It has been about a month since the last earnings report for Tapestry (TPR). Shares have added about 0.2% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Tapestry due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Tapestry Q2 Earnings & Sales Miss Estimates
Tapestry, Inc. reported lower-than-expected second-quarter fiscal 2019 results and downbeat view. Management hinted that the company’s performance did not live up to its expectation on account of volatile macroeconomic environment and geopolitical issues. Moreover, fall in Kate Spade sales was also not well perceived by investors. We note while overall net sales improved marginally, earnings came in line with the year-ago period.
The company posted adjusted earnings of $1.07 per share that missed the Zacks Consensus Estimate of $1.11. This broke the company’s 19 straight quarters of positive earnings surprise streak. Net sales of this New York-based company came in at $1,800.8 million, up 1% year over year on a reported and 2% on a constant currency basis. However, net sales came below the Zacks Consensus Estimate of $1,857 million, following four successive quarterly beats.
Consolidated adjusted gross profit came in at $1,207 million, up 1% from the prior-year quarter, while gross margin expanded 10 basis points to 67%. Further, adjusted operating income of $402.3 million fell 2.2% from the prior-year quarter figure, while operating margin contracted 70 basis points to 22.3%.
We note that adjusted SG&A expenses increased 2.7% to $804.7 million, while as a percentage of net sales the same increased 80 basis points to 44.7%. SG&A expenses increased on account of cost related to regional buybacks and JV consolidation, new store distribution at Kate Spade and higher level of marketing at Coach.
Management expects gross margin to improve and SG&A deleverage during the year. SG&A expenses are expected to rise significantly during the third quarter due to new store opening plans, investments in systems and shift in Kate Spade marketing spend.
Tapestry is undergoing a brand transformation and is introducing modern luxury concept stores in key markets. The acquisition of Stuart Weitzman and Kate Spade & Company is being viewed as a significant step in its efforts toward becoming a multi-brand company. Moreover, management has undertaken transformation initiatives revolving around product, stores and marketing.
Net sales for Coach came in at $1,248.6 million, reflecting an increase of 2% year over year on a reported and constant currency basis. Comparable-store sales rose 1%, comprising roughly a 100 basis points benefit due to rise in global e-commerce. Both gross and operating margins for the segment expanded. Management expects low single-digit growth in sales and comparable-store sales for fiscal 2019.
Kate Spade sales came in at $428.4 million, down 1% year over year on a reported and constant currency basis. We note that while gross margin expanded, operating margin declined. Comparable-store sales slid 11%, in spite of including the favorable impact of approximately 200 basis points from a rise in global e-commerce. Management expects comparable-store sales to improve in the second half of the fiscal year.
Net sales for Stuart Weitzman totaled $123.8 million, reflecting an increase of 3% on a reported and 4% on a constant currency basis. The segment’s gross and operating margins also shriveled considerably.
At the end of the quarter, the company operated 399 Coach stores, 218 Kate Spade outlets and 68 Stuart Weitzman stores in North America. Internationally, the count stood at 585, 176 and 50 for Coach, Kate Spade and Stuart Weitzman, respectively.
During the quarter, Tapestry opened net two Coach locations, 31 net new Kate Spade locations, including 15 stores acquired in Singapore and Malaysia, and seven Stuart Weitzman locations.
Coach is likely to witness a moderate decline in store count during fiscal 2019 on account of store closures in in North America and Japan. The company remains on track to open 60-70 Kate Spade locations worldwide. The company plans to open 40-50 net new locations in international markets. Moreover, management intends to open approximately 30 net new Stuart Weitzman locations in the fiscal year, mainly in China.
Other Financial Details
Tapestry ended the quarter with cash, cash equivalents and short-term investments of $1,495.2 million, long-term debt of $1,601 million and shareholders' equity of $3,488.4 million.
Management incurred capital expenditures of $61 million during the quarter and continues to anticipate the same in the range of $300-$325 million for fiscal 2019.
FY 2019 Guidance
Tapestry now envisions fiscal 2019 sales to increase at a low-to-mid-single-digit rate year over year. The company now expects earnings in the range of $2.55-$2.60 per share compared with $2.63 delivered in fiscal 2018.
The projection mirrors cost savings on account of realization of synergies from the Kate Spade buyout and the impact of distributor consolidations and systems investments. The company anticipates to attain run-rate synergies of approximately $100-$115 million from Kate Spade buyout in fiscal 2019. The outlook includes net interest expense expectation of around $50 million.
The company had earlier guided net sales increase at a mid-single-digit rate and earnings in the range of $2.75-$2.80 per share.
Management anticipates revenue growth to accelerate in the final quarter of fiscal 2019, as the performance of Kate Spade and Stuart Weitzman improve. As a result, Tapestry expects operating income and earnings per share to fall in the third quarter but increase in the fourth quarter.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted -19.9% due to these changes.
Currently, Tapestry has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. Following the exact same course, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Tapestry has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.
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