Total sales rose to $1.8 billion from $1.79 billion, while net income surged to $255 million, compared with $63 million in 2018.
Yet the numbers weren’t enough to satisfy analysts — or tame investor fears: Shares of the fashion company fell more than 12.5 percent in pre-market trading Thursday morning.
Victor Luis, the group’s chief executive officer, said, “During the second quarter, our sales and gross profit rose, successfully anniversary-ing the strong holiday results of the prior year. That said, this performance fell short of our expectations in the face of an increasingly volatile macroeconomic and geopolitical backdrop. Importantly, and as expected, we generated meaningful synergies from the integration of Kate Spade, and made material systems and strategic brand investments across our portfolio. Taken together, adjusted earnings per diluted share were even with the prior year.”
“At Coach, we delivered continued growth driven by positive global comparable store sales, reflecting our compelling offering across categories. We drove outperformance in our international markets and across our e-commerce platforms. Further, we achieved operating income growth through an increase in gross margin and expense leverage. In December, Coach held its first runway show in Shanghai, which was incredibly well received and garnered over 1 billion impressions. We were especially excited by the brand’s increased traction with Chinese consumers globally driven by domestic demand, partially offset by a decline in tourist spend. Moving forward, we’re focused on providing a heightened level of newness throughout the pyramid of fashion, price and occasion, supported by marketing messages that surprise and delight.”
Tapestry’s results didn’t surprise Erwan Rambourg, global co-head of consumer and retail research at HSBC.
“Macro noise,” such as volatility in U.S. equity markets, a slowdown in China and fears of a recession at home, “might have had a bit of a negative impact on the core Coach brand,” Rambourg said.
So has consumers’ preference shifting toward smaller bags, like fanny packs and hands-free backpacks.
Accessories, including fanny packs, were the fastest growing group last year, according to market research firm NPD Group. Sales of fanny packs grew more than 50 percent in the 12 months ending August 2018.
“Those are typically lower-priced products,” said Jay Sole, an analyst at UBS. “That’s a problem,” he said, for companies like Coach and Kate Spade that sell handbags.
But Rambourg described Tapestry’s current headwinds as the “last hurdle until the bull case plays out” and rated the stock a “buy.”
In fact, Kate Spade, which Coach acquired in 2017 before changing its name to Tapestry to reflect the broader company umbrella, could be the swing factor. The brand has been cleaning up its image lately with new products and advertising campaigns, as well as reducing promotional activity. Nicola Glass, who took over as creative director shortly after the Kate Spade acquisition, launched her inaugural collection with the brand this year.
Leadership changes have also positively impacted the company. In addition to Glass, Anna Bakst joined in 2018 as Kate Spade’s new ceo.
Rambourg called the transformation “one of the best repositioning stories in the [retail] space. But you’re not going to see the benefits until next quarter.”
Kate Spade is also planning on expanding its brick-and-mortar footprint in Asia. It’s target set: wealthy Millennials in China, where the brand is relatively unknown.
“There’s a discovery phase going on with the up-and-coming consumer,” Rambourg said. “It will likely be considered by most people as a new brand in China,” which means shoppers might be more eager to buy.
Still, in the meantime, sales at Kate Spade were some of Tapestry’s most disappointing during the quarter, totaling $428 million, compared with $435 million the same time last year. Global same-store sales declined 11 percent.
Year-to-date Tapestry’s stock is down nearly 20 percent.