Tapestry (TPR) Q2 Earnings & Sales Miss Estimates, Stock Down

Shares of Tapestry, Inc. (NYSE:TPR) are down roughly 11% during the pre-market trading session on Feb 7 following the company’s lower-than-expected second-quarter fiscal 2019 results and downbeat view. Management hinted that the company’s 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. We note while overall net sales improved marginally, earnings came in line with the year-ago period.

The company posted adjusted earnings of $1.07 per share that missed the Zacks Consensus Estimate of $1.11. This broke the company’s 19 straight quarters of positive earnings surprise streak. Net sales of this New York-based company came in at $1,800.8 million, up 1% year over year on a reported and 2% on a constant currency basis. However, net sales came below the Zacks Consensus Estimate of $1,857 million, following four successive quarterly beats.

Consolidated adjusted gross profit came in at $1,207 million, up 1% from the prior-year quarter, while gross margin expanded 10 basis points to 67%. Further, adjusted operating income of $402.3 million fell 2.2% from the prior-year quarter figure, while operating margin contracted 70 basis points to 22.3%. We note that adjusted SG&A expenses increased 2.7% to $804.7 million, while as a percentage of net sales the same increased 80 basis points to 44.7%.

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.

In the past three months, shares of this Zacks Rank #3 (Hold) company have fallen 8.6% compared with the industry’s decline of 15.1%.

Segment Details

Net sales for Coach came in at $1,248.6 million, reflecting an increase of 2% year over year on a reported and constant currency basis. Comparable-store sales rose 1%, comprising roughly a 100 basis points benefit due to rise in global e-commerce. Both gross and operating margins for the segment expanded.

Kate Spade sales came in at $428.4 million, down 1% year over year on a reported and constant currency basis. We note that while gross margin expanded, operating margin declined. Comparable-store sales slid 11%, in spite of including the favorable impact of approximately 200 basis points from a rise in global e-commerce. Management expects comparable-store sales to improve in the second half of the fiscal year.

Net sales for Stuart Weitzman totaled $123.8 million, reflecting an increase of 3% on a reported and 4% on a constant currency basis. The segment’s gross and operating margins also shriveled considerably.

Store Update

At the end of the quarter, the company operated 399 Coach stores, 218 Kate Spade outlets and 68 Stuart Weitzman stores in North America. Internationally, the count stood at 585, 176 and 50 for Coach, Kate Spade and Stuart Weitzman, respectively.

Other Financial Details

Tapestry ended the quarter with cash, cash equivalents and short-term investments of $1,495.2 million, long-term debt of $1,601 million and shareholders' equity of $3,488.4 million.

FY 2019 Guidance

Tapestry now envisions fiscal 2019 sales to increase at a low-to-mid-single-digit rate year over year. The company now expects earnings in the range of $2.55-$2.60 per share compared with $2.63 delivered in fiscal 2018. The current Zacks Consensus Estimate for fiscal year is pegged at $2.78, which may witness downward revision in the coming days.

The projection mirrors cost savings on account of realization of synergies from the Kate Spade buyout and the impact of distributor consolidations and systems investments. The company anticipates to attain run-rate synergies of approximately $100-$115 million from Kate Spade buyout in fiscal 2019. The outlook includes net interest expense expectation of around $50 million.

The company had earlier guided net sales increase at a mid-single-digit rate and earnings in the range of $2.75-$2.80 per share.

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