A month has gone by since the last earnings report for Tapestry (TPR - Free Report) . Shares have lost about 3% 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 drivers.
Tapestry Beats on Q4 Earnings, Provides FY 19 Outlook
Tapestry, Inc. posted better-than-expected fourth-quarter fiscal 2018 results. The adjusted earnings of 60 cents a share beat the Zacks Consensus Estimate of 57 cents, thereby resulting in a positive earnings surprise of 5% and marking the 18th straight quarter of earnings beat. The quarterly earnings improved approximately 21% year over year buoyed by top line growth.
Net sales of this New York-based company came in at $1,483.7 million, up 31% year over year. On a constant currency basis, net sales surged 29%. We noted that the total sales came ahead of the Zacks Consensus Estimate of $1,464 million, marking the third 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 $1,008.7 million, up significantly from $756.8 million, while gross margin expanded 120 basis points to 68%. Further, adjusted operating income of $227.5 million, up 27% from the prior-year quarter figure, however, operating margin shrunk 50 basis points to 15.3%.
Net sales for Coach came in at $1,098.9 million, reflecting an increase of 5% on a reported basis and 3% on a constant currency basis. Comparable-store sales rose 2% buoyed by robust performance in North America. Both gross and operating margins for the segment expanded. Management expects low single-digit growth in sales and comps for fiscal 2019.
Kate Spade sales came in at $311.9 million. Comparable-store sales slid 3%, including the adverse impact of about half a point from a fall in global e-commerce on account of lower online flash sales. Management highlighted that the segment’s results well surpassed its expectations. Kate Spade also managed to post double digit earnings per share accretion in its first year, in spite of the strategic pullback in online flash sales and wholesale disposition, which was partly offset by the consolidation of the joint ventures for Mainland China, Hong Kong, Macau and Taiwan. The company now envisions Kate Spade sales to increase in a double-digit rate in fiscal 2019.
Net sales for Stuart Weitzman totaled $72.9 million, reflecting a decrease of 17% year over year. The segment’s gross margin also shriveled considerably. The company hinted that as expected earlier development and delivery delays hurt sales and margins. 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 402 Coach stores, 200 Kate Spade outlets and 68 Stuart Weitzman stores in North America. Internationally, the count stood at 585, 142 and 35 for Coach, Kate Spade and Stuart Weitzman, respectively.
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 40 to 50 net new Kate Spade stores during the fiscal year. The company has also entered into purchase agreements to acquire Kate Spade’s operations in Singapore, Malaysia and Australia, where there are roughly 20 locations. Moreover, management intends to open approximately 30 net new Stuart Weitzman locations in the fiscal year, mainly in China.
Other Financial Details
Tapestry ended the quarter with cash, cash equivalents and short-term investments of $1,250 million, long-term debt of $1,599.9 million and shareholders' equity of $3,244.6 million.
Management generated cash from operations of $997 million and incurred capital expenditures of $267 million during fiscal 2018. The company generated free cash flow of roughly $729 million during the period. The company anticipates capital expenditures in the range of $300-$325 million during fiscal 2019.
FY 2019 Guidance
Tapestry now envisions 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. 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 $2.70-$2.80 per share compared with $2.63 delivered in fiscal 2018.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended downward during the past month.
Currently, Tapestry has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. 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 C. 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 #3 (Hold). We expect an in-line return from the stock in the next few months.