Shares in Tapestry dropped by more than 12% in pre-market trading today (7 February) as the accessories business reported a second-quarter performance that fell short of company expectations and lowered its guidance for the full year.
Even so, in the three months ended 29 December, earnings amounted to US$254.8m, on a reported basis, compared to $63.2m in the year prior. During the quarter the company recorded certain charges associated with integration and acquisition activities, ERP implementation efforts, and the impact of tax legislation changes. Taken together, these items depressed reported net income by about $55m.
Gross margin for the period widened to 66.8% from 65.9% in the prior year. And net sales were up 1% on a reported basis and 2% in constant currency to $1.8bn from $1.79bn.
“During the second quarter, our sales and gross profit rose, successfully anniversarying the strong holiday results of the prior year. That said, this performance fell short of our expectations in the face of an increasingly volatile macroeconomic and geopolitical backdrop,” said CEO Victor Luis. “Importantly, and as expected, we generated meaningful synergies from the integration of Kate Spade, and made material systems and strategic brand investments across our portfolio. Taken together, adjusted earnings per diluted share were even with the prior year.”
Net sales for Coach were up 2% to $1.25bn, while global comparable store sales increased by 1%. Kate Spade sales, meanwhile, were down 1% on last year to $428m, with global comparable store sales down 11%. At Stuart Weitzman, sales totalled $124m, an increase of 3% on a reported basis.
Looking ahead, Tapestry has lowered its guidance for fiscal 2019 and now expects revenues for the period to increase at a low-to-mid-single-digit rate from fiscal 2018. Shares in the company tumbled by more than 12% in pre-market trading but have since recovered.
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Neil Saunders, managing director of GlobalData Retail, notes that although Tapestry traded well in 2018, the latest results show it stumbled during the most important retail period at the end of the year. “By the company’s historic standards, revenue growth of 0.9% is a spiritless performance. That this came at a time of high consumer spending growth makes the outcome even more concerning as it points the finger of blame firmly at Tapestry.”
He adds: “Overall, these numbers represent a roadblock on Tapestry’s journey to becoming a much larger brand powerhouse. We believe the company has the potential to overcome such an obstacle – but only if it quickly gets back to delivering strong collections that engage and inspire customers.”