The company on Tuesday narrowed its fiscal year EPS guidance range to $2.75 to $2.80, up from the prior range of $2.70 to $2.80. That disclosure was made on the same day the company posted first-quarter results in which adjusted earnings per share were 48 cents on a 7.2 percent gain in sales to $1.38 billion.
In an interview with Tapestry’s chief executive officer Victor Luis, he said that guidance included a likely increase in tariffs come January. He explained that the current duty on travel goods — such as handbags and accessories — reached 10 percent in September, and the expectation is an increase to 25 percent in January. The good news for Tapestry is that production in China represents just 3 to 4 percent of the firm’s total sales.
Now, there’s talk of another hike in tariffs and an increase in product categories early next year, once the midterm elections are completed. According to Luis, “Should it expand to other goods, besides handbags and accessories, it would be footwear and ready-to-wear. Those are a very small piece of our business. Our teams are working hard on finding sources outside of China for our footwear production. Should things escalate further, we anticipate that by 2020, 70 percent of our footwear will be made outside of China.” He said the impact would be “tiny,” relative to its competitors. The company has been focused on its supply chain network and had already moved many of its manufacturing capabilities to other countries.
As for the possible impact on consumers as they see their discretionary income shrink due to the expansion of tariffs to other categories, Luis said, “Overall, at the moment, we don’t have much pointing to that. In fact, inflation remains low, there’s low unemployment and wages continue to rise. Consumer confidence is also at an 18-year high.”
The ceo said that while potential trade tensions, higher interest rates and stock market volatility could raise some questions over the long term on how the consumer may be feeling, there’s nothing at the moment that “points in that direction.”
On the brand side, Coach continues to see growth. Michael B. Jordan has been named the first global face of Coach’s men’s wear business, and he will participate in global advertising campaigns for men’s ready-to-wear accessories and fragrances beginning with the spring 2019 season.
At Kate Spade, first-quarter sales for the brand totaled $325 million, up 21 percent from a year ago. Results were driven by new stores and the consolidation of Kate Spade China.
And the company’s Stuart Weitzman brand, which saw manufacturing issues since the spring when it transitioned from a company-led founder to a more corporate structure, now seems to have those troubles behind it. “We had some executional glitches, which impacted more than anything else timely deliveries. If you are late in fashion, it doesn’t sell and you have to promote it to get rid of the inventory. This upcoming week, we are very on-time with pre-spring deliveries,” Luis said.
The company completed the buybacks in September and October of the Kate Spade operations in Singapore, Malaysia and Australia, as well as the Stuart Weitzman business in Southern China. Tapestry said it plans to acquire the Stuart Weitzman business in Australia from its distribution partner, and that its acquisition should close next summer.
With the latest acquisition, are there any more distribution-related deals planned for the company? The Coach brand completed the acquisitions of its distribution partners earlier on, before acquiring Kate Spade. According to Luis, not likely.
“Most of the key investments in terms of managing or taking control of our distribution has been done,” Luis said of other possible distributor buybacks.
That doesn’t mean that Tapestry isn’t looking at the mergers and acquisitions front in general. And with Michael Kors Holdings Corp.’s planned $2.1 billion purchase of fashion house Versace, could there be some pressure now to do another deal to further grow the company?
If there’s been any Wall Street pressures, Luis didn’t give any indication. If anything, he emphasized the company’s commitment to its disciplined investment strategy. That includes a focus on a capital allocation strategy that calls first for reinvestment into each brand under the Tapestry portfolio, such as significant marketing investments and funding to grow the international businesses. The company has also invested heavily on its internal systems platform and infrastructure to build a scalable shared services model.
But Luis, during the telephone interview, also didn’t rule out looking overseas for the company’s next transaction: “I would say we are not limited by geographic [constraints]. For us, the most important is a great brand, the opportunity for growth globally and the confidence that together we are stronger than alone.”