Tapestry Inc.’s stock reversed early losses to trade up 3.9% Thursday, after the parent of the Coach, Kate Spade and Stuart Weitzman brands missed revenue estimates for its fiscal first quarter and offered guidance that lagged consensus.
Analysts said softness in North America was less grim than feared and its profit held in thanks to margin improvements.
“The sales miss was driven by continued softness in Kate Spade and Stuart Weitzman,” said Jefferies analysts, who have a buy rating on the stock. “Coach results remain solid and beat consensus on top and bottom line, highlighting brand momentum.”
The company
TPR,
had net income of $195 million, or 84 cents a share, in the quarter to Sept. 30, after income of $195 million, or 79 cents a share, in the same period a year earlier.
Adjusted per-share earnings came to 93 cents, ahead of the 90-cent FactSet consensus.
Sales came to $1.51 billion, slightly above the same period a year earlier, and below the $1.54 billion FactSet consensus.
The company is now expecting full-year EPS of $4.10 to $4.15, while FactSet is expecting $4.12. It expects revenue of about $6.7 billion, below the $6.9 billion FactSet consensus.
On a call with analysts, Chief Executive Joanne Crevoiserat said North America revenue was roughly flat with the same period a year earlier and consistent with the company’s own expectations.
“Despite the challenging consumer backdrop in the U.S., we are driving a healthy business, underscored by significant gross and operating margin expansion compared to last year,” she said, according to a FactSet transcript.
The company attracted more than 1.2 million new customers in the quarter in North America alone, of whom roughly half were millennials or Gen Z, two key cohorts for the company. And its customers were shopping at a higher average unit retail, or AUR, meaning the average selling price within a period.
To further resonate with younger consumers, Tapestry launched a trial in September on Amazon
AMZN,
to meet that group where it shops. The trial is going well so far, according to Leonard Todd Kahn, the CEO and brand president for Coach.
“We’re learning, we’re using their technology,” he said. “Their 3D technology alone is fascinating in terms of showing the functionality and the desirability of our products. They’ve been a very good partner. It’s a wholesale relationship. And to date, we’ve seen no cannibalization.”
Gross margin rose 250 basis points in the quarter from a year ago, according to Chief Financial Officer Scott Roe, partly due to favorable freight costs and higher prices.
The company, which is in the midst of buying rival Capri Holdings Ltd.
CPRI,
parent to Michael Kors, Versace and Jimmy Choo, said the deal is making progress toward close next year as expected.
Roe said the deal is expected to immediately boost adjusted earnings, cash flow and other financial returns.
“Embedded in these expectations is the assumption that the standalone Capri business will generate free cash flow in the area of $500 million on a non-GAAP, un-synergized basis,” said Roe.
Wells Fargo analysts said the earnings provided “a needed sigh of relief for investors.”
“Notably, while 1Q was essentially in line, management held their FY EPS (despite a slight [revenue] cut) and talked to a much more stable U.S. market than we believe investors had expected,” they wrote in a note to clients.
Wells Fargo has an overweight rating on the stock, which has fallen 25% in the year to date, while the S&P 500
SPX,
has gained 14%.
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