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Tapestry (TPR) Up 4.7% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Tapestry (TPR - Free Report) . Shares have added about 4.7% 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 drivers.

Tapestry Q4 Loss Narrower Than Expected, Sales Fall Y/Y

Tapestry, Inc. reported better-than-expected fourth-quarter fiscal 2020 results. This house of modern luxury accessories and lifestyle brands posted narrower-than-expected loss. Further, the company’s net sales surpassed the Zacks Consensus Estimate for the third straight quarter. However, the coronavirus pandemic did impact the company’s performance with both top and bottom line declining sharply from the year-ago period.

The company posted adjusted loss of 25 cents a share narrower-than-the Zacks Consensus Estimate of loss of 48 cents. However, this compared unfavorably with the year-ago period. The company had reported adjusted earnings of 61 cents in the prior-year quarter. Lower net sales and higher interest expense hurt the company’s bottom-line results.

Net sales of this New York-based company came in at $714.8 million, down 53% year over year. However, the metric came ahead of the Zacks Consensus Estimate of $691.1 million. Sales declined across all brands.

Management stated that quarterly results came ahead of internal expectations. Notably, Tapestry continued with its sturdy e-commerce performance with digital sales rising in triple digits compared with the year-ago period. Impressively, the company registered year-over-year increase in sales in Mainland China during the quarter under review. Additionally, the company notified that the vast majority of directly operated stores globally were reopened by the end of the quarter. The company also efficiently managed inventories, which were down 5% from the prior-year period.

Tapestry also announced an Acceleration Program with multi-year initiatives to drive revenue growth, gross margin expansion and operating leverage across its portfolio. The program aims at transforming into a leaner and more responsive organization, building significant data and analytics capabilities with focus on enhancing digital and omnichannel capabilities, and operating with a clearly defined path and strategy for each brand.

Notably, the company intends to harness opportunities in China through tailored and optimized assortments coupled with enhanced marketing. Management is implementing structural changes, including 20% reduction in the global corporate headcount expense on a run rate basis. The company has also lowered its SKU count by approximately 50% for the upcoming holiday season. As a part of its customer engagement strategy, the company launched made-to-order CitySole on coach.com, allowing our customers to design one of a kind sneakers, featuring a new innovative 3D and augmented reality experience. The company is concentrating on new store formats and smaller square footage locations.

Although management did not provide any guidance for fiscal 2021, it stated that the company is undertaking actions to lower promotional activity and improve Average Unit Retail or AURs across brands to expand gross margin. The company is also targeting reductions in SG&A expenses and right sizing store fleet. With regards to Stuart Weitzman the company intends to rationalize the North America retail fleet by reducing the number of doors in fiscal 2021 and close all direct locations in Europe, Japan, Australia and Malaysia.

Management anticipates to realize about $300 million in gross run rate expense savings from these endeavors, including $200 million projected for fiscal 2021. The company expects to revert to sustained sales growth in the second half of fiscal 2021 as well as bottom-line growth in fiscal 2021, 2022 and 2023. Assuming a continuation of the slow and steady recovery from the pandemic, management anticipates fiscal 2021 revenues to be roughly even with the prior year.

Margin Discussions

Consolidated adjusted gross profit came in at $507.3 million, significantly down $1,017.9 million in the year-ago period. However, gross margin expanded 370 basis points to 71% owing to lower and more disciplined promotional activity as well as the benefit of geographic mix, given the higher penetration of international businesses. Gross margins increased at each of Coach, Kate Spade and Stuart Weitzman during the quarter.

Further, the company reported adjusted operating loss of $69.8 million as against operating income of $222 million in the prior-year quarter. We note that adjusted SG&A expenses fell 27.5% to $577.1 million. However, as a percentage of net sales, the same increased to 80.8% from 52.6% in the year-ago quarter.

Segment Details

Net sales for Coach came in at $517.4 million, down 53% year over year. Adjusted gross margin for the segment expanded 390 basis points to 73.6%. We note that adjusted operating margin shriveled to 9.1% from 27.5% a year ago.

Kate Spade sales came in at $164.1 million, down 51% from the year-ago period. Adjusted gross margin for the segment increased 270 basis points to 64.9%. The segment reported adjusted operating loss was $30 million as against adjusted operating income of $31 million in the year-ago period.

Net sales for Stuart Weitzman totaled $33.3 million, down 61% year over year. The segment’s adjusted gross margin jumped 460 basis points to 59.4%. Adjusted operating loss for the segment was $23 million compared with adjusted operating loss of $9 million in the year-ago period.

Store Update

At the end of the quarter, the company operated 375 Coach stores, 213 Kate Spade outlets and 58 Stuart Weitzman stores in North America. Internationally, the count was 583, 207 and 73 for Coach, Kate Spade and Stuart Weitzman, respectively.

Other Financial Details

Tapestry ended the quarter with cash, cash equivalents and short-term investments of $1,434.4 million (including $700 million drew down on $900 million revolver), long-term debt of 1,587.9 million and stockholders' equity of $ 2,276.4 million. During the quarter, the company capital expenditures of $33 million, reflecting a year-over-year decline of about 60%. Management now expects to incur capital expenditures of approximately $150 million during the fiscal year 2021, down $125 million from normal annualized spend.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a flat trend in estimates revision.

VGM Scores

At this time, Tapestry has a poor Growth Score of F, however its Momentum Score is doing a lot better with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

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

Outlook

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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