Accessories business Tapestry says its second-half results could be negatively impacted by up to US$250m in sales amid the outbreak of the coronavirus in China which has seen the group close the majority of its stores on the Mainland.
In its second-quarter earnings statement today (6 February), CEO Jide Zeitlin says the business entered its third fiscal quarter with strong underlying trends, notably at Coach, as sales growth accelerated from the holiday period.
“Therefore, we had anticipated maintaining our FY20 guidance despite continuing headwinds in Hong Kong SAR and challenges at Stuart Weitzman. However, the escalating coronavirus outbreak is now significantly impacting our business in China, resulting in the closure of the majority of our stores on the Mainland,” he adds.
“We now expect that our second half results could be negatively impacted by approximately $200-$250 million in sales and $0.35-$0.45 in earnings per diluted share, given current trends in China. If the situation further deteriorates, or the outbreak affects demand outside of the country, this impact could be worse.”
As a result, the company says its full-year guidance now includes an estimated negative impact of the coronavirus outbreak, adding given the dynamic nature of the situation, the potential financial impact to its business could be materially different.
Tapestry now expects revenues for Fiscal 2020 to total about $5.9bn, while earnings per diluted share are forecast in the range of $2.15-$2.25.
Despite the news, Zeitlin says Tapestry is “confident in our ability to effectively navigate through this period of uncertainty.”
He adds: “Our primary concern is the health and well-being of our team, their families and their local communities who are dealing with the daily reality of this situation. We believe in the resilience of the Chinese people and our view that China represents a significant opportunity for our brands is unchanged. Our strong balance sheet, cash position and globally diversified sourcing base and supply chain provide the flexibility to operate our company for the long term and to emerge stronger, as we have many times in the past.”
Tapestry’s announcement comes as Capri Holdings, owner of the Michael Kors and Jimmy Choo brands, sounded a warning on its full-year results in the wake of the coronavirus outbreak, with a number of retailers shuttering stores amid the epidemic, including NIKE, adidas, Ralph Lauren, and Levi Strauss.
For the fiscal second quarter ended 28 December, Tapestry reported net sales of $1.82bn compared to $1.8bn in the prior year, an increase of 1% on a reported and constant currency basis.
Net income amounted to $299m on a reported basis, compared to $255m in the prior-year period. On a non-GAAP basis, net income totalled about $304m, down from non-GAAP net income of $310m last year.
Gross margin narrowed to 66.6% from 66.8%. On a non-GAAP basis, gross margin was 66.7% as compared to 67% last time.
By brand, net sales for Coach totalled $1.27bn for the fiscal second quarter, 2% above the prior year on a reported and constant currency basis. Global comparable store sales increased 2%, including a benefit of about 200 basis points driven by an increase in global e-commerce.
At Kate Spade, which Tapestry acquired in 2017, net sales rose to $430m from $428m in the prior year. Global comparable store sales declined 4%, including the benefit of about 300 basis points from global e-commerce.
Meanwhile, net sales were down at the Stuart Weitzman brand, falling to $116 from the $124m reported last year, a decrease of 7% and 6% on a reported and constant currency basis, respectively.
The results come two months after Zeitlin, who was appointed in September, launched an in-depth review of the business to identify opportunities to drive organic growth and profitability across its portfolio. In the group’s earning statement today, he says its intent to drive the two is “unwavering.”
“As discussed during our first-quarter earnings call, we recently embarked on a comprehensive review of our business. Our findings show there is an opportunity to accelerate long-term growth in all three of our brands. To realise this potential, we need to become more responsive to changing consumer demands. This requires integrating data analytics and consumer insights in all aspects of the business, from design to product development to planning and allocation to marketing. We bring a sense of urgency to this work and are dedicating resources to formulate and implement our strategy to drive value and shareholder returns.”
Zeitlin says Tapestry will share the key components of this plan at an analyst and investor day in the summer.
His comments come as the business separately announced three executive appointments this morning.
As such, Liz Fraser has been named CEO and brand president of Kate Spade and is expected to join the company on 1 March. She will assume operational control of the brand from Joanne Crevoiserat, Tapestry’s CFO, who has been leading the brand in an interim capacity since December 2019. In this role, Fraser will be responsible for all aspects of Kate Spade globally.
Since 2018, Fraser has been the president of Lafayette 148, a New York-based, vertically integrated, women’s fashion brand, where she was responsible for global sales and marketing, as well as design and merchandising, for apparel and accessories. She joined Lafayette 148 from Anne Klein where she was CEO.
Meanwhile, Giorgio Sarné, currently president of Tapestry Asia and president and CEO of Coach Asia, will be promoted to CEO and brand president of Stuart Weitzman. He will succeed Eraldo Poletto, the brand’s current CEO and brand president, who has decided to leave the company effective 1 March. In this role, Sarné will be responsible for all aspects of Stuart Weitzman globally.
Emmanuel Ruelland, currently vice president, general manager, Tapestry Southeast Asia and Oceania, will succeed Sarné.
In addition, Yann Bozec, currently president of Tapestry China and president and CEO of Coach China will be promoted to president of Tapestry Asia Pacific, while continuing as president and CEO of Coach China.
Fraser, Sarné and Bozec will all join Tapestry’s executive committee.
“We are stewards of three powerful brands and, with the executive appointments announced separately this morning, we believe we have the leadership team and the capabilities to deliver strong, sustainable growth which will define the next chapter at Tapestry,” Zeitlin says.
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