Tapestry Confirms Its Holiday Outlook Despite a Sales Decline at Coach

Tapestry (TPR -2.16%) (formerly known as Coach) just announced its first quarterly earnings results that included the newly acquired Kate Spade franchise. The addition of the brand helped push overall sales higher. However, spiking costs hurt profitability, leading to a quarterly loss.

Here's how the latest headline numbers compare to the prior-year period:

Data source: Coach.

What happened this quarter?

Sales growth turned negative in the core Coach brand and sharp declines in both gross and operating profit margins led to far lower earnings. Yet Tapestry left its full-year revenue and earnings forecast in place as management expressed confidence in healthier growth to come.

Image source: Getty Images.

Here are the key highlights of the quarter:

• Coach brand sales fell 3%, reversing the prior quarter's 5% gain. Comparable-store sales dipped 2%, which management blamed on the timing of a Chinese holiday, inventory challenges, and the impact of hurricanes in North America and typhoons in Asia.
• The Coach segment's gross profit margin fell to 68% of sales from 70% a year ago.
• Kate Spade comparable-store sales declined 9%, mainly thanks to a 6% e-commerce slump driven by management's planned pullback from online promotions. The segment's gross margin, 61%, remained well below the company average. Its 8% operating margin was also far below Coach's 21.5%.
• The Stuart Weitzman brand posted 10% higher sales.
• Overall net income fell to a loss from a gain of over $117 million last year, mainly due to integration charges around the Kate Spade purchase. Tapestry's non-GAAP earnings ticked lower to $120 million, or $0.42 per share, from $126 million, or $0.45 per share.

What management had to say

Executives said the numbers met their targets and demonstrated how a broader product portfolio should boost operating results over time. "Our first quarter performance was in line with our expectations," CEO Victor Luis said in a press release, "reflecting the benefits of our diversified multi-brand model, notably the contribution of Kate Spade to our consolidated results and double-digit growth at Stuart Weitzman."

"While our Coach comparable store sales were impacted by both expected calendar shifts and inventory challenges as well as the effects of the unanticipated natural disasters -- we have returned to growth thus far in the second quarter and are well positioned for holiday," Luis continued.

Looking forward

That return to positive comps at Coach in the current quarter gave management confidence to affirm its full-year sales outlook. Management still believes revenue will rise by 30% overall, including low-single-digit comps gains. The Coach brand should benefit from improved product offerings and a new marketing campaign headed into the holiday season.

Investors should expect reduced profitability this year due to the addition of the Kate Spade business and Tapestry's plans to limit that franchise's promotional posture. As a result, operating income is projected to rise by between 22% and 25%, executives affirmed, trailing the revenue spike.

The retailer continues to predict profit gains of between 10% and 12% in fiscal 2018 as earnings rise to between $2.35 and $2.40 per share. A significant portion of that haul will be generated during the holiday months of November and December.