A month has gone by since the last earnings report for Tapestry (TPR). Shares have lost about 9.3% 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 its most recent earnings report in order to get a better handle on the important drivers.
Tapestry Beats on Q3 Earnings, Announces Share Buyback Program
Tapestry reported better-than-expected third-quarter fiscal 2019 bottom-line results. Also, the company announced $1 billion share buyback program. Management hinted that the quarterly performance live-up to its expectations with both sales and gross margin improving on a constant currency basis in each of the three brands. The company also registered sequential improvement in comparable-store sales at Kate Spade.
Meanwhile, the company reiterated its fiscal 2019 earnings per share view. It also projected double-digit increase in operating income and earnings per share in fiscal 2020. We note that the company posted adjusted quarterly earnings of 42 cents a share that beat the Zacks Consensus Estimate by a penny but fell 22% from the year-ago period.
Net sales of this New York-based company came in at $1,331.4 million, up 1% year over year on a reported and 2% on a constant currency basis. Sales increase at Kate Spade contributed to the top-line growth. However, net sales marginally came below the Zacks Consensus Estimate of $1,337.3 million. This was the second straight quarter that the company’s top line missed the estimates.
Consolidated adjusted gross profit came in at $920.9 million, up 1% from the prior-year quarter, while gross margin expanded 30 basis points to 69.2% buoyed by margin expansion across Kate Spade and Coach, offset by contraction in margin at Stuart Weitzman. Management expects gross margin contraction in the fourth quarter but expansion for the year. Further, adjusted operating income of $141.1 million plunged 23% from the prior-year quarter figure, while operating margin contracted 330 basis points to 10.6% due to increase investments. We note that adjusted SG&A expenses rose 7% to $779.8 million, while as a percentage of net sales the same increased 360 basis points to 58.6% due to new store distribution, higher marketing expense at Kate Spade, costs related to the regional buybacks and higher depreciation. Management expects SG&A deleverage in fiscal 2019 on account of regional distributor buyback activity and systems investments.
Net sales for Coach came in at $965 million, marginally down from $969.3 million in the year-ago period. On a constant currency basis, net sales increased 1%. Comparable-store sales rose 1%, comprising roughly a 100 basis points benefit due to rise in global e-commerce. While adjusted gross margin for the segment expanded 30 basis points to 71.7%, adjusted operating margins decreased 60 basis points to 25.4%.
Kate Spade sales came in at $281.1 million, up 4% year over year on a reported and 5% on a constant currency basis. Comparable-store sales slid 3%, in spite of including the favorable impact of approximately 700 basis points from a rise in global e-commerce. However, the metric showed a considerable improvement from a decline of 11% witnessed in the preceding quarter. While adjusted gross margin for the segment increased 90 basis points to 64.8%, adjusted operating margins shrunk 370 basis points to 4.7%.
Net sales for Stuart Weitzman totaled $85.3 million, reflecting an increase of 2% on a reported and 4% on a constant currency basis. The segment’s adjusted gross margin shriveled 140 basis points to 55.2%. The segment reported adjusted operating loss of $13 million.
Going forward, management anticipates to post positive comparable-store sales at both Coach and Kate Spade and enhance profitability at Stuart Weitzman in the final quarter of fiscal 2019 as well as years ahead. Certainly, management’s transformational initiatives revolving around product, stores and marketing bode well.
At the end of the quarter, the company operated 392 Coach stores, 212 Kate Spade outlets and 70 Stuart Weitzman stores in North America. Internationally, the count stood at 589, 181 and 58 for Coach, Kate Spade and Stuart Weitzman, respectively. 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 net new Kate Spade locations worldwide. The company plans to open 40-50 net new locations in international markets. Moreover, management intends to open approximately 50 directly operated Stuart Weitzman locations worldwide.
Other Financial Details
Tapestry ended the quarter with cash, cash equivalents and short-term investments of $ 1,337.3 million, long-term debt of 1,601.5 million and shareholders' equity of $ 3,531.2 million. Management incurred capital expenditures of $68 million during the quarter and continues to anticipate the same in the range of $320-$325 million for fiscal 2019.
FY 2019 Guidance
Tapestry continues to envision fiscal 2019 sales growth at a low-to-mid-single-digit rate on a year over year basis. The company reaffirmed earnings per share guidance of $2.55-$2.60 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.
How Have Estimates Been Moving Since Then?
Fresh estimates followed a downward path over the past two months.
Currently, 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.
Tapestry has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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