Acquisition Of Kate Spade To Boost Revenues For Tapestry In The Third Quarter

Tapestry Inc. (NYSE:TPR) is slated to report its third quarter results on May 1, wherein a rise in both revenues and earnings is expected. The addition of Kate Spade is expected to provide a boost to the company’s results. A pullback on flash sales, and hence, an increased sale of full-price items, together with a reduced exposure to the wholesale channel for Coach and Kate Spade, should ease the pressure on the margins, and improve profitability. Synergies totaling $30 to $35 million, primarily related to SG&A (selling, general, and administrative expenses), are expected for this financial year, along with synergies of $100 to $115 million in FY 2019, from COGS (cost of goods sold) and SG&A. The robust performance of Tapestry up till the second quarter, as well as the anticipated benefits from the lower tax rate and interest expense, prompted the company to raise its earnings per diluted share guidance to a range of $2.52-$2.60, an increase of about 17% to 21% for the year.

We have a $52 price estimate for Tapestry (Coach Inc), which is slightly lower than the current market price. The charts have been made using our new, interactive platform. You can click here to modify the different drivers to see their impact on Tapestry’s price estimate.

Kate Spade Integration Remains On Track

• The acquisition of Kate Spade is expected to give a nice bump to Tapestry’s revenues in FY 2018, with a modest organic growth of low single digits to be boosted by $1.2 billion of revenues from the acquired company.
• Kate Spade has had great success with the millennial customers, who have been the driving force behind the high growth rates the company has achieved. Approximately 60% of Kate Spade’s clientele are millennials, compared to just over 30% for Coach. Hence, this acquisition would give Tapestry access to a younger clientele.
• Tapestry has been curtailing the number of surprise sales and pulling back on its wholesale channel for the Kate Spade brand, similar to the steps it has taken for Coach, to ease the pressure on the margins. This factor resulted in a 7% drop in Kate Spade’s sales in the second quarter.
• Tapestry is also taking operational control of the Kate Spade joint venture from Mainland China, Hong Kong, Macau, and Taiwan, an area which has been generating strong results. This step would give Kate Spade an additional 50 stores. The success of Coach in the region gives the company an immense opportunity to leverage its relationship with suppliers and distributors for the Kate Spade brand.
• Furthermore, the brand has significant potential to grow internationally, where it does not have much of a presence. One key market identified has been Japan, the second largest handbag and accessory market in the world, where the brand is present currently, but is underpenetrated. Growth opportunities also exist in markets such as China and Europe. Tapestry expects 20 to 25 net openings for Kate Spade in FY 2018.

Return To Positive Growth In North America For Coach

• Tapestry has been working hard to transform the Coach brand in recent years, in the wake of market share loss to Michael Kors and other rivals, who also employed the former’s strategy of selling luxury products at affordable prices.
• The company hired designer Stuart Vevers, who introduced higher-end products, and undertook to remodel the stores into a new luxury format, with such stores noting especially strong growth.
• The retailer has also recruited Selena Gomez to be their new face, in order to appeal to the younger shoppers.
• Tapestry has also rationalized its department store distribution, taking its door count down by 25% to just over 750 by end of FY 2017 (year ended June 2017).
• Promotional events in the channel, in terms of days on sale, were also reduced by 20% in the second quarter. While this factor reduced wholesale revenues, it encourages greater sales of full-price items, which will logically improve the margins.
• As a result of the aforementioned steps, Coach brand sales were up 2% in Q2, with sales driven by an improvement across all productivity metrics- traffic, ticket trends, and conversion.
• Tapestry also launched its platform called Coach Create in the second quarter, which allows clients to customize their bags either online or in 36 stores. Moreover, in about 35% of its direct retail fleet worldwide, Coach offers monogramming. Coach intends to extend its Coach Create platform to over 250 stores globally, or about 40% of the direct retail store base, by the end of the year.

See our complete analysis for Tapestry here