Tapestry Inc. reported better-than-expected first quarter results and raised Fiscal Year 2022 guidance on consumer demand outpacing available inventory.
In a Nutshell: “The external environment continues to be dynamic, as consumer demand remains solid, but supply chain headwinds are constricting inventory availability,” Scott Roe, chief financial officer, said on conference call Thursday.
Tapestry took early action to secure supply and invested in freight to maintain product flow to meet strong consumer demand. The company expects external pressures and headwinds to be “most acute in Q2 and Q3.” While that will mean increased costs, Roe said the company will be able to drive continued underlying gross margin expansion through lower discounting and “price increases that will be implemented for the balance of the year across brands.”
Elevated input costs don’t reflect a “new dynamic for us,” Roe said. Factory reopenings in Vietnam, Tapestry’s largest single supply source at 40 percent, came seven weeks later than originally expected. Tapestry also secured air freight and is now seeing that production is “approaching [a] normalized level,” Roe said.
The Coach owner typically air freights or expedites just 10 percent of goods. Pricing power means the accessible luxury firm can maintain and even grow gross margins.
“The fundamental changes we’ve made to the Acceleration Program to transform Tapestry and our brands have enabled our teams to act with agility to drive highly effective customer engagement and support increasing demand,” CEO Joanne Crevoiserat said, citing the company’s technology infrastructure, globally diversified supply chain, a 90 percent direct-to-consumer model and staff all as contributors to the quarter’s results.
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“These assets coupled with our growing data and consumer insight capabilities have fueled more targeted product development, more efficient pricing and more effective marketing, all of which support accelerating revenue, higher gross margin, improving profitability, and most importantly, stronger connections with our customers,” she added.
Tapestry added 1.6 million new customers in Q1 across North America direct channels, an increase of over 20 percent growth in both stores and online, she said. Sales rose nearly 50 percent, with digital penetration now nearly four times pre-pandemic levels. In addition, Crevoiserat said the company further strengthened its positioning in China, where the rising middle class poses a significant opportunity.
Coach posted a 15 percent sales gain compared to 2019, and gross margin reached “nearly 75 percent, the highest rate in any quarter in the last 10 years.” The brand acquired over 900,000 new North American customers, and sales in China rose over 25 percent, fueled by improvements in stores and e-commerce. Coach’s men’s business also outperformed, keeping the brand on track to hit its goal of $1 billion in sales.
Kate Spade, eyeing $2 billion in revenue, acquired 650,000 new customers across channels in North America.
Stuart Weitzman outperformed in high-growth areas including digital and China, where brand revenue could grow over 25 percent from 18 percent growth in the quarter. Shifting market trends saw the brand focus more on occasion and dress footwear, and it deliberately lowered promotional activity, while implementing select price increases.
Crevoiserat said an internal survey of the North American holiday market indicates strong demand for handbags and footwear.
“We’re controlling the factors within our control, and playing offense. We’ve moved quickly and taking bold and deliberate actions to mitigate industry wide inventory constraints,” she said. “We’re also messaging to customers earlier in the holiday season to elongate the shopping period and capture demand early.”
Net Sales: For the three months ended Oct. 2, net sales rose 26 percent to $1.48 billion from $1.17 billion. Compared with 2019’s pre-pandemic levels, sales rose 9 percent in the quarter.
Sales at Coach rose 27 percent to $1.11 billion, while Kate Spade sales rose 25 percent to $299.5 million. Sales at Stuart Weitzman were up 18 percent to $66.5 million.
Earnings: Net income fell 2 percent to $226.9 million, or 80 cents a diluted share, from $231.7 million, or 83 cents, in the year-ago quarter. On an adjusted basis, earnings per diluted share was 82 cents.
Wall Street expected adjusted diluted earnings per share (EPS) of 70 cents on revenue of $1.44 billion.
For the second quarter, revenue is forecasted to grow in the “high teens,” reflecting continue momentum for Tapestry’s brands on a two-year basis. Operating income is projected to be in the same range as prior-year levels, including a projection of incremental air freight charges of $70 million for the quarter.
Looking ahead to Fiscal Year 2022, the company now expects revenue to approach $6.6 billion. That represents a mid-teens gain versus Fiscal Year 2021, and an increase from the prior outlook for $6.4 billion. Diluted EPS is now expected in the range of $3.45 to $3.50, up from prior guidance of $3.30 to $3.35.
CEO’s Take: “We’ve entered the second quarter with momentum and have proactively put in place plans to deliver for our customers this holiday season and into the new year,” Crevoiserat said.