• Q1 net loss on a reported basis total US$18m
  • Net income negatively impacted by $137m
  • Net sales jump 24% $1.29bn from $1.04bn

Accessories business Tapestry, formerly known as Coach Inc, swung to a loss in the first quarter as it was hampered by costs related to the acquisition of Kate Spade, but the addition of the brand helped drive net sales by 24% in the period.

For the period ended 30 September, net loss on a reported basis totalled US$18m, compared to net income of $117m in prior year. Gross margin narrowed to 59.3% from 68.9% on a reported basis and to 66.2% from 68.9% on a non-GAAP basis.

During the quarter, Tapestry said it recorded charges of about $188m in relation to the purchase and integration of accessories and apparel business Kate Spade, and of about $3m under its Operational Efficiency Plan, primarily related to technology infrastructure and organisational efficiency costs.

Tapestry said these items decreased the company's consolidated reported operating profit by about $191m, due to a reduction in gross profit of about $88m and an increase in SG&A expenses of about $102m. It added reported net income was negatively impacted by $137m in the first quarter.

Net sales meanwhile, increased 24% $1.29bn from $1.04bn in the year-ago period. On a constant currency basis, total sales increased 25%.

As previously announced, beginning in fiscal 2018, Tapestry changed its reportable segments to be by brand.

At Coach, operating income slipped to $198.3m from $232.3m in the year-ago period, while net sales 3% slipped to $923.7m from $950.1m. Tapestry said the results include the negative impact associated with the shift in timing of the Chinese mid-autumn festival into October, exacerbated by the impact of inventory mix issues as well as natural disasters occurring in the quarter, notably hurricanes in North America and typhoons in Asia.

Net sales at Stuart Weitzman meanwhile, totalled $96.4m, an increase of 10% from $87.5m last year. Operating income on a reported basis was $8.4m, compared to $3.9m in the year-ago period.

For the post-acquisition period, net sales for Kate Spade totalled $268.8m, reflecting, in part, Tapestry said, the strategic pullback in wholesale disposition and online flash. Global comparable store sales declined 9%, including the negative impact of about 600 basis points basis points from a decline in global e-commerce, as projected. Operating income meanwhile, was a loss of $134.9m on a reported basis. On a non-GAAP basis, operating income totalled $22m.

CEO Victor Luis said the first quarter performance was in line with expectations and noted the company is "well positioned" for the key holiday trading season. "Importantly, we remain on track to achieve the annual guidance we set out for Tapestry in August," he added.

"We have been especially pleased with our progress on the integration of Kate Spade onto the Tapestry platform. During the quarter, we took significant actions to position the brand for long-term success.

"After only a few months since the close of the Kate Spade acquisition, we're even more excited about the opportunities for the brand, both in terms of revenue growth, driven by distribution and productivity, and profitability improvements, as we leverage our scale across our supply chain, global business development organisation and other corporate functions."

Looking ahead, Tapestry continues to expect revenues for fiscal 2018 to increase about 30% versus fiscal 2017, to between $5.8bn and $5.9bn, with low-single digit organic growth and the acquisition of Kate Spade adding over $1.2bn in revenue.

Tapestry changed its name from Coach Inc at the end of last month as part of its business transformation and bid to expand beyond the namesake brand.

Coach to change its name to Tapestry

Neil Saunders, managing director of GlobalData Retail, notes Tapestry is likely to add to its stable of brands over the next couple of years, adding the inclusion of Kate Spade flatters the overall revenue number of 24%. "However, if this is excluded, a weaker picture emerges with sales down by 1.7% over the prior year," he explains. "This is solely the result of the continued revenue slide at Coach where overall sales dipped by 2.8%, including a 2% decline in comparables. "

For Saunders, the pullback from department stores and other channels that Tapestry considers to be detrimental are part of the reason for the slide in Coach's numbers.

He adds: "This is not an unusual pattern. However, we feel that there is an additional softness in this quarter's results and that they indicate a slight worsening of performance since the prior period. Fortunately, much of this appears to be down to transitory factors such as a shift in the Chinese Mid-Autumn festival and natural disasters in the United States. Even so, they serve as a reminder of the fickleness of demand when it comes to higher-end brands - which is why Tapestry wants to move away from being reliant on just one label."

That noted, Saunders admits recent store visits to Coach lead GlobalData to believe that the holiday quarter will be a positive one. "The collection is looking strong with some good gifting stories; merchandising is compelling and engaging. Our consumer data also indicates that perceptions of Coach continue to rise and its status as a brand that people want to receive and to gift have both improved since last year."

Ultimately, for Saunders, as important as the performance of the individual brands is, it is the way in which Tapestry will bring them together that will determine business performance. Here, despite the negative revenue growth and this quarter's net loss, Saunders says GlobalData is encouraged by the progress. 

"Synergy savings from the Kate Spade integration are ahead of schedule, which allowed the company to beat its earnings forecast. Moreover, Tapestry has increased its targeted savings out to 2019 from $50m to $115m.

"All of this suggests that the current period is one of transition for Tapestry and that better numbers will come through over time. Overall, we have confidence in the general direction and strategy of the group."