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Tapestry (TPR) Q3 Earnings Beat Estimates, Revenues Up 13% Y/Y

Tapestry, Inc. TPR reported better-than-expected third-quarter fiscal 2022 results, thanks to stellar demand and strong customer engagement. This house of modern luxury accessories and lifestyle brands witnessed significant improvement in sales trends with double-digit growth across each brand. Markedly, revenue growth in North America helped offset decline in Mainland China that was hit hard by the resurgence of Covid-19.

Sales & Earnings Picture

Tapestry posted third-quarter adjusted earnings of 51 cents a share that comfortably surpassed the Zacks Consensus Estimate of 40 cents and came in line with the year-ago figure.

Net sales of this New York-based company came in at $1,437.5 million, ahead of the Zacks Consensus Estimate of $1,415 million. The metric rose 13% on a year-over-year basis driven by growth across brands. Strength in North America as well as sustained growth in digital channel contributed to this upbeat performance. Notably, the company added more than 1.4 million new customers across channels in North America.

Despite better-than-anticipated performance, management revisited its fiscal 2022 outlook due to an estimated headwind of 25-30 cents a share owing to incremental Covid-related pressure in China as well as an adverse impact of about 17 cents based on the current expectation that the Generalized System of Preferences with retroactive benefit will not be adopted in the current fiscal year.

Tapestry now envisions revenues to be approximately $6.7 billion for fiscal 2022. This suggests high-teens growth rate versus the prior year on a 52-week, comparable basis. The company guided earnings in the area of $3.45 per share versus its prior estimate of $3.60-$3.65. The current projection suggests a sharp increase from adjusted earnings of $2.97 per share reported in fiscal 2021. The company remains on track to realize gross run-rate savings of $300 million in fiscal 2022.

Tapestry, Inc. Price, Consensus and EPS Surprise

Tapestry, Inc. Price, Consensus and EPS Surprise
Tapestry, Inc. Price, Consensus and EPS Surprise

Tapestry, Inc. price-consensus-eps-surprise-chart | Tapestry, Inc. Quote

Let’s Take an Insight

For the third quarter, net sales for Coach came in at $1,072.4 million, up 11% year over year. Kate Spade sales came in at $301.5 million, surging 19% from the year-ago period. Net sales for Stuart Weitzman totaled $63.6 million, reflecting an increase of 11% year over year.

Tapestry continued with its sturdy e-commerce performance with digital sales rising more than 20% compared with the prior-year period. Sales in North America surged 22%, fully offsetting mid-teens decline in Mainland China.

Margin Discussions

Consolidated gross profit came in at $1,005.1 million, up 10% from the year-ago period. However, gross margin contracted 170 basis points to 69.9%. Management informed that gross margin was adversely impacted by higher freight cost in order to maintain product flow, which totaled $63 million or 440 basis points.

Further, the company reported adjusted operating income of $175.8 million, up from adjusted operating income of $182.9 million in the prior-year quarter. Meanwhile, adjusted operating margin shrunk 220 basis points to 12.2%.

We note that adjusted SG&A expenses rose 14% year over year to $829.3 million. Again, as a percentage of net sales, SG&A expenses increased to 57.7% from 57.3% in the year-ago period.

Management foresees gross margin contraction in fiscal 2022, inclusive of 260 basis points of headwinds from increased freight expenses. It expects fiscal operating margin to shrink more than 70 basis points year over year.

Store Update

At the end of the quarter, Tapestry operated 346 Coach stores, 207 Kate Spade outlets and 40 Stuart Weitzman stores in North America. Internationally, the count was 606, 192 and 57 for Coach, Kate Spade and Stuart Weitzman, respectively.

Other Financial Details

Tapestry ended the quarter with cash, cash equivalents and short-term investments of $1,073 million, long-term debt of $1,189.8 million and stockholders' equity of $2,535 million.

Free cash flow year-to-date was an inflow of $541 million. The company incurred capital expenditures and implementation costs related to Cloud Computing of $119 million in the year-to-date period. For fiscal 2022, management anticipates capital expenditures and implementation costs related to Cloud Computing of about $180 million.

Tapestry anticipates to repurchase approximately $1.6 billion worth of shares in fiscal 2022, up from the prior expectation of $1.25 billion. The company repurchased shares worth $500 million in the third quarter. As of quarter-end, $350 million remained under the existing share repurchase program, which is expected to be utilized in the final quarter. The company’s board approved a new $1.5 billion share buyback program, expected to be utilized in fiscal 2023.

Shares of this Zacks Rank #3 (Hold) company have fallen 41.5% in the past year compared with the industry’s decline of 56%.

Pick These 3 Stocks

Here we highlight three top-ranked stocks, namely, Steven Madden SHOO, G-III Apparel GIII and Target TGT.

Steven Madden is a leading designer and marketer of fashion-forward footwear, accessories and apparel for women, men and children. The stock currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Steven Madden’s current financial year revenues and EPS suggests growth of 15.2% and 19.6%, respectively, from the year-ago reported figure. SHOO has a trailing four-quarter earnings surprise of 44%, on average.

G-III Apparel designs, sources and markets apparel and accessories under owned, licensed and private label brands. The stock currently carries a Zacks Rank #1.

The Zacks Consensus Estimate for G-III Apparel’s current financial year revenues and EPS suggests growth of 10% and 5.4%, respectively, from the year-ago reported figure. G-III Apparel has a trailing four-quarter earnings surprise of 160.6%, on average.

General merchandise retailer Target currently carries a Zacks Rank #2 (Buy). TGT has an expected EPS growth rate of 16.5% for three-five years.

The Zacks Consensus Estimate for Target’s current financial-year sales and EPS suggests growth of 3.7% and 7.7%, respectively, from the corresponding year-ago period’s levels. TGT has a trailing four-quarter earnings surprise of 21.3%, on average.

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