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Is Kate Spade to Blame for Tapestry's Dismal Run on Bourses?

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The past three months have not been a smooth ride for Tapestry, Inc. (TPR - Free Report) , as shares of this provider of luxury accessories and lifestyle brands have fallen roughly 18.3% compared with the industry’s decline of approximately 12.2%. Further, analysts have become pessimistic regarding the stock over time, as evident from downward revision in the Zacks Consensus Estimate.

We note that the Zacks Consensus Estimate for earnings for fiscal 2020 and 2021 have moved south by 27 cents and 35 cents in the past 60 days to $2.57 and $2.73, respectively. The consensus mark for the third quarter has fallen 17 cents to 36 cents in the aforementioned period.

What’s Weighing on the Stock?

This Zacks Rank #4 (Sell) stock came under pressure following the company’s fourth-quarter fiscal 2019 results, wherein earnings came in line but net sales fell short of the Zacks Consensus Estimate for the third quarter in row. Further, soft first-quarter fiscal 2020 view was not well perceived by investors.


 

Challenging retail backdrop in North America, unfavorable currency movements, soft margins and weakness in Kate Spade brand hurt the company’s performance. These factors compelled management to trim earnings forecast for fiscal 2020 and provide a disappointing first-quarter view.

Tapestry expects first-quarter revenues to be marginally below the prior year and earnings per share to decrease year over year. Consolidated gross margin is also likely to remain under pressure during the first quarter. For fiscal 2020, management now anticipates revenues to increase at a low-single-digit rate with earnings per share expected to be flat with the prior year. The company had earlier guided double-digit increase in both operating income and earnings per share.

The company revisited its projection after taking into account the current business trend at Kate Spade brand, given the uncertain environment in North America. Consolidated gross margin is likely to witness a modest decline on account of bringing Kate Spade’s footwear business in-house and include currency and tariff related impact.

Weakness in Kate Spade

Tapestry acquired the Kate Spade brand in June 2017 with hope to consolidate its position as a multi-brand company. However, the brand’s performance failed to live up to management’s expectations. The company launched new products under the brand but those did not perform as expected. We believe that the weakness in brand is likely to persist in the near term and may hurt sales.

In the final quarter of fiscal 2019, Kate Spade sales increased 6% year over year on a reported and 7% on a constant currency basis, however, comparable-store sales declined 6%. We note that the rate of decline in comparable-store sales accelerated from 3% witnessed in the preceding quarter. Also, this fared unfavorably with management’s expectation to post positive comparable-store sales.

Management expects comparable-store sales to decline in high-teens rate at Kate Spade during the first quarter of fiscal 2020 based on the current traffic trend, and product and merchandising challenges.

Management is Sparing no Effort to Recover

Tapestry is trying all means to tackle prevailing headwinds in the retail landscape — soft store traffic, stiff competition from online retailers and aggressive pricing strategy. The company has undertaken transformational initiatives revolving around products, stores and marketing. Further, management has undertaken initiatives to have direct control over international distribution.

The company concluded the buybacks of the Kate Spade operations in Singapore, Malaysia and Australia. It also completed the buyback of the Stuart Weitzman business in Southern China. The company also acquired the Stuart Weitzman business in Australia from its distribution partner. Such moves help the company to directly operate these businesses, look for growth opportunities in international markets and enhance brand development.

All said, we hope that the abovementioned initiatives will provide some relief to the stock and help it return to growth trajectory.

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