Tapestry (TPR) Q1 Earnings Beat, Sales Miss, Retains View

Despite tough retail landscape, Tapestry, Inc. (NYSE:TPR) posted better-than-expected first-quarter fiscal 2018 bottom-line results. The adjusted earnings of 42 cents a share beat the Zacks Consensus Estimate of 36 cents, thereby resulting in a positive earnings surprise of 16.7% and marking the 15^th straight quarter of earnings beat. However, the quarterly earnings declined roughly 6.7% year over year due to higher SG&A expenses. Even an increase in top line failed to act as a savior.

Net sales of this New York-based company came in at $1,288.9 million, up 24% year over year. On a constant currency basis, net sales rose 25%. However, we noted that the total sales fell short of the Zacks Consensus Estimate of $1,304 million for the fifth successive quarter.

Nonetheless, Tapestry is undergoing a brand transformation and is introducing modern luxury concept stores in key markets. The acquisition of Stuart Weitzman and Kate Spade & Company is being viewed as a significant step in its efforts toward becoming a multi-brand company. Moreover, management has undertaken transformation initiatives revolving around product, stores and marketing. These endeavors have aided the stock to rise 18.4% so far in the year compared with the industry that declined 2.6%.

Consolidated adjusted gross profit surged 19.3% to $852.8 million, however, gross margin contracted 270 basis points to 66.2%. Adjusted operating income came in at $168.8 million, down 4.5% from the prior-year quarter figure, while operating margin shriveled 390 basis points to 13.1%.

Segment Details

Net sales for Coach declined 3% year over year to $923.7 million, while on a constant currency basis, the same slid 2%. Comparable-store sales fell 2% due to shift in timing of the Chinese Mid-Autumn festival into October, inventory challenges and disruptions caused by hurricanes.

Kate Spade sales came in at $268.8 million. Comparable-store sales declined 9%, including the adverse impact of about 600 basis points from a fall in global e-commerce. Net sales for Stuart Weitzman totaled $96.4 million, reflecting an increase of 10%.

Tapestry, Inc. Price, Consensus and EPS Surprise

Tapestry, Inc. Price, Consensus and EPS Surprise | Tapestry, Inc. Quote

Store Update

At the end of the quarter, the company operated 417 Coach stores, 183 Kate Spade outlets and 69 Stuart Weitzman stores in North America. Internationally, the count stood at 543, 93 and 12 for Coach, Kate Spade and Stuart Weitzman, respectively.

Other Financial Details

Tapestry, which carries a Zacks Rank #3 (Hold), ended the quarter with cash, cash equivalents and short-term investments of $1,670.9 million, long-term debt of $1,888.2 million and shareholders' equity of $2,940 million.

Guidance

Management continues to expect fiscal 2018 revenue to increase approximately 30% year over year to $5.8-$5.9 billion with low-single digit organic growth and Kate Spade acquisition adding more than $1.2 billion in revenue. The company maintains earnings projection of $2.35-$2.40 per share, reflecting an increase of approximately 10-12%, comprising low-to-mid-single digit accretion from the Kate Spade buyout.

Tapestry projects operating income growth in the band of 22-25% on the back of mid-single digit organic growth, Kate Spade buyout and estimated synergies of $30-$35 million. Interest expense is now expected to be about $80-$85 million for the fiscal year.

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