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Tapestry's (TPR) Q1 Earnings Beat, Digital Sales Rise, View Up

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·6 min read
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  • TPR
  • CPRI
  • BOOT
  • AEO

In spite of a challenging backdrop, Tapestry, Inc. TPR reported stronger-than-anticipated first-quarter fiscal 2022 results, thanks to sturdy demand and strong customer engagement. This house of modern luxury accessories and lifestyle brands witnessed significant improvement in sales trends that even surpassed pre-pandemic levels. Also, the company attained a meaningful improvement in earnings per share on a year-over-year basis. Markedly, robust underlying business trends and impressive performance prompted management to raise revenues and earnings per share view for the fiscal year.

Sales & Earnings Picture

Tapestry posted first-quarter adjusted earnings of 82 cents a share that comfortably surpassed the Zacks Consensus Estimate of 69 cents. Remarkably, the bottom line improved significantly from adjusted earnings of 58 cents a share reported in the year-ago period owing to higher net sales and margin expansion.

Net sales of this New York-based company came in at $1,480.9 million, ahead of the Zacks Consensus Estimate of $1,432 million. The metric soared 26% on a year-over-year basis driven by growth across brands. Management highlighted that strength in North America as well as sustained growth in Digital and China contributed to this upbeat performance. Notably, the company added more than 1.6 million new customers across channels in North America.

Tapestry now envisions revenues to be approximately $6.6 billion for fiscal 2022, up from the prior view of $6.4 billion. This suggests mid-teens growth versus the prior year on a 52-week, comparable basis. The company projected earnings in the band of $3.45-$3.50 per share, ahead of the previous estimate of $3.30-$3.35. The current projection suggests a sharp increase from adjusted earnings of $2.97 per share reported in fiscal 2021.

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

Tapestry’s impressive performance validates significant progress on previously announced Acceleration Program. The program aims at transforming into a leaner and more responsive organization, building significant data and analytics capabilities with focus on e-commerce channels, and operating with a clearly defined path and strategy for each brand.

For the first quarter, net sales for Coach came in at $1,114.9 million, up 27% year over year. Kate Spade sales came in at $299.5 million, surging 25% from the year-ago period. Net sales for Stuart Weitzman totaled $66.5 million, reflecting an increase of 18% year over year.

The company continued with its sturdy e-commerce performance with global digital sales rising about 50% compared with prior year period and more than 275% compared with pre-pandemic levels. Impressively, the company registered more than 25% year-over-year increase in sales in Mainland China and approximately 65% versus pre-pandemic levels. Sales in North America surged more than 40% versus the prior-year quarter.

Tapestry’s actions to lower promotional activity, increase SKU productivity and improve Average Unit Retail or AURs across brands helped post margin expansion. Despite supply-chain bottlenecks, first-quarter gross margin increased approximately 140 basis points compared with the prior-year period and over 450 basis points compared with pre-pandemic levels. The company posted operating income growth and operating margin expansion ahead of the prior year and pre-pandemic levels. The company remains on track to realize gross run-rate savings of $300 million in fiscal 2022.

Margin Discussions

Consolidated adjusted gross profit came in at $1,068.7 million, up considerably from $830.2 million reported in the year-ago period. Moreover, adjusted gross margin expanded 140 basis points to 72.2%. Further, the company reported adjusted operating income of $307.1 million, up from adjusted operating income of $228.8 million in the prior-year quarter. Meanwhile, adjusted operating margin increased 120 basis points to 20.7%.

We note that adjusted SG&A expenses rose 26.6% year over year to $761.6 million. Again, as a percentage of net sales, SG&A increased to 51.4% versus 51.3% in the year-ago period.

Store Update

At the end of the quarter, Tapestry operated 355 Coach stores, 209 Kate Spade outlets and 44 Stuart Weitzman stores in North America. Internationally, the count was 583, 193 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 $1,655.2 million, long-term debt of $1,191.4 million and stockholders' equity of $3,150 million. The company expects to pay down its July 2022 bonds, totaling $400 million, by the end of the current fiscal year.

Free cash flow was an outflow of $12 million in the first quarter. The company incurred capital expenditures of $33 million during the quarter under discussion. For fiscal 2022, management anticipates capital expenditures of about $220 million.

Tapestry’s board of directors approved an incremental $1 billion share-repurchase program. The company repurchased shares worth $250 million in the first quarter. It intends to buyback approximately $1 billion worth of shares in fiscal 2022, up from the prior expectation for $500 million.

Shares of this Zacks Rank #4 (Sell) company have fallen 4.1% in the past three months compared with the Retail - Apparel And Shoes industry’s decline of 8.3%.

Wrapping Up

Well, the industry has been witnessing a resurgence in demand, courtesy of pandemic-relief package and stepped-up vaccinations. Industry players like Capri Holdings CPRI and Boot Barn Holdings BOOT also registered top line growth in the recently reported quarters. While Boot Barn’s net sales increased 67.1% to $312.7 million, Capri Holdings’ revenues grew 17% to $1,300 million in the second quarter of fiscal 2022.

For fiscal 2022, Boot Barn anticipates new unit growth of 10% and exclusive brand penetration growth of 350 basis points. Capri Holdings now envisions revenues to be approximately $5.4 billion for fiscal 2022 compared with the prior forecast of $5.3 billion. Both BOOT and CPRI currently sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Another major player in the industry, American Eagle Outfitters AEO is slated to report earnings on Nov 23, 2021. The company is likely to register an increase in the bottom line when it reports third-quarter fiscal 2021 numbers. The Zacks Consensus Estimate for third-quarter earnings per share has remained unchanged in the past 30 days at 60 cents. The figure suggests an increase of 71.4% from the year-ago quarter’s reported figure.

American Eagle’s top line is also expected to rise year over year. The Zacks Consensus Estimate for quarterly revenues is pegged at $1,230 million, which suggests a rise of 19.2% from the figure reported in the prior-year quarter. AEO presently carries a Zacks Rank #3 (Hold).

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