Tapestry's (TPR) Q3 Earnings Likely To Fall Y/Y: Here's Why

Tapestry, Inc. (NYSE:TPR) is slated to release third-quarter fiscal 2019 results on May 9. In the trailing four quarters, this house of lifestyle brands as well as designer and marketer of fine accessories and gifts has outperformed the Zacks Consensus Estimate, with an average positive earnings surprise of 4.7%. In the last reported quarter, the company reported a negative earnings surprise of 3.6%.

After reporting in-line earnings with the year-ago period during the second quarter of fiscal 2019, Tapestry is likely to witness year-over-year decline of about 22.2% in the third quarter. The Zacks Consensus Estimate for the quarter under review is pegged at 42 cents compared with 54 cents reported in the year-ago quarter. We note that the Zacks Consensus Estimate has fallen by a penny in the last 30 days. The Zacks Consensus Estimate for revenues stands at $1,341 million, reflecting an improvement of slightly more than 1% from the year-ago quarter.

Factors Likely to Influence Tapestry’s Performance

Tapestry had earlier guided that operating income and earnings per share are likely 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. Analysts 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.

Nevertheless, 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 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 anticipates the top line to accelerate during the third quarter on the back of revenue growth across Kate Spade and Stuart Weitzman brands. The consensus estimates of sales for Coach, Kate Spade and Stuart Weitzman brands reflects likely growth of 0.9%, 6.3% and 6% to $978 million, $286 million and $89 million, respectively.

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.

What the Zacks Model Unveils?

Our proven model does not conclusively show that Tapestry is likely to beat estimates this quarter. A stock needs to have both — a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP — for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Tapestry has a Zacks Rank #3 but an Earnings ESP of -7.51%, which makes surprise prediction difficult.

3 Stocks With Favorable Combination

Here are three companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat:

Target (NYSE:TGT) has an Earnings ESP of +0.42% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Dollar General (NYSE:DG) has an Earnings ESP of +1.51% and a Zacks Rank #3.

Ross Stores (NASDAQ:ROST) has an Earnings ESP of +2.20% and a Zacks Rank #3.

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