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Tapestry’s Q3 Sales Beat Reflects Consumer, Digital Focus

Coach and Kate Spade parent Tapestry Inc. beat Wall Street estimates for its third-quarter earnings by focusing on customer wants, using digital to attract 700,000 new North American customers and driving significant growth in Mainland China.

In a Nutshell: The company has been executing on its Acceleration Program, a comprehensive strategic initiatives, as it tightened its customer focus. That led to better than expected third-quarter results for sales and earnings per share. The company also achieved sequential improvement in year-over-year revenue trends when compared to the fiscal year 2020 and 2019 periods. It also saw continued momentum digital, driving triple-digit growth versus a year ago, and improved store trends.

All three of Tapestry’s brands, including Stuart Weitzman, improved operations during the period. While Coach reported a gain in operating income, Kate Spade and Stuart Weitzman finally seemed to be turning a corner as both reported a significant narrowing of their operating losses for the third quarter when compared with year-ago results.

“Our third quarter results significantly outpaced expectations, underscoring the power of the Acceleration Program and enthusiasm for our brands. Through a sharpened focus on the consumer, we fueled new customer acquisition at Coach, Kate Spade, and Stuart Weitzman and delivered robust sales growth led by Digital and China,” said CEO Joanne Crevoiserat.

During the company conference call with Wall Street analysts, Crevoiserat said triple-digit e-commerce growth contributed about 30 percent of the Tapestry’s total revenue, led by the “ recruitment of 700,000 new customers across brands through e-commerce channels in North America. We’re continuing to capture a growing number of millennial and Gen Z customers.”

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Corporate initiatives also drove higher purchase frequency versus the prior year across all brands, she added.

We also continue to reactivate lapsed customers across the portfolio. This reflects the work we’ve done to crystallize the unique positioning of our brands, while strengthening our platform to better utilize data to support more targeted marketing campaigns,” she said. “Overall, we remain incredibly excited by the digital opportunity and the scalable Tapestry omni-channel platform we’re building. Digital is a key competitive advantage and a growth enabler for us long term, supporting both revenue growth and profit gains.”

Part of the Acceleration Program’s focus is on store optimization and profitability. “We’ve made substantial progress. In fact, the operating margin for our global bricks and mortar business exceeded pre-pandemic fiscal year 2019 levels, despite the challenging backdrop,” Crevoiserat said. “We see further opportunity going forward as we remain focused on delivering compelling omni channel experiences with both digital and stores contributing to our success. This is clearly evidenced by the ongoing strength we’re seeing in our digital channels, even as our brick and mortar business improves.”

The company has 49 net closures year-to-date, representing a net decreased of 94 stores from the prior year. The company said it remains on track to “achieve gross run-rate savings of $300 million, including gross savings of $200 million in fiscal 2021.”

Net Sales: For the quarter ended March 27, net sales rose 19 percent to $1.27 billion from $1.07 billion.

Inventory at quarter’s end fell to $700 million versus $853 million a year ago. Gross profit totaled $912 million, while gross margin was 71.6 percent. That compares with gross profit of $616 million and gross margin of 57.4 percent.

Tapestry reported triple-digit growth in digital sales versus a year ago. Crevoiserat said during the conference call that its global digital businesses was over $1.5 billion in revenue on a trailing 12-month basis, which more than doubled in size from the previous year-ago frame. Tapestry said that revenues in Mainland China skyrocketed 175 percent versus fiscal year 2020. From a pre-pandemic standpoint, the revenue in Mainland China was up 40 percent compared to fiscal year 2019.

By brand, Coach net sales rose 25 percent to $964 million, representing a return to pre-pandemic revenue levels, the company said. Gross profit was $718 million and gross margin was 74.5 percent. Gross profit a year ago was $476 million, while gross margin was 61.6 percent. The brand reported operating income of $251 million, compared with $38 million in operating income a year ago. Crevoiserat said gross margin expansion was achieved through “deliberate actions as anticipated we significantly reduce the number of SKUs in our offering across channels, providing more focused impactful assortments and clear messages to consumers. Importantly, we also continue to be disciplined in our approach to promotions, consistent with our strategy we’re shifting the customer’s focus to the value attributes and quality of the Coach product.”

For Kate Spade, net sales increased 1 percent to $252 million, reflecting a decision to pullback in lower margin wholesale disposition sales. Gross profit for the period was $160 million, while gross margin was 63.5 percent. A year ago, gross profit was $123 million, while gross margin was 49.1 percent. The brand posted an operating loss of $9 million, versus and operating loss of $91 million in the comparable year-ago quarter. In addition to the introduction of a novelty assortment that resonated with customers, the brand’s team was able to leverage data to inform on assortment breadth and pricing strategies. That led to a reduction of stock-keeping unit counts by over 40 percent, Crevoiserat noted.

Stuart Weitzman saw sales rise by 13 percent to $57 million. Gross profit totaled $34 million, while gross margin was 58.9 percent. That compares with gross profit of just $18 million and gross margin of 35.4 percent in the year-ago period. The brand lowered its operating loss to $18 million from $531 million a year ago. Stock-keeping unit count was reduced by over 50 percent globally for the brand, which drover higher productivity and clear messaging to consumers. Digital revenue rose over 50 percent compared to last year, the CEO said. China remained a significant area of growth for the brand, and the quarter’s performance in the country was driven by growing sales among new and younger customers, the CEO said.

For the nine months, net sales fell 3 percent to $4.13 billion from $4.25 billion.

Earnings: For the quarter, net income was $91.7 million, or 32 cents a diluted share, against a net loss of $677.1 million, or $2.45, a year ago. One-time charges in the quarter include $46 million on a pre-tax basis connected to store assets due to the pandemic and $20 million, also on a pre-tax basis, connected to costs in implementing certain strategic initiatives, including severance pay.  On a non-GAAP basis, adjusted earnings per diluted share was 51 cents, versus 27 cents a year ago.

Wall Street was expecting adjusted diluted earnings per share of 31 cents on revenue of $1.22 billion.

The company said it wasn’t providing detailed guidance for fiscal 2021 because of Covid-19 and the lack of visibility. Because of better-than-expected results year-to-date, and presuming a continued recovery, the company guided revenue expectations to rise in the mid-teens rate and said it expects earnings per share to increase as well.

For the nine months, net income was $634.4 million, or $2.25 a diluted share, against a net loss of $358.3 million, or $1.28, in the year-ago period.

CEO’s Take: “Building on this momentum, we are increasingly optimistic about our ability to generate sustainable top and bottom-line growth. Looking forward, while the environment remains volatile, we see encouraging signs of recovery as vaccination efforts progress, resulting in increased consumer confidence, strong demand for our categories, and improving in-store traffic trends,” Crevoiserat said. “In this context, we remain focused on driving brand relevance and customer engagement through product innovation and compelling marketing, supported by data-driven insights and a digital-first mindset. We will also continue to lean into our competitive advantages, including our globally diversified, direct-to-consumer model, and distort investments to high-growth opportunities. We are confident that our clear, consumer-centric strategy, powerful brands, and differentiated, scalable platform uniquely position us to capture market share at higher levels of profitability.”