Tapestry (formerly "Coach") on Tuesday said that net sales in its first quarter 2018 rose 24.2% to $1.29 billion from $1.04 billion in the prior-year quarter, missing the forecast from Thomson Reuters I/B/E/S for $1.31 billion. On a constant currency basis, total sales increased 25%, according to a company press release. On a non-GAAP basis, net income for the quarter totaled $120 million, with earnings of 42 cents per diluted share, which bested the average analyst estimate cited by Reuters for 36 cents.
Mostly because of $188 million in charges related to its $2.4 billion May acquisition of Kate Spade, Tapestry reported a net loss in the quarter of $17.7 million, or 6 cents per share, compared with a profit of $117.4 million, or 42 cents per share, in the year-ago quarter.
By brand, Coach same-store sales unexpectedly fell 2%, in contrast to the 2% increase forecast by Consensus Metrix analysts that were cited by Reuters) due mostly to a shift in timing of the Chinese Mid-Autumn festival into October. This was exacerbated by inventory mix issues and natural disasters including hurricanes in North America and typhoons in Asia. These declines were only partially offset by some 100 basis points from an increase in global e-commerce. Kate Spade global same-store sales declined 9%, including the expected negative impact of some 600 basis points from a decline in global e-commerce. Stuart Weitzman net sales rose 10%, the company said.
In his statement on Tuesday, Tapestry CEO Victor Luis demonstrated no qualms about the company’s surprise sales miss at Coach. "As we look forward to holiday and beyond, we are well positioned to drive positive comparable store sales for Coach driven by compelling product, our differentiated modern luxury store experience and bold marketing campaigns," he said, adding that the company’s well performing Stuart Weitzman is unveiling new designs from Giovanni Morelli and expanding internationally. For Kate Spade, the company’s priority is integration and building the foundation for growth, he also said.
That will understandably take time and the company is indeed well positioned, according to GlobalData Retail Managing Director Neil Saunders, who said the company will likely add more brands to its stable.
"As important as the performance of the individual brands is, it is the way in which Tapestry will bring them together that will determine business performance," he said in an email to Retail Dive. "Despite the negative revenue growth and this quarter's net loss of $17.7 million, we are encouraged by the progress. Synergy savings from the Kate Spade integration are ahead of schedule, which allowed the company to beat its earnings forecast. Moreover, Tapestry has increased its targeted savings out to 2019 from $50 million to $115 million. All of this suggests that the current period is one of transition for Tapestry and that better numbers will come through over time."
The softness in Kate Spade’s and Coach’s sales numbers are a bit worrying, even though they come in part from the company’s concerted effort to pull away from department stores. Overall though, the merchandising is strong, according to a note from Jane Hali and Associates analysts emailed to Retail Dive. "The Coach brand continues to resonate with consumers and their partnership with Selena Gomez attracts millennial consumers," according to the note. Coach inked a $10 million deal with Gomez to develop a product line in December 2016. "As Coach moves forward into further developing other categories like outwear and menswear, we believe this will be a positive for them. However, we are concerned about the factory business for both Coach and Kate. Coach’s ratio is close to one to one between their full price and factory stores."
Saunders agrees that the declines are partly due to the weather events and Chinese festival timing, but believes they go beyond these instances. That reflects "the fickleness of demand when it comes to higher-end brands, which is why Tapestry wants to move away from being reliant on just one label," he said, adding, "Overall, we have confidence in the general direction and strategy of the group."