A month has gone by since the last earnings report for Tapestry (TPR). Shares have lost about 9% 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 catalysts.
Tapestry’s Q1 Earnings & Revenues Surpass Estimates
Tapestry, Inc. posted better-than-expected first-quarter fiscal 2019 results. The adjusted earnings of 48 cents a share beat the Zacks Consensus Estimate of 44 cents, thereby resulting in a positive earnings surprise of 9% and marking the 19th straight quarter of earnings beat. The quarterly earnings improved approximately 14% year over year buoyed by top line growth, gross margin expansion and favorable tax rate.
Net sales of this New York-based company came in at $1,381.2 million, up 7% year over year on a reported and constant currency basis. We noted that the total sales came ahead of the Zacks Consensus Estimate of $1,351 million, marking the fourth successive quarterly beat.
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. Sales increase at Coach brand, contributions from recent buyouts and cost containment efforts favorably impacted the results.
We note that consolidated adjusted gross profit came in at $935.7 million, up significantly from $851.3 million, while gross margin expanded 170 basis points to 67.8%. Further, adjusted operating income of $181.2 million, up 7% from the prior-year quarter figure, however, operating margin remained flat at 13.1%.
Net sales for Coach came in at $960.7 million, reflecting an increase of 4% year over year on a reported and constant currency basis. Comparable-store sales rose 4%, comprising roughly a 50 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 $325.4 million, up 21% year over year on a reported and constant currency basis. Sales increased on account of new store distribution and the consolidation of the joint ventures for Mainland China Hong Kong, Macau and Taiwan, partly offset by fall in comparable-store sales and the strategic pullback in wholesale disposition sales. Comparable-store sales slid 5%, in spite of including the favorable impact of approximately 300 basis points from a rise in global e-commerce.
Management expects comparable-store sales to improve in the second half of the fiscal year with launch of Nicola Glass's full collection worldwide. The company now envisions Kate Spade sales to increase in a double-digit rate in fiscal 2019 on account of new distribution, buyouts and consolidations of the distributor businesses and positive comparable-store sales in the second half.
Net sales for Stuart Weitzman totaled $95.1 million, reflecting a decline of 1% year over year on a reported and constant currency basis. The segment’s gross margin also shriveled considerably. The company hinted that as expected earlier development and delivery delays hurt sales and margins, however, rate of sales decline decelerated sharply from 17% recorded in the final quarter of fiscal 2018. Management expects the segment’s topline to return to growth in the second quarter of fiscal 2019.
At the end of the quarter, the company operated 398 Coach stores, 211 Kate Spade outlets and 67 Stuart Weitzman stores in North America. Internationally, the count stood at 584, 152 and 44 for Coach, Kate Spade and Stuart Weitzman, respectively. During the quarter, the company added 24 net new outlets.
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 plans to open 60-70 net new Kate Spade directly operated stores during the fiscal year. 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.
The company concluded the buybacks of the Kate Spade operations in Singapore, Malaysia and Australia. It also completed the buyback of the Stuart Weitzman business in Southern China. The company has entered into a deal to acquire the Stuart Weitzman business in Australia from its distribution partner, which is likely to close next summer. These endeavors facilitate international expansion.
Other Financial Details
Tapestry ended the quarter with cash, cash equivalents and short-term investments of $1,063.2 million, long-term debt of $1,600.5 million and shareholders' equity of $3,309.6 million.
The company generated negative operating cash flow of $19 million and incurred capital expenditure of $55 million during the quarter. As a result, free cash flow was an outflow of $75 million.
FY 2019 Guidance
Tapestry continues to envision fiscal 2019 sales to increase at a mid-single-digit rate year over year to $6.1-$6.2 billion. Management expects operating income growth rate to surpass that of the top line on the back of organic growth, realization of synergies from the Kate Spade buyout, impact of distributor consolidations and systems investments, partly offset by SG&A deleverage. The company anticipates to attain run-rate synergies of approximately $100-$115 million from Kate Spade buyout in fiscal 2019.
The company forecasts fiscal 2019 earnings in the range of $2.75-$2.80 per share compared with $2.63 delivered in fiscal 2018. The company had earlier projected earnings between $2.70 and $2.80 per share. Management expects EBITDA in the band of $300-$325 million in fiscal 2019.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
Currently, Tapestry has a poor Growth Score of F, however its Momentum Score is doing a bit better with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Tapestry has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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