Reasons Behind Tapestry's (TPR) Sluggish Run On The Bourses

The past six months have not been a smooth ride for Tapestry, Inc. (NYSE:TPR) , as shares of this provider of luxury accessories and lifestyle brands have fallen roughly 34% compared with the industry’s decline of 16.4%. This Zacks Rank #4 (Sell) stock came under pressure following the company’s lower-than-expected second-quarter fiscal 2019 results and soft view.



Analysts have grown bearish on the stock overtime, as evident from downward revision in the Zacks Consensus Estimate. We note that the Zacks Consensus Estimate for earnings for fiscal 2019 and 2020 have moved south by 18 cents and 22 cents in the past 60 days to $2.60 and $2.86, respectively. Although, the consensus mark for the third quarter of fiscal 2019 remained stable in the past 30 days, the same has moved down by 13 cents in the past 60 days.

What’s Weighing on the Stock?

Tapestry’s second-quarter fiscal 2019 performance did not live up to its expectation on account of volatile macroeconomic environment and geopolitical issues. Moreover, fall in Kate Spade sales was also not well perceived by investors. Although, management expects comparable-store sales for the segment to improve in the second half of the fiscal year, analysts remain skeptical about its turnaround. We note that while overall net sales improved marginally, earnings came in line with the year-ago period.

As a result, management forecast fiscal 2019 sales to increase at a low-to-mid-single-digit rate year over year, down from mid-single-digit rate growth previously estimated. The company projects earnings in the band of $2.55-$2.60 per share (compared with $2.63 in fiscal 2018), down from the range of $2.75-$2.80 envisioned earlier. Tapestry expects operating income and earnings per share to fall in the third quarter. Significant increase in SG&A expenses may be cited as one of the reasons behind the same.

SG&A expenses have been increasing for quite some time now. Certainly, any deleverage in the same has a direct bearing on margins. Management expects SG&A expenses to increase significantly during the third quarter owing to new store opening plans, investments in systems and shift in Kate Spade marketing spend. For the year, the company expects deleverage in SG&A expenses.

Management Looking in Every Nook & Cranny

Instead of sitting idle, management is looking into every corner for growth prospects. Tapestry is trying all means to tackle prevailing headwinds in the retail landscape — soft store traffic, stiff competition from online retailers and aggressive pricing strategy. The company has undertaken transformational initiatives revolving around products, stores and marketing.

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 its performance and is being viewed as a significant step toward becoming a multi-brand company. Management expects to attain run-rate synergies of approximately $100-$115 million from Kate Spade buyout in fiscal 2019.

Further, management has undertaken initiatives to have direct control over international distribution. The company concluded the buybacks of the Kate Spade operations in Singapore, Malaysia and Australia. It also completed the buyback of the Stuart Weitzman business in Southern (NYSE:SO) China. The company has entered into a deal to acquire the Stuart Weitzman business in Australia from its distribution partner. Such moves help the company to directly operate these businesses, look for growth opportunities in international markets and enhance brand development.

All said, we hope that the above-mentioned initiatives will provide some cushion to the stock and help it return to growth trajectory.

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