me by a colleague [of his] as a hardworking, humble man…always smiling and never any drama. That’s as honorable a way to live one’s life as one could live,” Zeitlin said.