Tapestry stock's rally indicates that investors have renewed confidence that its growth prospects are bright. But is this warranted? To examine that question, it's time to look deeper into Tapestry's story.
Tapestry sells luxury goods, primarily under the Coach and Kate Spade brands. For the fiscal first quarter, which ended on Sept. 26, sales continued to slide. Its top line dropped by 14% year over year to $1.2 billion, due to reduced demand caused by the COVID-19 pandemic. Tapestry did grow its e-commerce sales by triple digits, though, and e-commerce accounted for nearly 25% of its quarterly sales.
But that is only part of the story. The company showed some progress under its strategic plan, which management calls its acceleration program. Part of this is to collect and analyze customer data. Then, it tries to offer the goods its shoppers want without ordering too much or too little. The resulting improvements in inventory management allowed Tapestry to avoid widespread discounting. This helped drive the company's gross margin up more than 3 percentage points year over year to 70.8%. Meanwhile, its cost-cutting efforts helped the company's adjusted operating income increase by 37% to $228.8 million.
The company has made good progress, but management has more work to do. After all, closing stores and cutting expenses are fairly easy steps to accomplish.
Another part of its plan involves getting to know the customer's wants and needs better. Management has discussed understanding its customers through analytics. Using this data, it hopes to offer merchandise that they want. It is pushing out loyalty programs to help keep customers, too. If these initiatives succeed, sales growth should accelerate and continue for the long term.
However, it remains unclear how this strategy differentiates Tapestry from what other companies are doing. After all, many consumer companies have discussed using analytics. Focusing on the customer is important, but this is easier said than done.
In the meantime, while there's encouraging news on the vaccine front, the exploding number of COVID-19 cases creates a major challenge right now. Some government officials have already instituted new restrictions.
This could certainly curtail shopping at stores, hurting Tapestry's sales. However, the more concerning part is the ripple effect on the overall economy. After all, luxury goods are economically sensitive. In fiscal 2009 -- during the last recession -- the company's sales grew by only 2%, and its adjusted operating income fell by 15% to $1 billion.
If investors were paid a dividend, that would be one reason to feel more optimistic. However, the board of directors suspended the quarterly payments earlier this year. Given the pandemic, it's hard to criticize the move. But it does mean investors can't rely on dividends while waiting for management to execute its plan.
So, while Tapestry was able to improve its profitability last quarter, I would wait to buy the shares until the economy is on firmer ground and the company is able to boost sales.