Tapestry, Formerly Coach, Looks to Wring Savings From Kate Spade

Updated on
  • CEO Victor Luis says growth has returned so far this quarter
  • Sales miss last quarter blamed on hurricanes, inventory mix

Tapestry Inc., the leather-goods company formerly known as Coach Inc., is looking to finally get a payoff from its Kate Spade deal.

Chief Executive Officer Victor Luis expects cost savings from the merger to reach $100 million to $115 million in fiscal 2019, more than twice the company’s previous estimate. He also sees sales rebounding after a stumble last quarter.

“We have returned to growth thus far in the second quarter and are well positioned for holiday,” Luis said in a statement Tuesday.

Tapestry shares rose as much as 3.3 percent to $42.83 in New York. The stock had gained 18 percent this year through Monday’s close.

In its fiscal first quarter, which ended Sept. 30, same-store sales for the Kate Spade and Coach brands missed analysts’ estimates. The company also suffered a decline in its gross margin.

The results reflect the company’s need to bolster its top line after buying the handbag maker earlier this year for $2.4 billion. Tapestry has sacrificed revenue by reducing flash sales and pulling Kate Spade merchandise out of struggling department stores. And to win more customers, the fashion house is tapping social-media influencers like singer Selena Gomez, who helped create a collection of Coach-branded fashion items.

Transition Period

Neil Saunders, managing director of researcher GlobalData Retail, said he was encouraged by the Kate Spade integration progress, and the projected cost savings.

“All of this suggests that the current period is one of transition for Tapestry and that better numbers will come through over time,” Saunders said. “Overall, we have confidence in the general direction and strategy of the group.”

Tapestry changed its name from Coach last month as it grows into a multibrand lifestyle company following the purchases of Kate Spade and shoemaker Stuart Weitzman.

The New York-based company had costs of about $188 million last quarter related to the Kate Spade deal. And that was felt in its gross margin, which dropped to 59.3 percent from 68.9 percent a year earlier.

Tapestry’s profit topped analysts’ estimates. The earnings came in at 42 cents a share, excluding some items, compared with the 36-cent prediction. 

Same-store sales for the Coach brand dropped 2 percent from a year earlier. Analysts projected a gain of 2 percent, according to Consensus Metrix. The sales were negatively affected by the hurricanes in North America and a typhoon in Asia as well as the shift in timing of a Chinese holiday and inventory mix issues.

Kate Spade same-store sales plunged 9 percent, slightly more than analysts’ estimated. Total revenue also trailed projections.

The comparable sales drop for the Coach brand wasn’t expected, said Arun Daniel, a senior portfolio manager at investment boutique J O Hambro Capital Management.

“But they said things have recovered in the second quarter,” he said. “If you believe that, and with them confirming guidance for the year, that gives us some confidence that the issues are not systemic.”

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