It has been about a month since the last earnings report for Tapestry (TPR). Shares have lost about 8.6% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Tapestry due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Tapestry Reports Wider-than-Expected Q3 Loss, Sales Beat
The deadly coronavirus severely impacted Tapestry, Inc.’s third-quarter fiscal 2020 results. This luxury lifestyle retailer posted wider-than-expected loss for the quarter under review. Also, the company’s top line fell sharply from the year-ago quarter. Nonetheless, the company’s net sales came ahead of the Zacks Consensus Estimate for the second straight quarter.
The company posted adjusted loss of 27 cents a share wider-than-the Zacks Consensus Estimate of loss of 16 cents. This also compares unfavorably with earnings of 42 cents reported in the year-ago period. Lower net sales, higher cost of sales and increased interest expense hurt the company’s bottom-line results.
Net sales came in at $1,072.7 million, down 19% year over year on both reported and constant currency basis. However, the metric came ahead of the Zacks Consensus Estimate of $1,033.5 million. Sales declined across all major brands. Management highlighted that 90% of the company’s stores were either shut or were operating on shortened hours. The company notified that beginning May 1 it will reopen roughly 40 outlets in North America for contactless curbside or storefront pickup service only.
To address challenges tied to the pandemic Tapestry remains focused on global digital opportunity for all its brands, and ensures that its e-commerce and distribution centers remain operational in key regions. Throughout the quarter, the company witnessed robust double-digit growth in global e-commerce business. Meanwhile, management has been taking actions to curb expenses in order to stay resilient during such a crisis. It has decided to eliminate non-essential operating expenses and lower fixed costs like rent as well as enhance SG&A savings via right-sizing marketing spend. It is also reducing corporate payroll.
Also, the company is cutting down on capex by deferring or cancelling store openings, while prioritizing investments in high-return areas, including digital. Furthermore, it is focused on effectively managing inventories, and expects working capital savings of more than $500 million. The company stated that it is reducing capex by at least $100 million in fiscal 2021 as compared to its run-rate spend of about $275 million.
Management had earlier announced plans to suspend shareholder-friendly moves, including repurchases and quarterly cash dividend. This will result in savings of approximately $700 million annually. Also, Tapestry has drawn $700 million from the $900 million revolving credit facility to strengthen liquidity. Considering the current scenario, the company refrained from providing guidance for the final quarter and fiscal year.
Consolidated adjusted gross profit came in at $720.2 million, down 22% from the year-ago period. Moreover, gross margin contracted 210 basis points to 67.1% due to the lower penetration of higher margin international businesses. Further, the company reported adjusted operating loss of $31.6 million as against operating income of $145.1 million in the prior-year quarter. We note that adjusted SG&A expenses fell 3% to $751.8 million. However, as a percentage of net sales, the same increased to 70.1% from 58.3% in the year-ago quarter.
Net sales for Coach came in at $772.5 million, down 20% year over year on both reported and constant currency basis. Adjusted gross margin for the segment shrunk 210 basis points to 69.6%. We note that adjusted operating margin shriveled to 15.1% versus 25.3% a year ago.
Kate Spade sales came in at $249.5 million, down 11% on both reported and constant currency basis. Adjusted gross margin for the segment contracted 280 basis points to 62%. The segment reported adjusted operating loss was $17 million as against adjusted operating income of $14 million in the year-ago period.
Net sales for Stuart Weitzman totaled $50.7 million, down 40% on both reported and constant currency basis. The segment’s adjusted gross margin decreased 50 basis points to 54.7%. Adjusted operating loss for the segment was $35 million compared with adjusted operating loss of $13 million in the year-ago period.
At the end of the quarter, the company operated 381 Coach stores, 220 Kate Spade outlets and 71 Stuart Weitzman stores in North America. Internationally, the count was 591, 204 and 87 for Coach, Kate Spade and Stuart Weitzman, respectively.
Other Financial Details
Tapestry ended the quarter with cash, cash equivalents and short-term investments of $898.2 million, long-term debt of 1,587.2 million and shareholders' equity of $ 2,553.1 million. Management now expects to incur capital expenditures of approximately $225 million during the fiscal year 2020, down $75 million from originally planned.
How Have Estimates Been Moving Since Then?
Estimates revision followed a downward path over the past two months. The consensus estimate has shifted -2817.33% due to these changes.
At this time, Tapestry has a poor Growth Score of F, however its Momentum Score is doing a lot better with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Tapestry has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.
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