Tapestry Inc.’s strategy to attract a younger consumer paid off in the second quarter, allowing the company to exceed Wall Street expectations for the period and buck the sluggish trend of other fashion brands.
On Thursday, the New York-based parent of Coach, Kate Spade and Stuart Weitzman reported net income of $330 million, with earnings per diluted share of $1.36. This compared to net income of $318 million and earnings per diluted share of $1.15 in the prior-year period. Net sales for the period ended Dec. 31 were $2.03 billion, down 5 percent from the $2.14 billion posted in the prior year due in large part to a strengthening of the U.S. dollar.
Related Galleries
As a result of the strong showing, the company updated its fiscal 2023 earnings outlook and is now projecting earnings per diluted share of about $3.70 to $3.75, which reflects a high-single-digit growth rate. Sales are now expected to be about $6.6 billion, a slight decrease compared to the prior year due to continued currency pressure.
Sales in North America are expected to decline in the low-single digits in the second half while Japan is seen increasing in the mid-teens and the rest of Asia jumping 35 percent. Europe is seen growing in the low-double digits.
Joanne Crevoiserat, chief executive officer of Tapestry Inc., said, “During the key holiday season, we outperformed expectations. To this end, we delivered record second-quarter earnings despite a challenging backdrop. We remained disciplined stewards of our brands, expanding gross margin, while making investments that support our strategic growth agenda.”
She told WWD the company’s performance was evidence of Tapestry’s ability to “manage challenges” and its ability to “build a very sustainable, healthy business. Our category has proven to be durable.”
While promotions have been an issue for many fashion brands, Crevoiserat said for Tapestry, they have “normalized” in North America as “consumer behavior reverts back” to what it was prior to the pandemic.
She was similarly unconcerned about inventory levels, which were up 30 percent over last year, but are expected to drop to single digits by the end of this fiscal year. “We’re ahead of where we expected to be and our content and quality is good,” she said.
The mix is resonating with younger consumers. In the second quarter, the company acquired nearly 2.6 million new customers in North America, nearly half of whom were Gen Z and Millennials.
By region, North American sales were down 2 percent from the prior year with stronger than expected margins, but up 25 percent when compared with 2019 in the pre-pandemic climate.
In Asia, the company posted low-single-digit constant currency revenue growth overall in Japan, Europe and Asia, outside of Greater China, including a low-single-digit increase in direct-to-consumer sales. In Greater China, however, revenue fell 20 percent due to the ongoing issues with COVID-19. The company did note that there has been “significant sequential improvement in traffic and revenue trends” so far in the fiscal third quarter in that country.
By brand, Coach sales slipped 5 percent in the quarter to $1.4 billion, down from $1.5 billion in the prior year. Core leather goods continue to fuel the company’s growth, the CEO said, led by the Willow, Tabby and Rogue handbag franchises. Shoulder bags, along with micro and mini handbags, including the studio baguette and mini Tabby, “resonated with Gen Z consumers” in the period, she said.
Todd Kahn, president and CEO of Coach, said these “icon” products represent one of the best opportunities to reduce promotions because they create an emotional connection with customers and “price becomes secondary.” He pointed to a mini bag just big enough to hold a phone that sells for $199, more than a traditional tote that is six times the size and retails for $150. The popularity of this item proves customers are buying not because the product is being discounted, but because the “product and brand story resonate with them.”
Coach’s new global ambassador Lil Nas X, who signed on last September, also helped “cut through with consumers,” Crevoiserat said. The campaign video in which he is featured has been viewed 350 million times.
The quarter also saw double-digit top-line gains in lifestyle product at the Coach brand, including footwear such as loafers and a men’s low-line sneaker, as well as boots and booties. Menswear growth was fueled by core leather goods, and men’s and women’s outerwear, including puffers with the brand’s signature C as well as cut-and-sew gifts featuring the Rexy mascot, also proved popular for holiday.
At Kate Spade, sales dipped 2 percent in the quarter to $490 million from $500 million last year, but the brand enjoyed a record Thanksgiving week and Cyber Monday, according to Crevoiserat. Here, too, handbags were the star, along with a slingback pump shoe. But because the North American consumer was “more value driven” over the holidays, promotions were higher than two years ago.
The brand also saw strength in its apparel including festive sweaters and skirts for holiday as well as outerwear, which Crevoiserat said will be the “long-term driver of sustainable growth” for Kate Spade. Boots and booties and jewelry were also popular in the quarter.
Turning to Stuart Weitzman, she said the brand’s “significant exposure to China as well as a decrease in wholesale” sales led to a 17 percent decline in sales in the second quarter to $150 million from $182 million in the prior year. Top sellers in the period included both casual and occasion-style shoes, and a small handbag launch in the period met with an encouraging consumer response.
Looking ahead, Tapestry said it still plans to return about $1 billion to shareholders in fiscal 2023 and pay an annual dividend of $1.20 per share in the current fiscal year, a 20 percent increase over last year and totaling about $300 million. It will also buy back some $700 million in common stock this year. During the first six months, Tapestry spent $300 million to repurchase 8.4 million shares.