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Tapestry CEO Blames Traffic Challenges for Kate Spade’s Q4 Troubles

The North American selling environment has not been kind to Tapestry Inc.’s fourth quarter, as sales at Coach, its core brand, were flat in the quarter and comparable store sales at Kate Spade were down 6 percent.

In a Nutshell: During the conference call with Wall Street analysts Thursday, Tapestry chief executive officer Victor Luis said of Nicola Glass‘ creative vision for the Kate Spade brand, [W]hile there have been some green shoots, we clearly need more time to drive an inflection to positive comps, especially given the brand’s exposure to the competitive and traffic-challenged North America market.”

Luis also said that while conversion comps at Kate Spade doors grew sequentially and were positive for the quarter, the comp result was also under pressure against both the North American retail environment and the anniversarying of a difficult comparison from a year ago from the passing of the brand’s founder.

That said, Luis noted that comps were positive in the quarter, suggesting that there were emerging positive signs from Glass’ new product offering.

According to Luis, while there was strength in the handbag offerings at Kate Spade, missing was the “breadth of choice in key silhouettes, such as wear-to-work satchels.” He also noted that some of the best-selling styles at full-price retail doors didn’t do as well when introduced into the outlet channel.

More specifically, Luis said starting in May and into June, there was “rapid deterioration in the North American environment [as] traffic declined. And especially in the outlet channel.”

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While the Kate Spade brand has a growing presence internationally, the bulk of its business is still dependent on the North American market. That’s in contrast to Coach, which has a larger international presence, in addition to its sizable North American market.

As for the fix, the CEO said the brand will launch additional updated satchels and new designs using a broader range of high-quality materials that “provide the structure, durability and functionality that the Kate Spade brand is known for.” Luis noted that there is an opportunity for the brand in crossbody styles and backpacks due to the “hands-free trend” in the market.

As for analysts’ take on Kate Spade, Morgan Stanley’s Kimberly Greenberger said the brand’s turnaround “appears long-range. We wonder if the Kate Spade transformation under new brand leadership has disengaged its core customer.”

Wells Fargo’s Ike Boruchow, noting that the issues at Kate Spade mean Tapestry “will not be pursuing M&A over the next 12 months,” believes that the core Coach brand should continue to support the new initiatives at Kate Spade while the company works on comp growth and margin improvement. He noted that Coach, representing 70 percent of sales for Tapestry, is “still performing well, and actually improved fundamentally from three months ago.”

Jefferies’s analyst Randal J. Konik questioned the strength of the Kate Spade brand, noting that was a point he made back when Tapestry, then Coach Inc., inked an agreement to acquire the brand in May 2017 for $2.4 billion. But he also said that the brands in Tapestry’s portfolio aren’t “high luxury,” which could create “risk for sustainable pricing power and gross margins.”

Net Sales: For the period ended June 29, net sales rose 2.0 percent to $1.51 billion from $1.48 billion.

By brand, Coach sales were essentially flat at $1.10 billion for the fourth quarter. Global comparable store sales rose 2 percent. Gross profit totaled $765 million, while gross margin was 69.7 percent, compared with year-ago figures of $762 million and 69.3 percent, respectively.

At Kate Spade, sales rose to $332 million from $312 million. But global comps fell 6 percent, compared with Wall Street’s expectations of an increase of 1.6 percent. Gross profit was $206 million, with gross margin at 62 percent. That compares with year-ago results of $203 million and 65.1 percent, respectively.

Stuart Weitzman saw sales rise to $85 million from $73 million. Gross profit was $29 million and gross margin was 33.7 percent, versus $37 million and 50.3 percent, respectively, a year ago.

Earnings: Net income fell 29.7 percent to $148.9 million, or 51 cents a diluted share, from $211.7 million, or 73 cents, a year ago. On an adjusted basis, diluted EPS was 61 cents.

For Fiscal 2020, the company guided revenues to increase in the low-single-digit rate from Fiscal 2019, with projected diluted EPS about even with the prior year. The change from prior outlook is due to an expectation for “more modest topline growth at Kate Spade in North America.”

Tapestry did note that its expects both top- and bottom-line growth at its Coach brand, and profitability improvements at its Stuart Weitzman business in fiscal 2020.

For the first quarter, revenue was projected to be slightly below prior year’s results, with Kate Spade comps guided to a decline at a “high teens rate,” given the current traffic trends.

CEO’s Take: According to Luis, “Looking ahead, we are revising our outlook for Fiscal 2020 to reflect the current trends in our business, notably at Kate Spade. We believe this is prudent, particularly in light of the uncertain environment in North America, and as we build the brand’s global awareness. That said, we understand it’s critical to act swiftly and decisively, applying our learnings to drive positive change. As part of this strategy, we are deliberately pulling back on the number of new store openings for the brand, while we seek to focus on maximizing productivity.”