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Why Is Tapestry (TPR) Down 1.5% Since Last Earnings Report?
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It has been about a month since the last earnings report for Tapestry (TPR - Free Report) . Shares have lost about 1.5% 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 the most recent earnings report in order to get a better handle on the important drivers.
Tapestry’s Q1 Earnings Beat, Decline Year Over Year
Tapestry, Inc. came out with its first-quarter fiscal 2020 results, wherein the bottom line came ahead of the Zacks Consensus Estimate but top line missed the same.
The company posted adjusted quarterly earnings of 40 cents a share that beat the Zacks Consensus Estimate of 37 cents. However, the bottom line declined 17% from the year-ago period on account of lower net sales and higher SG&A expenses.
Net sales of this New York-based company came in at $1,357.9 million, down 2% year over year on a reported and 1% on a constant currency basis. Sales increase in Coach brand was offset by declines at Kate Spade and Stuart Weitzman. Net sales also came below the Zacks Consensus Estimate of $1,372.7 million. This was the fourth straight quarter that the company’s top line missed the estimates.
Management highlighted that the company’s international business was sturdy than North America business, where it continued to face industry headwinds. It further added that adjusted operating income and earnings per share fared better than its guidance.
Notably, Coach registered eighth straight quarter of comparable store sales (comps) growth led by digital and international channels. Comps were strong across Europe, Japan and Mainland China but soft in Hong Kong. Comps were flat in North America. We note that comps at Kate Spade fell owing to product and merchandising challenges, while sales at Stuart Weitzman were hurt by sluggish wholesale demand and operational challenges.
Consolidated adjusted gross profit came in at $918.6 million, down 2% from the prior-year quarter. Gross margin contracted 20 basis points to 67.6%. Further, adjusted operating income of $166.5 million fell 10% from the prior-year quarter figure, while operating margin shrunk 110 basis points to 12.3%. We note that adjusted SG&A expenses came in at $752.1 million, reflecting an increase of $2.2 million from the year-ago period. As a percentage of net sales, the same increased 110 basis points to 55.4%.
Segment Details
Net sales for Coach came in at $965.9 million, up 1% year over year on both reported and constant currency basis. Comparable-store sales rose 1%, comprising roughly a 100-basis-point benefit due to a rise in global e-commerce. While adjusted gross margin for the segment contracted 80 basis points to 70.2%, adjusted operating margin increased 30 basis points to 25%.
Kate Spade sales came in at $305.5 million, down 6% on both reported and constant currency basis. Comparable-store sales slid 16%, including the adverse impact of approximately 200 basis points from a rise in global e-commerce. While adjusted gross margin for the segment shriveled 30 basis points to 63.1%, adjusted operating margin shrunk 810 basis points to 6.3%.
Net sales for Stuart Weitzman totaled $86.5 million, reflecting a decrease of 9% on a reported and 8% on a constant currency basis. The segment’s adjusted gross margin expanded 550 basis points to 55.7%. The segment reported adjusted operating loss of $10 million.
Store Update
At the end of the quarter, the company operated 392 Coach stores, 212 Kate Spade outlets and 72 Stuart Weitzman stores in North America. Internationally, the count was 592, 198 and 78 for Coach, Kate Spade and Stuart Weitzman, respectively.
During the quarter, the company added net four locations driven by international expansion at Kate Spade and Stuart Weitzman. The company ended the quarter with 1,544 directly operated stores worldwide.
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 $788.4 million, long-term debt of 1,597.3 million and shareholders' equity of $ 3,086.9 million. Management incurred capital expenditures of $72 million during the quarter under review and anticipates the same to be roughly $300 million for fiscal 2020.
During the quarter, the company repurchased approximately 12 million shares for a total of roughly $300 million. At the end of the period, the company still had $600 million remaining under its current buyback program. The company plans to return about $700 million to its shareholders in fiscal 2020 via share buybacks and dividends.
Guidance
Management expects second-quarter fiscal 2020 revenue to be in line with the prior-year period. Notably, comps are projected to increase in low single-digit at Coach but to decline in high single-digit rate at Kate Spade. Revenues at Stuart Weitzman are expected to be approximately flat with last year.
Tapestry anticipates second-quarter operating income to decline year over year owing to gross margin contraction and mid-single-digit increase in SG&A, including the shift in timing of expenses from the first quarter. Management envisioned second-quarter earnings in the range of 95 cents to $1.00 per share, down from $1.07 reported in the year-ago period.
For fiscal 2020, management continues to anticipate revenues increase at a low-single-digit rate with earnings per share expected to be even with the prior year.
Management expects low-single digit growth in both revenues and comparable-store sales at Coach brand. Kate Spade is likely to register low to mid-single digit sales growth driven by distribution. At Stuart Weitzman, management expects marginal growth owing to lower-than-expected performance in the first quarter as well as continued soft wholesale demand.
Consolidated gross margin is likely to witness a modest decline on account of bringing Kate Spade’s footwear business in-house in the second half of the fiscal year, currency pressure primarily at Coach 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 -8.86% due to these changes.
VGM Scores
At this time, Tapestry has a subpar Growth Score of D, however its Momentum Score is doing a lot better with an A. Charting a somewhat similar path, 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. Notably, 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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Why Is Tapestry (TPR) Down 1.5% Since Last Earnings Report?
It has been about a month since the last earnings report for Tapestry (TPR - Free Report) . Shares have lost about 1.5% 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 the most recent earnings report in order to get a better handle on the important drivers.
Tapestry’s Q1 Earnings Beat, Decline Year Over Year
Tapestry, Inc. came out with its first-quarter fiscal 2020 results, wherein the bottom line came ahead of the Zacks Consensus Estimate but top line missed the same.
The company posted adjusted quarterly earnings of 40 cents a share that beat the Zacks Consensus Estimate of 37 cents. However, the bottom line declined 17% from the year-ago period on account of lower net sales and higher SG&A expenses.
Net sales of this New York-based company came in at $1,357.9 million, down 2% year over year on a reported and 1% on a constant currency basis. Sales increase in Coach brand was offset by declines at Kate Spade and Stuart Weitzman. Net sales also came below the Zacks Consensus Estimate of $1,372.7 million. This was the fourth straight quarter that the company’s top line missed the estimates.
Management highlighted that the company’s international business was sturdy than North America business, where it continued to face industry headwinds. It further added that adjusted operating income and earnings per share fared better than its guidance.
Notably, Coach registered eighth straight quarter of comparable store sales (comps) growth led by digital and international channels. Comps were strong across Europe, Japan and Mainland China but soft in Hong Kong. Comps were flat in North America. We note that comps at Kate Spade fell owing to product and merchandising challenges, while sales at Stuart Weitzman were hurt by sluggish wholesale demand and operational challenges.
Consolidated adjusted gross profit came in at $918.6 million, down 2% from the prior-year quarter. Gross margin contracted 20 basis points to 67.6%. Further, adjusted operating income of $166.5 million fell 10% from the prior-year quarter figure, while operating margin shrunk 110 basis points to 12.3%. We note that adjusted SG&A expenses came in at $752.1 million, reflecting an increase of $2.2 million from the year-ago period. As a percentage of net sales, the same increased 110 basis points to 55.4%.
Segment Details
Net sales for Coach came in at $965.9 million, up 1% year over year on both reported and constant currency basis. Comparable-store sales rose 1%, comprising roughly a 100-basis-point benefit due to a rise in global e-commerce. While adjusted gross margin for the segment contracted 80 basis points to 70.2%, adjusted operating margin increased 30 basis points to 25%.
Kate Spade sales came in at $305.5 million, down 6% on both reported and constant currency basis. Comparable-store sales slid 16%, including the adverse impact of approximately 200 basis points from a rise in global e-commerce. While adjusted gross margin for the segment shriveled 30 basis points to 63.1%, adjusted operating margin shrunk 810 basis points to 6.3%.
Net sales for Stuart Weitzman totaled $86.5 million, reflecting a decrease of 9% on a reported and 8% on a constant currency basis. The segment’s adjusted gross margin expanded 550 basis points to 55.7%. The segment reported adjusted operating loss of $10 million.
Store Update
At the end of the quarter, the company operated 392 Coach stores, 212 Kate Spade outlets and 72 Stuart Weitzman stores in North America. Internationally, the count was 592, 198 and 78 for Coach, Kate Spade and Stuart Weitzman, respectively.
During the quarter, the company added net four locations driven by international expansion at Kate Spade and Stuart Weitzman. The company ended the quarter with 1,544 directly operated stores worldwide.
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 $788.4 million, long-term debt of 1,597.3 million and shareholders' equity of $ 3,086.9 million. Management incurred capital expenditures of $72 million during the quarter under review and anticipates the same to be roughly $300 million for fiscal 2020.
During the quarter, the company repurchased approximately 12 million shares for a total of roughly $300 million. At the end of the period, the company still had $600 million remaining under its current buyback program. The company plans to return about $700 million to its shareholders in fiscal 2020 via share buybacks and dividends.
Guidance
Management expects second-quarter fiscal 2020 revenue to be in line with the prior-year period. Notably, comps are projected to increase in low single-digit at Coach but to decline in high single-digit rate at Kate Spade. Revenues at Stuart Weitzman are expected to be approximately flat with last year.
Tapestry anticipates second-quarter operating income to decline year over year owing to gross margin contraction and mid-single-digit increase in SG&A, including the shift in timing of expenses from the first quarter. Management envisioned second-quarter earnings in the range of 95 cents to $1.00 per share, down from $1.07 reported in the year-ago period.
For fiscal 2020, management continues to anticipate revenues increase at a low-single-digit rate with earnings per share expected to be even with the prior year.
Management expects low-single digit growth in both revenues and comparable-store sales at Coach brand. Kate Spade is likely to register low to mid-single digit sales growth driven by distribution. At Stuart Weitzman, management expects marginal growth owing to lower-than-expected performance in the first quarter as well as continued soft wholesale demand.
Consolidated gross margin is likely to witness a modest decline on account of bringing Kate Spade’s footwear business in-house in the second half of the fiscal year, currency pressure primarily at Coach 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 -8.86% due to these changes.
VGM Scores
At this time, Tapestry has a subpar Growth Score of D, however its Momentum Score is doing a lot better with an A. Charting a somewhat similar path, 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. Notably, Tapestry has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.