Tapestry's Got One Strong Brand, Not Three

Tapestry (TPR -1.60%) reported revenue growth of 26% when it released fiscal 2022 first-quarter earnings results in November 2021. Compared to pre-pandemic levels, sales were up 9%. That sounds great, and from a big-picture perspective, it is pretty darn good. But when you dig in a little deeper, there are notable problems that investors need to worry about.

Three brands in one

Tapestry was once simply known as Coach, the maker of high-end handbags. However, it changed its name to reflect the fact that it had acquired the Kate Spade and Stuart Weitzman nameplates. These are both higher-end offerings, and logically fit well with the Coach brand. They also add some diversification to the mix, which is arguably a benefit. That said, Coach is by far the biggest brand in the portfolio, accounting for 75% of fiscal 2022 first-quarter sales. To round things out, Kate Spade made up 20% of sales, and Stuart Weitzman roughly 5%.

Image source: Getty Images.

The pandemic was tough for most retailers, so it's not really fair to look down on Tapestry's weak results through that unique period. And each of the brands bounced back strongly on a year-over-year basis in the fiscal first quarter of 2022. Coach's sales jumped 27% compared to the pandemic-impacted prior year, with Kate Spade up 25% and Stuart Weitzman's sales higher by 18%. That looks fairly positive until you look back to the pre-pandemic comparisons.

Sales were not so strong after all

Tapestry's most important brand, Coach, witnessed a sales increase of 15% in the fiscal first quarter of 2022 compared to the pre-pandemic period. That's good news, and because this brand makes up 75% of the overall business, it helped push the company's overall top line higher too. There were a number of key positives worth noting, including increased purchase frequency, 60% digital growth, and 25% sales growth in China. This particular retailer is, in fact, doing pretty well right now.

However, when you look at the smaller brands that Tapestry owns, things aren't quite as positive. Kate Spade's sales were actually down 2% compared to the pre-pandemic quarter. That means that it still hasn't managed to work back from the coronavirus sales downturn. There were some positives worth noting, including 15% digital sales growth and some success at bringing back old customers. But, all in all, there's more work to be done at Kate Spade.

Data source: Tapestry.

The story is even worse when you examine Stuart Weitzman. Sales here were down 23% compared to the pre-pandemic period. That's not good at all, even though the company managed to increase digital sales by 30% and sales in China were higher by a solid 25%. This business, which didn't turn a profit in the fiscal first quarter, is obviously having a hard time working back from the pandemic hit.

On the positive side of things, Coach is still a large brand that resonates with customers and, more importantly, produces strong profits. However, the other two brands, accounting for a not-insubstantial 25% of sales, aren't holding their own right now. In fact, even though Kate Spade was profitable in the quarter, its 12.9% operating margin was well less than half that of Coach's 32.9%. As noted, Stuart Weitzman lost money, so its operating margin was negative. Although nobody could have predicted the timing of the global pandemic, it looks like Coach's diversification efforts are holding it back more than helping it right now.

Doing investors a disservice

Tapestry isn't doing poorly, but that's largely because Coach is doing well enough to offset the slow recovery at the other two brands it owns. You should, of course, pay attention to Coach, but don't let the success of this brand blind you to the struggles of the other two. What was meant to be diversification is currently looking like "di-worsification," meaning Tapestry may have done investors a disservice when it bought Kate Spade and Stuart Weitzman. Right now, that's the story long-term investors should probably be paying attention to.