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Tapestry (TPR) Reports Wider-than-Expected Q3 Loss, Sales Beat

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The deadly coronavirus that led to the closure of vast majority of stores has severely impacted Tapestry, Inc.’s (TPR - Free Report) third-quarter fiscal 2020 results. This luxury lifestyle retailer posted wider-than-expected loss for the quarter under review. Also, the company’s top line fell sharply from the year-ago quarter. Nonetheless, the company’s net sales came ahead of the Zacks Consensus Estimate for the second straight quarter.

Shares of Tapestry are down roughly 3% during the pre-market trading hours. Shares of this Zacks Rank #4 (Sell) company have plunged 33.8% compared with the industry’s decline of 37.6% in the past three months.

The company posted adjusted loss of 27 cents a share wider-than-the Zacks Consensus Estimate of loss of 16 cents. This also compares unfavorably with earnings of 42 cents reported in the year-ago period. Lower net sales, higher cost of sales and increased interest expense hurt the company’s bottom-line results.

Net sales of this New York-based company came in at $1,072.7 million, down 19% year over year on both reported and constant currency basis. However, the metric came ahead of the Zacks Consensus Estimate of $1,033.5 million. Sales declined across all brands. Management highlighted that 90% of the company’s stores were either shut or were operating on shortened hours. The company notified that beginning tomorrow it will reopen roughly 40 outlets in North America for contactless curbside or storefront pickup service only.

To address challenges tied to the pandemic Tapestry remains focused on global digital opportunity for all its brands, and ensures that its e-commerce and distribution centers remain operational in key regions. Meanwhile, management has been taking actions to curb expenses in order to stay resilient during such a crisis. It has decided to eliminate non-essential operating expenses and lower fixed costs like rent as well as enhance SG&A savings via right-sizing marketing spend.

Also, the company is cutting down on capex by deferring or cancelling store openings, while prioritizing investments in high-return areas, including digital. Furthermore, it is focused on effectively managing inventories, and expects working capital savings of more than $500 million. The company stated that it is reducing capex by at least $100 million in fiscal 2021 as compared to its run-rate spend of about $275 million.

Management had earlier announced plans to suspend shareholder-friendly moves, including repurchases and quarterly cash dividend. This will result in savings of approximately $700 million annually. Also, Tapestry has drawn $700 million from the $900 million revolving credit facility to strengthen liquidity. Considering the current scenario, the company refrained from providing guidance for the final quarter and fiscal year.

Margin Discussions

Consolidated adjusted gross profit came in at $720.2 million, down 22% from the year-ago period. Moreover, gross margin contracted 210 basis points to 67.1%. Further, the company reported adjusted operating loss of $31.6 million as against operating income of $145.1 million in the prior-year quarter. We note that adjusted SG&A expenses fell 3% to $751.8 million. However, as a percentage of net sales, the same increased to 70.1% from 58.3% in the year-ago quarter.

Segment Details

Net sales for Coach came in at $772.5 million, down 20% year over year on both reported and constant currency basis. Adjusted gross margin for the segment shrunk 210 basis points to 69.6%. We note that adjusted operating margin shriveled to 15.1% versus 25.3% a year ago.

Kate Spade sales came in at $249.5 million, down 11% on both reported and constant currency basis. Adjusted gross margin for the segment contracted 280 basis points to 62%. The segment reported adjusted operating loss was $17 million as against adjusted operating income of $14 million in the year-ago period.

Net sales for Stuart Weitzman totaled $50.7 million, down 40% on both reported and constant currency basis. The segment’s adjusted gross margin decreased 50 basis points to 54.7%. Adjusted operating loss for the segment was $35 million compared with adjusted operating loss of $13 million in the year-ago period.

 Store Update

At the end of the quarter, the company operated 381 Coach stores, 220 Kate Spade outlets and 71 Stuart Weitzman stores in North America. Internationally, the count was 591, 204 and 87 for Coach, Kate Spade and Stuart Weitzman, respectively.

Other Financial Details

Tapestry ended the quarter with cash, cash equivalents and short-term investments of $898.2 million, long-term debt of 1,587.2 million and shareholders' equity of $ 2,553.1 million.

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