Coach parent company Tapestry Inc. shares took a major hit yesterday after announcing Q3 earnings and noting 9% comp sales declines at Kate Spade and stating that Stuart Weitzman’s problems will continue through the year.
While Q3 earnings and sales beat expectations, (Coach net sales totaled $969 million for the third fiscal quarter as compared to $915 million in the prior year, an increase of 6% on a reported basis and 3% on a constant currency basis) Wall Street reacted negatively to the overall Tapestry news and shares fell 12.1% in early Tuesday trading. It was Tapestry’s largest single-day decline since October 2016.
“At Stuart Weitzman, results were negatively impacted by execution issues including production delays and lower sell-through of key carryover styles, which pressured sales and margins,” said Tapestry Chief Executive Victor Luis in a statement. “While we believe that some of these issues will continue through the Fall/Winter season, we remain confident in our long-term strategic and creative direction under the leadership of newly appointed CEO and brand president, Eraldo Poletto and Creative Director, Giovanni Morelli.”
All is not bad news, and even the 9% comp slide at Kate Spade doesn’t mean doom for the brand. In fact, Tapestry noted that it’s trying to do at Kate Spade what it did for Coach: namely, pull back its oversaturation and cut back on flash sales and some wholesale distribution. The tactic helped make Coach more exclusive, so there is company precedent there. In addition, Tapestry expects Kate Spade to contribute $145 million in operating income for the year, higher than the $130 to $140 million in earlier guidance.
Overview of Third Quarter 2018 Tapestry, Inc. Results:
Fiscal 2018 third quarter performance includes the contribution of Kate Spade, which the Company acquired on July 11, 2017 and therefore is not included in the prior year results.
- Net sales totaled $1.32 billion for the third fiscal quarter as compared to $995 million in the prior year, an increase of 33% on reported basis. On a constant currency basis, total sales increased 30%.
- Gross profit totaled $909 million on a reported basis, while gross margin for the quarter was 68.7% on a reported basis compared to 70.9% in the prior year. On a non-GAAP basis, gross profit totaled $913 million, while gross margin was 69.0% as compared to 70.9% in the prior year.
- SG&A expenses totaled $750 million on a reported basis and represented 56.7% of sales compared to 55.7% in the year-ago quarter. On a non-GAAP basis, SG&A expenses were $729 million and represented 55.1% of sales as compared to 54.6% in the year-ago period.
- Operating income for the quarter was $159 million on a reported basis, while operating margin was 12.0% versus 15.2% in the prior year. On a non-GAAP basis, operating income was $184 million, an increase of 14% versus prior year, while operating margin was 13.9% versus 16.3% in last year’s third quarter.
- Net interest expense was $17 million in the quarter as compared to $4 million in the year ago period.
- Net income for the quarter was $140 million on a reported basis, with earnings per diluted share of $0.48. This compared to reported net income of $122 million with earnings per diluted share of $0.43 in the prior year period.