Tapestry Inc.’s Shares Plunge 12% Despite Delivering A Beat

Tapestry Inc. (NYSE:TPR) reported its third quarter results (three months ended March 2018) on May 1, wherein a rise in both revenues and earnings were reported, with both metrics exceeding expectations. The revenue increase was due to the addition of Kate Spade, as well as a result of organic growth in the Coach brand. However, the comparable sales at Kate Spade fell 9% in the quarter, which can be blamed on the pullback in the wholesale channel and on online flash sales. Synergies are now expected to total $45 million in FY 2018 (from $30 to $35 million earlier), primarily related to SG&A (selling, general, and administrative expenses), along with synergies of $100 to $115 million in FY 2019. The lowering of the corporate tax rate helped in the significant improvement in the EPS. Despite delivering a beat in the quarter, the shares of the company plummeted 12% in the aftermath. This can be attributed to the higher than expected comps decline at Kate Spade, as well as weakness in the Stuart Weitzman brand. Tapestry continues to expect revenues to be between $5.8 billion to $5.9 billion and earnings per diluted share for the year in the range of $2.57 to $2.60, versus a prior range of $2.52 to $2.60. We have estimated Tapestry’s revenues to be $5.84 billion and an EPS of $2.59.

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

Factors That May Impact Future Performance

1. Problems at Stuart Weitzman: While the company reported a rise in sales in the segment in Q3, it was noted that the brand’s supply chain in Spain was unable to handle “the level of complexity and new development.” Consequently, the company is in the process of adding infrastructure and capacity to support the brand and ensure quality on-time deliveries. As a result of this, the segment will continue to face disruption in the near term, with a return to growth projected in the second half of FY ’19.

2. Pullback from Wholesale Channel and Flash Sales: 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 9% drop in Kate Spade’s comparable sales in the third quarter. This trend is set to continue in the fourth quarter as well, with the company guiding for a high single-digit decrease in comps for the full fiscal year.

3. Acquisition of Businesses: Tapestry took 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. In addition, Tapestry acquired its Stuart Weitzman business from its distributor in Northern China in mid-February and completed the buyback of the Coach business in Australia and New Zealand from its distributor in early March.

4. Partnership with Selena Gomez: The retailer has recruited Selena Gomez to be the new face of the Coach brand, in order to appeal to the younger shoppers. The collaboration has now been extended to ready-to-wear, which the brand will be launching in the fall.

5. New Initiatives: Tapestry launched its platform called Coach Create in the second quarter, which was extended to over 250 stores by the end of Q3. Moreover, the brand intends to have its monogramming service in about 50% of its global direct retail fleets.

6. Return of the Logo Trend: The trend for logos had fallen out of fashion in the recent past, but this seems to be reversing now, benefiting a brand like Coach. Keeping this in mind, the company successfully relaunched its Signature pattern in the quarter. Coach has plans to build upon this, including an expanded range of small leather goods, which should ensure growth for the brand.

See our complete analysis for Tapestry here