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Why Is Tapestry (TPR) Up 29.5% Since Last Earnings Report?

Zacks Equity Research

It has been about a month since the last earnings report for Tapestry (TPR). Shares have added about 29.5% in that time frame, outperforming 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 the most recent earnings report in order to get a better handle on the important catalysts.

Tapestry’s Q4 Earnings Meet, Revenues Miss Estimates

Tapestry came out with its fourth-quarter fiscal 2019 results. While earnings came in line, net sales fell short of the Zacks Consensus Estimate. Also, soft first-quarter fiscal 2020 view was not well perceived by investors.

We note that the company posted adjusted quarterly earnings of 61 cents a share, which met the Zacks Consensus Estimate but came in a penny higher than the year-ago period.

Net sales of this New York-based company came in at $1,513.7 million, up 2% year over year on a reported and 4% on a constant currency basis. Sales increase at Kate Spade and Stuart Weitzman contributed to the top-line growth. However, net sales came below the Zacks Consensus Estimate of $1,534 million. This was the third straight quarter that the company’s top line missed the estimates.

Consolidated adjusted gross profit came in at $1,017.9 million, up 1% from the prior-year quarter. However, gross margin contracted 60 basis points to 67.3%. Further, adjusted operating income of $220.8 million fell 3% from the prior-year quarter figure, while operating margin shrunk 70 basis points to 14.6%. We note that adjusted SG&A expenses increased 2% to $797.1 million, while as a percentage of net sales, the same increased 10 basis points to 52.7%.

Segment Details

Net sales for Coach came in at $1,096.6 million, almost flat year over year. On a constant currency basis, net sales increased 2%. Comparable-store sales rose 2%, comprising roughly a 150-basis-point benefit due to a rise in global e-commerce. This was the seventh straight quarter of comparable-store sales growth. While adjusted gross margin for the segment expanded 10 basis points to 69.7%, adjusted operating margin increased 70 basis points to 27.5%.     

Kate Spade sales came in at $331.9 million, up 6% year over year on a reported and 7% on a constant currency basis. Comparable-store sales slid 6% in spite of including the favorable impact of approximately 600 basis points from a rise in global e-commerce. We note that the rate of decline in comparable-store sales accelerated from 3% witnessed in the preceding quarter. Also, this fared unfavorably with management’s expectation to post positive comparable-store sales. While adjusted gross margin for the segment shriveled 300 basis points to 62.2%, adjusted operating margin shrunk 360 basis points to 9.3%.

Net sales for Stuart Weitzman totaled $85.2 million, reflecting an increase of 17% on a reported and 20% on a constant currency basis. The segment’s adjusted gross margin expanded 130 basis points to 54.8%. The segment reported adjusted operating loss of $10 million.

Store Update

At the end of the quarter, the company operated 391 Coach stores, 213 Kate Spade outlets and 71 Stuart Weitzman stores in North America. Internationally, the count was 595, 194 and 76 for Coach, Kate Spade and Stuart Weitzman, respectively.

During fiscal 2019, Tapestry added a net of 108 locations driven by international expansion at Kate Spade and Stuart Weitzman, including a total of 69 net new openings and 39 stores acquired through regional distributor buybacks. The company ended the fiscal year with 1,540 directly operated stores globally. The company opened 48 Coach Stores, 68 Kate Spade Stores and 28 Stuart Weitzman locations.

Coach is likely to witness a moderate change in store count during fiscal 2020 on account of store closures in North America, offset by modest net openings internationally.

The company plans to open a net of 15-20 Stuart Weitzman locations globally, and net 30-40 Kate Spade stores in fiscal 2020. Clearly, the company has scaled back its Kate Spade store opening plans.

Other Financial Details

Tapestry ended the quarter with cash, cash equivalents and short-term investments of $1,233.8 million, long-term debt of 1,601.9 million and shareholders' equity of $ 3,513.4 million. Management incurred capital expenditures of $274 million during fiscal 2019 and anticipates the same to be roughly $300 million for fiscal 2020.

During the quarter, the company repurchased approximately 3.4 million shares for a total of roughly $100 million. At the end of the period, the company still had $900 million remaining under its current buyback program. The company plans to return about $700 million to its shareholders in fiscal 2020 via share buybacks (about $300 million) and dividends.

Guidance

Tapestry expects first-quarter revenues to be marginally below the prior year and earnings per share to decrease year over year. Management envisions low-single digit comparable-store sales growth at Coach. However, the metric is expected to decline in high-teens rate at Kate Spade based on the current traffic trend as well as product and merchandising challenges. Tapestry expects Stuart Weitzman to post an operating loss.

Consolidated gross margin is also likely to remain under pressure during the first quarter. Moreover, SG&A expenses is expected to increase on account of store openings and higher depreciation related to systems investments.

For fiscal 2020, management anticipates revenues to increase at a low-single-digit rate with earnings per share expected to be even with the prior year. The company had earlier guided double-digit increase in both operating income and earnings per share in fiscal 2020. The company revisited its projection to take into account the current business trend at Kate Spade brand, given the uncertain environment in North America.

Management expects low-single digit growth in both revenue and comparable-store sales at Coach brand. Kate Spade is likely to register low to mid-single digit sales growth driven by distribution. The company anticipates solid sales growth at Stuart Weitzman.

Consolidated gross margin is likely to witness a modest decline on account of bringing Kate Spade’s footwear business in-house, currency pressure and tariff related impact. Moreover, SG&A expenses is expected to increase at a low-single-digit rate attributable to new store openings, regional buybacks in order to expand brands and directly manage operations in key international market and systems investments.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -31.02% due to these changes.

VGM Scores

At this time, Tapestry has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise 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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