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Tapestry Looks Troubled: Is Kate Spade the Sole Reason?

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A glimpse of Tapestry, Inc.’s TPR share price movement reveals that it has fallen 14.3% in the past six months compared with the industry’s decline of 11.3%. So, what is behind the dismal show in the bourses? Are the initiatives undertaken by management enough to revive this Zacks Rank #4 (Sell) stock?

Let’s Dig

Challenging retail backdrop in North America, unfavorable currency movements, soft margins, and weakness in Kate Spade brand are hurting Tapestry’s performance. A reflection of the same was visible in the company’s first-quarter fiscal 2020 results, wherein both the top and the bottom lines fell year over year. Further, net sales missed the Zacks Consensus Estimate for the fourth straight quarter. These factors compelled management to provide a disappointing second-quarter view.

Tapestry anticipates second-quarter operating income to decline year over year owing to gross margin contraction and mid-single-digit increase in SG&A. Also, management expects earnings per share to decline year over year. We note that second-quarter earnings projection of 95 cents to $1.00 per share, suggests a decline from $1.07 reported in the year-ago period.

Management expects second-quarter revenues 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.

In the first quarter of fiscal 2020, Kate Spade sales came in at $305.5 million, down 6% on both reported and constant currency basis, while comparable-store sales slid 16% owing to product and merchandising challenges. We note that the rate of decline in comparable-store sales accelerated from 6% witnessed in the preceding quarter.

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.

Management Sparing no Effort

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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