It has been about a month since the last earnings report for Tapestry, Inc. (TPR - Free Report) . Shares have lost about 7.7% in that time frame.
Will the recent negative trend continue leading up to its next earnings release, or is TPR 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 catalysts.
Tapestry Q3 Earnings & Revenues Top Estimates
Tapestry, Inc. posted better-than-expected third-quarter fiscal 2018 results. Adjusted earnings of 54 cents a share beat the Zacks Consensus Estimate of 50 cents, thereby resulting in a positive earnings surprise of 8% and marking the 17th straight quarter of earnings beat. The quarterly earnings improved approximately 17% year over year buoyed by top line growth.
Net sales came in at $1,322.4 million, up 33% year over year. On a constant currency basis, net sales surged 30%. We noted that the total sales came ahead of the Zacks Consensus Estimate of $1,304 million, marking the second 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.
The company also relaunched Signature in retail and expanded offering in sport category. The company introduced footwear in directly operated stores worldwide and in North America wholesale with plans to expand distribution to important wholesale partners in Europe in fiscal 2019. The company also launched smartwatch with Fossil.
However, investors became cautious following management’s remark on Stuart Weitzman results. The company highlighted that delay in production and lower sell-through of important carryover styles hurt sales and margins. Management hinted that some of these issues may persist through the Fall/Winter season and added that sales and profitability may continue to remain under pressure in the final quarter. Analysts also pointed that dismal comparable-store sales performance at Kate Spade and overall margin contraction might have also weigh on investor sentiment. The company also hinted that it will continue to pull back wholesale disposition and lower surprise sales for the Kate Spade brand.
We note that consolidated adjusted gross profit surged roughly 29% to $913 million, however, gross margin decreased 190 basis points to 69%. The lower margin profile of the Kate Spade brand hurt gross margin by roughly 120 basis points. Further, adjusted operating income came in at $184.3 million, up 14% from the prior-year quarter figure but operating margin shrunk 240 basis points to 13.9%.
During the quarter under review, the company concluded the acquisition of the Coach business in Australia and New Zealand as well as the Stuart Weitzman business in Northern China from its distributors. Management also took full control of the Kate Spade joint ventures for Mainland China, Hong Kong, Macau and Taiwan. Such moves help the company to directly operate these businesses, look for growth opportunities in international markets and enhance brand development.
Net sales for Coach came in at $969.3 million, reflecting an increase of 6% on a reported basis and 3% on a constant currency basis. Comparable-store sales rose 3%, including a gain of about 100 basis points on account of rise in global e-commerce.
Kate Spade sales came in at $269.3 million. Comparable-store sales declined 9%, including the adverse impact of about 800 basis points from a fall in global e-commerce. Net sales for Stuart Weitzman totaled $83.8 million, reflecting an increase of 5%.
At the end of the quarter, the company operated 405 Coach stores, 188 Kate Spade outlets and 70 Stuart Weitzman stores in North America. Internationally, the count stood at 575, 144 and 33 for Coach, Kate Spade and Stuart Weitzman, respectively. During the quarter, the company opened 9 new stores and closed 11.
Tapestry plans to close approximately 5 net Coach locations and open 20 net new Kate Spade locations globally. The company has opened 2 net Stuart Weitzman locations year-to-date.
Other Financial Details
Tapestry ended the quarter with cash, cash equivalents and short-term investments of $1,038.3 million, long-term debt of $1,599.5 million and shareholders' equity of $3,138 million.
Management generated cash from operations of $156 million and incurred capital expenditures of $60 million, thereby resulting in free cash flow of roughly $95 million. The company projects capital expenditures of about $300 million for fiscal 2018.
FY 2018 Guidance
Management continues to expect fiscal 2018 revenue to increase approximately 30% year over year to $5.8-$5.9 billion with low-single digit organic growth and Kate Spade acquisition adding more than $1.2 billion in revenue.
Tapestry now projects operating income growth of at least 22% on the back of mid-single digit organic growth, Kate Spade buyout and estimated synergies of $45 million. Interest expense is now expected to be about $75 million.
Management now envisions earnings in the band of $2.57-$2.60, reflecting an increase of approximately 19-21%, comprising high single digit accretion from the Kate Spade buyout. The company had earlier projected earnings in the range of $2.52-$2.60 per share.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. There have been ten revisions lower for the current quarter.
At this time, TPR has a nice Growth Score of B. Its Momentum is doing a bit better with an A. However, 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 A. If you aren't focused on one strategy, this score is the one you should be interested in.
Based on our scores, the stock is primarily suitable for momentum investors while also being suitable for those looking for growth and to a lesser degree value.
Estimates have been broadly trending downward for the stock and the magnitude of these revisions indicates a downward shift. Interestingly, TPR has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.