Tapestry Has Slight Stumble in Q4 as North American Sales Sag
After a string of strong earnings, Tapestry Inc. hit a bump in the road in the fourth quarter as softer consumer demand in North America and a challenging currency exchange rate took a bite out of business.
The New York-based owner of Coach, Kate Spade and Stuart Weitzman on Thursday reported lower-than-expected results for the fourth quarter and year and also forecast profits and sales for fiscal 2024 below estimates. The numbers come shortly after the company agreed to acquire Capri in a deal valuing the business at $8.5 billion.
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Tapestry now expects adjusted earnings in the range of $4.10 to $4.15 per share in fiscal 2024, compared to estimates of $4.24, and net sales of around $6.9 billion, compared to analysts’ estimate of $6.93 billion. This represents an increase of approximately 3 to 4 percent in sales over the prior year. North America is expected to rise slightly next year.
Although international sales grew 13 percent, the picture was not as pretty in North America, where sales fell 8 percent in the fourth quarter and 2 percent in the fiscal year “amid the softer consumer demand environment,” the company said. But Tapestry also pointed to “a sequential improvement in revenue trends quarter-to-date in the first quarter of fiscal ’24 with sales in line with the prior year.”
For the quarter ended July 1, Tapestry posted net income of $224 million, or 95 cents a share, up from $189 million, or 75 cents a share, in the prior year. Analysts polled by Factset forecast 97 cents per share.
Sales fell to around $1.62 billion, from $1.625 billion a year ago. Wall Street estimated $1.653 billion.
Even so, there were some bright spots, particularly in Asia where sales rose 50 percent in Greater China and Japan in the fourth quarter.
Direct-to-consumer sales also grew 2 percent in the quarter, with a low-single-digit gain in stores and 3 percent for the year where brick-and-mortar sales rose in the mid-single-digits. Digital now represents nearly 30 percent of overall sales, the company said.
By brand, Coach managed to hold its own while both Kate Spade and Stuart Weitzman didn’t fare as well. In the fourth quarter, Coach’s sales rose 3 percent to $1.25 billion from $1.21 billion the prior year. However, Kate Spade’s sales dropped 10 percent to $309.5 million from $344.1 million the prior year, while Stuart Weitzman fell 13 percent to $62.6 million from $71.8 million the year before.
In the fiscal year, Coach’s sales increased 1 percent to $4.96 billion from $4.92 billion in the year ended July 2, 2022. Kate Spade’s sales fell 2 percent to $1.42 billion to $1.45 billion the year before. Stuart Weitzman was down 11 percent to $281.6 million from $317.7 million the prior year.
Tapestry’s stock rose slightly by 0.8 percent to close at $34.60 on Thursday.
Todd Kahn, chief executive officer of Coach, told WWD that he was buoyed by his brand’s performance just a year after it launched its new focus on “expressive luxury,” which now “permeates” every part of the business. This led to stronger operating margins and an improvement in gross margins. And looking to the future, the guidance that the brand provided Thursday means it will have the “highest revenue in Coach’s history.”
On the earnings call Thursday morning, Joanne Crevoiserat, CEO of Tapestry Inc., broke down the best performers, noting that small leather goods and lifestyle offerings achieved “outsized top-line gains” in the period at Coach and the company also “drove handbag AUR [average unit retail] growth globally and in North America for both the quarter and the year.”
Specifically, she said key product offerings in the Tabby, Willow, Field and Rogue businesses were introduced in the period with the Tabby shoulder bag experiencing “notable success.” In addition, extensions into small leather goods, such as a wristlet and chain clutch, proved popular with younger customers. In apparel, a washed denim jean was a success that she said “bodes well for our various denim introductions in the year ahead.” Overall, ready-to-wear achieved a mid-single-digit constant currency growth rate in the period, she noted, and the men’s category was positively impacted by the successful launch of a cross grain leather program. And the Coachtopia sustainable brand is also off to a strong start, she noted.
Scott Roe, chief financial officer, said that while Kate Spade and Stuart Weitzman didn’t deliver at the same level as Coach, the company remains committed to a long-term strategy of brand building for these businesses. He pointed to Kate Spade in particular as being impacted by the softening North American business since 80 percent of its sales are on this continent. “But the AUR grew in all channels and we continue to invest in brand building for the long-term,” he said.
On the earnings calls, Crevoiserat said Kate Spade’s Knott handbag offering performed the best globally, followed by an expanded Hudson offering and the Sam bag. In fiscal 2024, she said the core handbag grouping will be strengthened along with jewelry, and marketing will be a priority along with growth in China where 10 stores are expected to open next year.
Turning to Stuart Weitzman, she said the low pumps and booties continue to perform, led by the SoHo and Stewart collections. In fiscal 2024, an expanded sneaker assortment will be launched in the second quarter as well as new offerings of flats. Growth in China, a region that accounted for nearly 40 percent of sales in 2021, will also be prioritized next year, she added.
Overall, Crevoiserat focused on the more positive news of the reporting period, noting: “We achieved record EPS this fiscal year, reinforcing the power of brand building, consumer-centric strategies and disciplined execution. We drove revenue gains at constant currency, significant gross margin expansion, and double-digit EPS growth despite a rapidly shifting backdrop. Importantly, we meaningfully advanced our strategic priorities, engaging with consumers around the world through product excellence, unique storytelling and distinctive omnichannel experiences. At the same time, we continued to invest in our brands and our data-rich customer engagement platform, which underpin our growth agenda.”
She also pointed to last week’s deal to acquire Capri Holdings Ltd., parent of Michael Kors, Jimmy Choo and Versace, as key to the company’s future success. “By bringing together six iconic brands with a heritage and design and craftsmanship and leveraging our modern consumer engagement platform, we will drive greater innovation, consumer connectivity and cultural relevance creating superior value for our consumers, employees, communities and shareholders around the world,” she said.
Roe echoed that sentiment, adding that the logic of the acquisition “is obvious to almost everybody.” He pointed to Capri’s strength in Europe that will help build on Tapestry’s historic strengths in the U.S. and Asia, and noted that the acquisition will be “very compelling financially and immediately accretive to earnings.”
For the year, net income was $936 million, with earnings per diluted share of $3.88. This compared to reported net income of $856 million and earnings per diluted share of $3.17 in the prior year. Operating income was $1.17 billion, while operating margin was 17.6 percent, figures that were negatively impacted by foreign exchange headwind of approximately 120 basis points. This compared to reported operating income of $1.18 billion and operating margin of 17.6 percent in the prior year. Sales for the year dropped slightly to $6.66 billion as compared to $6.68 billion in the prior year.
Even so, the reaction from analysts was not overwhelmingly positive. Neil Saunders, managing director of GlobalData, said in a report Thursday: “Tapestry has come down to earth with a bump,” citing the “retrenchment among shoppers” in North America that “has not reached the luxury end of the market.” He said Tapestry is “particularly exposed as it plays it a space between high-end accessible luxury, so is more susceptible to the cuts from pressured middle-income consumers than many other luxury brands.”
He pointed to Coach as “the star performer” in the period and attributed it to the fact that handbags and accessories are “a bit more insulated than the clothing market” from the luxury downturn. But Kate Spade and Stuart Weitzman are “going backward,” he said, noting that both brands are “more exposed to the challenged North American market” and their new collections “did not inspire the consumer in the way previous seasons have done.”
He also took a wait-and-see attitude about the Capri acquisition, concluding: “Tapestry is a solid business but in a tightening environment the question of where growth will come from inevitably gets raised. The answer is from the acquisition of Capri. Tapestry will hope that by applying its playbook to brands like Michael Kors, it will be able to deliver gains on the top and bottom line. This is a fair view. However, the price being paid, and the debt being taken on to fund the deal are both issues Tapestry will need to grapple with once the merger takes place.”
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