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Digital and China Bolstered Tapestry’s Q2

Tapestry Inc.’s second quarter results show that initiatives from its Acceleration Program are bearing fruit, fueled by sales gains in digital and China.

In a Nutshell: The parent company to Coach, Stuart Weitzman and Kate Spade said its initiatives helped achieve “significant sequential improvement in revenue trends across all brands, led by North America.”

In addition, Tapestry saw triple-digit e-commerce growth versus the prior year, with digital about one-third of global sales, with nearly half that revenue in North America. The company recruited over 1.5 million new customers in North America across its brands through its e-commerce channels. Tapestry said it delivered triple-digit digital growth by expanding its network through added fulfillment capacity and the diversification of parcel carrier partnerships.

Revenue grew over 30 percent on a year-over-year basis in Mainland China, the company said. That growth was helped by its Coach brand, which was the number one ranked brand in the handbags, luggage and leather goods category during the 11.11 Global Shopping Festival on the Tmall Luxury Pavilion.

The company has been using new data and analytics tools to drive decision making to optimize Tapestry’s marketing messaging, assortment planning and promotional levels.

“Our results significantly outpaced expectations driven by the successful execution of our Acceleration Program,” Joanne Crevoiserat, CEO, said. “Importantly, for the second consecutive quarter, we generated strong operating income growth supported by a reduction in promotional activity and higher [average unit retail], as well as disciplined inventory and expense management. Further, we delivered this profit growth in the face of unprecedented Covid-related external headwinds, including pressured bricks and mortar traffic, store closures and capacity limits, as well as higher freight costs and shipping constraints.”

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In a call to Wall Street analysts, Crevoiserat said the company’s sharpened focus on the consumer fueled new customer acquisitions across all brands.

“Digital growth is a key enabler,” she said noting that operating profits are higher than from sales in the brick-and-mortar channel. She also said that the sharper focus on the consumer and digital allows the company to become a leaner and more responsive organization.

Net Sales: The company said net sales for the quarter ended Dec. 26 fell 7 percent to $1.69 billion from $1.82 billion.

By brand, Coach’s net sales decreased 4 percent to $1.23 billion, while gross margin was 72.5 percent. Crevoiserat said the brand, which celebrates its 80 anniversary this year, is shifting the consumer focus on product to its “value” attributes.

Net sales for Kate Spade were down 13 percent to $376 million, reflecting the decision to pull back on lower margin wholesale disposition sales, the company said. Gross margin for the quarter was 62.1 percent.

The brand in the quarter “leaned into fundamental elements that we know our customers value,” Crevoiserat said, noting that Kate Spade was rebuilding its core collection and that customers had responded well to novelty elements.

And at Stuart Weitzman, net sales fell 27 percent to $85 million, while gross margin for the quarter was 62.2 percent. She said the brand was the number one ranked footwear brand during Tmall’s 11.11 Global Shopping Festival.

Inventory at the end of the quarter was $632 million, versus $748 million a year ago.

For the six months, net sales were down 10 percent to $2.86 billion from $3.17 billion.

Earnings: Net income for the three months rose 4 percent to $311.0 million, or $1.11 a diluted share, from $298.8 million, or $1.08, in the year-ago quarter. On an adjusted basis, earnings per diluted share was $1.15.

Wall Street was expecting adjusted diluted earnings per share of $1.01 on revenue of $1.63 billion.

In the quarter, the company paid down $500 million of its $700 million revolver and free cash flow was $697 million year-to-date. The company repaid the $200 million balance last week.

The company declined to provide fiscal 2021 outlook due to the Covid-19 crisis and lack of visibility. It did note that given its better-than-anticipated results and presuming a continued recovery from the pandemic, revenue for the fiscal year could increase at a high-single digital rate on a 52-week basis and in the 10 percent range on a 53-week basis. Fiscal 2021 includes a 53rd week in its fourth fiscal quarter.

For the six months, net income spiked 70 percent to $542.7 million, or $1.94 a diluted share, from $318.8 million, or $1.13, in the year-ago period.

CEO’s Take: “As we enter the second half of our fiscal year, we are optimistic for the future in spite of the uncertain backdrop. We are listening closely to consumers and responding in real-time to changes in their values, shopping behaviors, and brand engagement. We are leaning into the competitive advantages of our platform, bringing innovation to both product and how we connect with customers. As a result, we are driving demand for our categories and stretching what’s possible for our brands,” Crevoiserat said. “Looking forward, I am confident that Tapestry will emerge from the pandemic stronger, well-positioned to both capture market share at higher levels of profitability and fully unlock the flywheel of sustainable, long-term growth.”