Tapestry Earnings: Turnaround Still On Track

(Bloomberg) -- Alert to the investors selling off Tapestry Inc. stock: It still has this whole turnaround thing in the bag.

The accessories giant’s shares plunged more than 13 percent in early trading on Tuesday after it reported quarterly earnings. But combing through the details of the results, I don't think we learned much we didn't already know about the opportunities and challenges facing the corporate parent of Coach, Kate Spade and Stuart Weitzman.

Net sales rose 33 percent over a year earlier, driven by 3 percent comparable sales growth at Coach, its largest brand, and by adding Kate Spade to its portfolio.

Kate Spade did have a 9 percent decline in comparable sales in the quarter, which sounds ghastly. But Tapestry is deliberately trying to make the brand less ubiquitous, retreating from flash sales and certain wholesale locations. It’s a good idea; a similar pullback restored the exclusivity of the Coach brand and should do the same for Kate Spade.

And Tapestry gave updated guidance that offered reason for optimism about Kate Spade. It now expects that acquisition to create $45 million in synergies, up from the $30 to $35 million it outlined in previous guidance. Tapestry also now expects Kate Spade to contribute $145 million in operating income for the year, higher than the $130 to $140 million in earlier guidance. That suggests the integration of this brand is progressing well.

The only real weak spot in the earnings report was the Stuart Weitzman brand, which the company said was challenged by production delays and "lower sell-through of key carryover styles."

That certainly isn't a good thing. But Stuart Weitzman is, by far, the smallest piece of the Tapestry empire, meaning trouble there doesn’t rock the balance sheet too much.

Tapestry in April named a new CEO for the Stuart Weitzman brand, so there are fresh eyes on its problems.

Looking beyond this earnings report, there are other signs Tapestry can keep building on its progress in 2018. Logos are back in style in a big way, a boon to the Coach brand. Consumer sentiment remains strong in the U.S., which should help support the luxury business overall in Tapestry’s home market.

And its handbag brands are highly covetable to U.S. shoppers, even when compared to some of its more luxurious competition, according to survey data from a report by Bernstein analyst Jamie Merriman.

Tapestry stock boomed in the early part of this year, noted Deborah Aitken, a luxury industry analyst with Bloomberg Intelligence; expectations for the company’s pace of improvement may simply have gotten overheated.

But the latest earnings results largely showed that progress continues as planned.   

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