Tapestry (TPR) Q2 Earnings & Revenues Surpass Estimates

Tapestry, Inc. (NYSE:TPR) posted better-than-expected second-quarter fiscal 2018 results. The adjusted earnings of $1.07 per share beat the Zacks Consensus Estimate of 86 cents, thereby resulting in a positive earnings surprise of 24.4% and marking the 16th straight quarter of earnings beat. The quarterly earnings improved 42.7% year over year buoyed by top-line growth.

Net sales of this New York-based company came in at $1,785 million, up 35% year over year on both reported and constant currency basis. We noted that the total sales came ahead of the Zacks Consensus Estimate of $1,767.6 million, after missing the same in the trailing five quarters.

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. Sales increase at Coach brand, contributions from recent buyouts and sturdy holiday offerings along with improved inventory mix favorably impacted the results.

Tapestry, Inc. Price, Consensus and EPS Surprise

These endeavors have aided the stock to rise 22% in a year compared with the industry that declined 3.1%.

Consolidated adjusted gross profit surged roughly 32% to $1,195.8 million, however, gross margin contracted 160 basis points to 67%. Adjusted operating income came in at $411.3 million, up 40% from the prior-year quarter figure, while operating margin expanded 70 basis points to 23%.

Segment Details

Net sales for Coach came in at $1,229.6 million, up 2% on a reported and constant currency basis. Comparable-store sales rose 3%, including a gain of about 100 basis points on account of rise in global e-commerce.

Kate Spade sales came in at $434.7 million. Comparable-store sales declined 7%, including the adverse impact of about 400 basis points from a fall in global e-commerce. Net sales for Stuart Weitzman totaled $120.7 million, reflecting an increase of 2%.

Store Update

At the end of the quarter, the company operated 416 Coach stores, 189 Kate Spade outlets and 70 Stuart Weitzman stores in North America. Internationally, the count was 551, 95 and 13 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 $2,091.8 million, long-term debt of $1,887.5 million and shareholders' equity of $2,949.4 million. The company in the month of January lowered its debt load by $1.1 billion.

FY18 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 revenues.

Tapestry continues to forecast 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 $75-$78 million, down from $80-$85 million previously anticipated.

On account of revisions to the U.S. tax code as well as lower interest expense, management now envisions 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.

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