Tapestry Sinks Amid Struggles at Kate Spade, Stuart Weitzman

(Bloomberg) -- Tapestry Inc., the company formerly known as Coach, is running into big hurdles in its quest to win back shoppers.

Same-store sales at Tapestry’s Kate Spade brand missed analysts’ estimates in the latest quarter, while production delays and other problems at the Stuart Weitzman brand were a drag as well. Same-store sales for the Coach brand, its biggest business, met projections, but the downbeat smaller brands and a full-year profit warning disappointed investors.

The results sent Tapestry shares down as much as 14 percent to $46 in New York Tuesday, the biggest intraday decline since August. They had climbed 22 percent this year through Monday’s close.

Tapestry Sinks Amid Struggles at Kate Spade, Stuart Weitzman

“Revenue is bound to suffer” as Tapestry pulls back on wholesale distribution and reduces flash sales at Kate Spade, said Neil Saunders, an analyst at GlobalData Retail. “Nevertheless, we support the strategic direction and believe that this corrective action is ultimately necessary to strengthen the brand.”

Under Chief Executive Officer Victor Luis, Tapestry has re-engineered itself as a house of three luxury fashion brands: Coach, Kate Spade and Stuart Weitzman. Coach has been pulling back from over-discounting and is benefiting from the sale of more full-price products. Kate Spade has also sacrificed short-term results as it tries to wean customers off of markdowns.

Tapestry is recovering from an extended period of weakness after its leather goods became cheaper and ubiquitous. The swift rise of competition from rivals such as Michael Kors Holdings Ltd. led to heavy discounting as the handbag brands battled each other over customers.

Tapestry forecast full-year adjusted per-share earnings of $2.57 to $2.60, moving up the lower end of the range from $2.52. Analysts had expected $2.61 on average.

Stuart Weitzman

Stuart Weitzman was plagued by issues with production delays and style misses, the company said. In an interview Tuesday, Luis said the “lack of freshness” in new versions of the label’s over-the-knee boots and sandals stifled sales.

“We’re seeing some bumps in the road in the development and delivery of new product,” he said.

Tapestry expects the shoe label’s problems to persist through next winter and return to growth in the second half of fiscal 2019. New creative director Giovanni Morelli’s first new line will reach store shelves this summer. The goal is still to build a $1 billion brand, Luis said.

Saunders, at GlobalData Retail, said the issues at the shoemaker didn’t only reduce sales, they “also weakened overall interest in the brand,” he said.

Coach Results

Coach’s same-store sales, a key metric, gained 3 percent in the period that ended March 31, the company said in the statement. The measure for Kate Spade fell 9 percent, compared with estimates for a 6.9 percent decline.

Tapestry bought Kate Spade for $2.4 billion in 2017 and has spent the past months folding its operations into the parent company. In November, Tapestry said it expects about $100 million to $115 million in cost savings in fiscal 2019 from the integration of Kate Spade.

New senior executives run each of Tapestry’s three brands now. Last year, it hired Neiman Marcus Group Ltd. veteran Joshua Schulman to run Coach. In March, it brought on former Michael Kors executive Anna Bakst to run Kate Spade. Three weeks later, Stuart Weitzman announced that its new CEO would be Eraldo Poletto, previously of Italian fashion label Salvatore Ferragamo.

Excluding some items, profit was 54 cents a share, compared with projections for 50 cents. Revenue of $1.32 billion topped the average $1.31 billion estimate.

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