Tapestry's (TPR) Q1 Earnings Beat, Decline Year Over Year

Tapestry, Inc. (NYSE:TPR) came out with its first-quarter fiscal 2020 results, wherein the bottom line came ahead of the Zacks Consensus Estimate but top line missed the same.

The company posted adjusted quarterly earnings of 40 cents a share that beat the Zacks Consensus Estimate of 37 cents. However, the bottom line declined 17% from the year-ago period on account of lower net sales and higher SG&A expenses.

Net sales of this New York-based company came in at $1,357.9 million, down 2% year over year on a reported and 1% on a constant currency basis. Sales increase in Coach brand was offset by declines at Kate Spade and Stuart Weitzman. Net sales also came below the Zacks Consensus Estimate of $1,372.7 million. This was the fourth straight quarter that the company’s top line missed the estimates.

For fiscal 2020, management continues to anticipate revenues increase at a low-single-digit rate with earnings per share expected to be even with the prior year.

Management highlighted that the company’s international business was sturdy than North America business, where it continued to face industry headwinds. It further added that adjusted operating income and earnings per share fared better than its guidance.

Notably, Coach registered eighth straight quarter of comparable store sales (comps) growth led by digital and international channels. Comps were strong across Europe, Japan and Mainland China but soft in Hong Kong. Comps were flat in North America. We note that comps at Kate Spade fell owing to product and merchandising challenges, while sales at Stuart Weitzman were hurt by sluggish wholesale demand and operational challenges.

Consolidated adjusted gross profit came in at $918.6 million, down 2% from the prior-year quarter. However, gross margin contracted 20 basis points to 67.6%. Further, adjusted operating income of $166.5 million fell 10% from the prior-year quarter figure, while operating margin shrunk 110 basis points to 12.3%. We note that adjusted SG&A expenses came in at $752.1 million, reflecting an increase of $2.2 million from the year-ago period. As a percentage of net sales, the same increased 110 basis points to 55.4%.

Shares of Tapestry have fallen 16% compared with the industry’s decline of 25% in the past six months.

Segment Details

Net sales for Coach came in at $965.9 million, up 1% year over year on both reported and constant currency basis. Comparable-store sales rose 1%, comprising roughly a 100-basis-point benefit due to a rise in global e-commerce. While adjusted gross margin for the segment contracted 80 basis points to 70.2%, adjusted operating margin increased 30 basis points to 25%.

Kate Spade sales came in at $305.5 million, down 6% on both reported and constant currency basis. Comparable-store sales slid 16%, including the adverse impact of approximately 200 basis points from a rise in global e-commerce. While adjusted gross margin for the segment shriveled 30 basis points to 63.1%, adjusted operating margin shrunk 810 basis points to 6.3%.

Net sales for Stuart Weitzman totaled $86.5 million, reflecting a decrease of 9% on a reported and 8% on a constant currency basis. The segment’s adjusted gross margin expanded 550 basis points to 55.7%. The segment reported adjusted operating loss of $10 million.

Store Update

At the end of the quarter, the company operated 392 Coach stores, 212 Kate Spade outlets and 72 Stuart Weitzman stores in North America. Internationally, the count was 592, 198 and 78 for Coach, Kate Spade and Stuart Weitzman, respectively.

Other Financial Details

Tapestry, which carries Zacks Rank #3 (Hold), ended the quarter with cash, cash equivalents and short-term investments of $788.4 million, long-term debt of 1,597.3 million and shareholders' equity of $ 3,086.9 million.

During the quarter, the company repurchased approximately 12 million shares for a total of roughly $300 million. At the end of the period, the company still had $600 million remaining under its current buyback program.

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