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Tapestry posts earnings loss

coach-at-sydney-airports-t1-fashion-precinct-facadeThe leather goods company formerly known as Coach Inc., Tapestry, has reported earnings for the first time since the name change.

Tapestry, which is in the midst of a major rebranding, posted a 24.2 per cent increase in revenue to $1.29 billion and a net loss of $17.7 million compared with a profit of $117.4 million the previous year.

Same store sales dropped two per cent for the Coach brand.

Neil Saunders, managing director at GlobalData Retail, said the current period is one of transition for Tapestry, which changed its name from Coach last month as it grows into a multibrand lifestyle company following the acquisitions of accessories retailer Kate Spade and shoemaker Stuart Weitzman.

“The inclusion of Kate Spade flatters the overall revenue number, which rose by almost 24 per cent,” Saunders said. “However, if this is excluded, a weaker picture emerges with sales down by 1.7 per cent over the prior year. This is solely the result of the continued revenue slide at Coach where overall sales dipped by 2.8 per cent, including a two per cent decline in comparables.”

The pullback from department stores and other channels that Tapestry considers to be detrimental are part of the reason for the slide in Coach’s numbers. Saunders said this is not an unusual pattern.

“However, we feel that there is an additional softness in this quarter’s results and that they indicate a slight worsening of performance since the prior period,” he said. “Fortunately, much of this appears to be down to transitory factors such as a shift in the Chinese Mid-Autumn festival and natural disasters in the United States. Even so, they serve as a reminder of the fickleness of demand when it comes to higher-end brands – which is why Tapestry wants to move away from being reliant on just one label.”

Saunders said their recent store visits to Coach has led them to believe that the holiday quarter will be a positive one.

“The collection is looking strong with some good gifting stories; merchandising is compelling and engaging,” he said. “Our consumer data also indicates that perceptions of Coach continue to rise and its status as a brand that people want to receive and to gift have both improved since last year.”

Tapestry’s newest addition, Kate Spade, also suffered a sales decline, with comparables down by 9 per cent.

“While this is a less than auspicious start, it is the result of deliberate action by Tapestry to wean the brand off its reliance on discounting and flash sales,” Saunders said. “Predictably, this had a negative impact on volumes, especially online where global e-commerce declined by 600 basis points.”

As much as this is beneficial to gross margins, the shift put severe pressure on the bottom line.

“Thanks to this, and the disruption and expense of the acquisition, Kate Spade fell firmly into the red,” Saunders said. “However, we are not overly concerned by this as we believe Kate Spade needs to take two steps back before it can move forward.”

With Tapestry’s two leading brands in negative sales territory, it fell to Stuart Weitzman to try and make up some lost ground. The division duly delivered with a 10.2 per cent uplift in sales. Better collections in store coupled with improved demand for footwear drove the results.

“We are confident that this uptick will continue into the holiday quarter and beyond, bolstered by the much-awaited collection from Giovanni Morelli,” Saunders said.

According to Saunders, as important as the performance of the individual brands is, it is the way in which Tapestry will bring them together that will determine business performance. “Here, despite the negative revenue growth and this quarter’s net loss of $17.7 million, we are encouraged by the progress,” he said. “Synergy savings from the Kate Spade integration are ahead of schedule, which allowed the company to beat its earnings forecast. Moreover, Tapestry has increased its targeted savings out to 2019 from $50 million to $115 million.”

Saunders added that all of this suggests that the current period is one of transition for Tapestry and that better numbers will come through over time.

“Overall, we have confidence in the general direction and strategy of the group.”

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