Tapestry Stays Steady Ahead of Capri Deal
Coach, which just started to sell on Amazon, was the company's powerhouse during its fiscal first quarter.
Even as Tapestry Inc. looks to its future — and a much bigger, $12 billion operation once competitor Capri Holdings is brought on board — the company is pressing ahead in the here and now.
Wall Street was heartened to see the company fare well in what is a tough consumer economy during its fiscal first quarter. Earnings per share topped expectations, with a strong sales boost from Coach, and the company showed its continuing willingness to try new things at the brands it already owns.
Coach — the largest name in the portfolio, which also includes Kate Spade and Stuart Weitzman — started selling on Amazon in September and has found the e-commerce platform to be a safe space, so far.
We did a lot of due diligence,” said
Todd Kahn, chief executive officer and brand president at Coach, told WWD in an interview. “We worked very hard with the fashion people at Amazon ahead of it. And what we love is the shop that we stood up on Amazon, it reflects the brand really well.
“We're really leaning in and learning about how to work with Amazon,” Khan said. “What we keep discovering is it's such a site for overall discovery of the category, particularly for these younger consumers. And for us that's very engaging. It doesn't change our focus on our direct consumer business. It's complimentary as I see it.”
Scott Roe, chief financial officer and chief operating officer, who also participated in the interview, said,
“There's an understanding between us and Amazon on how to treat the brand and that's the expectation and that's what we require.”
Count Coach's foray into the Amazon ecosystem as one small thread into a much bigger, well, Tapestry — which is about pull out in front of its peers when it completes its acquisition of Capri, which owns Michael Kors, Versace and Jimmy Choo. The deal will give Capri an enterprise value of $8.5 billion.
While there are cost synergies in the deal, the real appeal is really the brands.
Joanne Crevoiserat, CEO of Tapestry, told analysts on a conference call: “Over time, in a world where consumers can get pretty much anything they want, anywhere they want, any time they want, what matters are brands. Brands matter in this market. And brands matter with consumers and what consumers value has changed over time and how they shop has changed over time. And I think what we've done in the last three years has really positioned our business to be able to speak to consumers to win in a marketplace where brands matter and we need to reach consumers in a different way.”
Tapestry expects to complete the Capri transaction on schedule next year and is coming into the holiday season with a solid performance.
First-quarter profits slipped modestly to $195 million from $195.3 million a year earlier — although earnings per diluted share increased to 84 cents from 79 cents given a change in the number of shares outstanding.
Adjusted EPS came in at 93 cents, beating the 90 cent profit analysts projected, according to FactSet.
Sales for the three months ended Step. 30 increased 0.4 percent to $1.513 billion from $1.507 billion. Analysts were looking for something more from sales and projected a top line of $1.535 billion.
North American revenues were roughly flat, while international sales grew 7 percent in constant currencies, with gains of 12 percent in Japan and 9 percent in Greater China.
Investors liked what they saw and traded shares of Tapestry up 3 percent to $28.28 on Thursday, giving the firm a market capitalization of $6.5 billion.
The Coach brand, which has increased its average unit retail prices by more than 30 percent over the past three years, remained the powerhouse. For the quarter, the brand's sales were up 5 percent in the quarter to $1.2 billion. Kate Spade's sales fell 5 percent to $303 million and Stuart Weitzman dropped 18 percent to $53 million.
Coach's business is about 90 percent direct-to-consumer — sparing the brand much of the weakness seen by other brands at wholesale this year — but the macroeconomic landscape is still a tricky one to navigate.
For the full fiscal year, the company pulled back its revenue outlook some and is now looking for a top line of $6.7 billion, down from the $6.9 billion projected in August. But the EPS outlook held steady at $4.10 to $4.15.
“The overall picture is I would say is
[one of ] consistency,” Roe said. “We've taken an approach over the last several quarters to really look at the trend in the business and it's been fairly stable. We've seen a little bit of reduction in the top line [outlook], but real strength in the quality of the business. You see that in our gross margin. You see that in our earnings. You see that in our cash flow. So we reiterated our earnings for the full year, we reiterated our cash flow, and that's really based on what we see as a resilient consumer and continuing the trends that we see on the ground right now.”
Despite the weaker performance in North America — where more customers are feeling squeezed and fashion brands across the spectrum are struggling — Tapestry added roughly 1.2 million new customers in the market, half of which were Gen Zers or Millennials.
When Capri joins in, Tapestry will have access to more new shoppers.
But Roe said the deal won't fundamentally reset the fashion competitive landscape.
“If you look at the size of the market that we play in, it's over $200 billion in total,” he said. “And while we like to think of ourselves as important, the reality is there's very few barriers to entry in our business. There are a lot of choices that consumers have and frankly, we're less worried about our competitive set and more worried about driving more engagement with our very specific consumers. We would argue that our insight into our consumer through our direct-to-consumer business and the data that we have allows us to understand those consumers better than anybody else. It's not about getting bigger per se,” he said. “It's about using the skills that we have across more brands and driving that tighter engagement with the consumer. That's the winning formula.”