Tapestry, Inc. (NYSE:TPR) looks quite disciplined in its approach of tackling prevailing headwinds in the retail landscape — soft store traffic, stiff competition from online retailers and aggressive pricing strategy. Despite the ultra-competitive retail scenario, the stock has surged 21.9% so far in the year against the industry’s decline of 4.5%.
The company has undertaken transformational initiatives revolving around products, stores and marketing. These are likely to fuel top-line growth in fiscal 2018. Analysts polled by Zacks expect third-quarter and fiscal 2018 revenues to come in at $1.30 billion and $5.85 billion, reflecting an increase of roughly 30.8% and 30.4%, respectively.
Multi-Brand Strategy
Tapestry is undergoing a brand transformation and is introducing modern luxury concept stores in key markets. The acquisition of Stuart Weitzman and Kate Spade has been accretive to performance and is being viewed as a significant step toward becoming a multi-brand company. Additionally, the company is aggressively expanding e-commerce platform. It also plans to undertake strategic measures involving, upgrading of core technology platforms and enhancement of international supply chain.
Management expects to attain run-rate synergies of approximately $100-$115 million from Kate Spade buyout in fiscal 2019 compared with the prior view of $50 million. Kate Spade sales came in at $434.7 million, while net sales for Stuart Weitzman totaled $120.7 million during the second quarter of fiscal 2018. Management continues to expect fiscal 2018 revenue to increase approximately 30% year over year to $5.8-$5.9 billion.
Other Growth Drivers
As one of the leading American marketers of fine accessories and gifts, Tapestry boasts a proven strategy of investing in stores to enhance sales output through product innovation, compelling pricing strategy, new merchandise assortments and a cost-effective global sourcing model. We believe that these strategies will help drive comparable-store sales and operating margins in the long term. The company’s growth drivers include expansion of global distribution model and venturing into under-penetrated markets. The company also launched Coach Create, a platform to customize bags either online or in outlets.
Positive Earnings Surprise Streak
Tapestry’s second-quarter fiscal 2018 marked the 16th straight quarter of earnings beat. The adjusted earnings of $1.07 per share surpassed the Zacks Consensus Estimate of 86 cents, thereby resulting in a positive earnings surprise of 24.4%. The quarterly earnings improved 42.7% year over year buoyed by top-line growth
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On account of revisions to the U.S. tax code as well as lower interest expense, management now envisions fiscal 2018 earnings in the band of $2.52-$2.60, reflecting an increase of approximately 17-21%, comprising mid-to-high single digit accretion from the Kate Spade buyout. The company had earlier projected earnings in the range of $2.35-$2.40 per share.
Wrapping Up
Sales increase at Coach brand, contributions from buyouts and sturdy holiday offerings along with improved inventory mix have favorably impacted the stock’s performance. However, fashion obsolescence remains the main concern for Tapestry’s business model, which involves a sustained focus on product and design innovation. The company’s pioneering position may be compromised by delays in its product launches. This Zacks Rank #3 (Hold) company operates in the highly competitive premium handbag and accessories segment.
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