Tapestry's (TPR) Q1 Earnings Beat Estimates, Increase Y/Y

Zacks Equity Research
·5-min read

In spite of a challenging backdrop, Tapestry, Inc. TPR reported better-than-expected first-quarter fiscal 2021 results. This house of modern luxury accessories and lifestyle brands witnessed significant improvement in sales trends on a sequential basis. While the quarter marked the fourth straight top-line beat, the bottom line surpassed the Zacks Consensus Estimate for the second time. Also, the company attained a meaningful improvement in earnings per share on a year-over-year basis owing to gross margin expansion and lower SG&A expenses.

Tapestry posted adjusted earnings of 58 cents a share that comfortably surpassed the Zacks Consensus Estimate of 22 cents, and increased from 40 cents reported in the year-ago quarter.

Net sales of this New York-based company came in at $1,172.2 million, ahead of the Zacks Consensus Estimate of $1,074.6 million. However, the metric declined 14% on a year-over-year basis. Nonetheless, we note that the rate of sales decline has decelerated sharply from 53% witnessed in the preceding quarter. Management highlighted that strength in e-commerce and China contributed to this upbeat performance. Notably, the company attained sequential improvement in revenue trends across all brands.

Shares of Tapestry were up during the pre-market trading hours. Shares of this Zacks Rank #2 (Buy) company have increased 60.3% in the past three months compared with the industry’s rally of 29.7%.

Tapestry, Inc. Price, Consensus and EPS Surprise

Tapestry, Inc. Price, Consensus and EPS Surprise
Tapestry, Inc. Price, Consensus and EPS Surprise

Tapestry, Inc. price-consensus-eps-surprise-chart | Tapestry, Inc. Quote

Let’s Take an Insight

Clearly, Tapestry’s impressive performance validates significant progress on previously announced Acceleration Program. The program aims at transforming into a leaner and more responsive organization, building significant data and analytics capabilities with focus on e-commerce channels, and operating with a clearly defined path and strategy for each brand.

Management stated that quarterly results came ahead of expectations. Notably, the company continued with its sturdy e-commerce performance with digital sales rising in triple digits compared with the year-ago period. Impressively, the company registered double-digit year-over-year increase in sales in Mainland China. The company also efficiently managed inventories, which were down 8% from the prior-year period. Additionally, as part of global fleet optimization, the company notified the closure of 15 net stores in the quarter.

Markedly, Tapestry remains on track to realize about $300 million in gross run rate expense savings, including $200 million projected for fiscal 2021.

Although management did not provide detailed guidance for fiscal 2021 owing to the ongoing pandemic, it is undertaking actions to lower promotional activity and improve Average Unit Retail or AURs across brands. The company is also targeting reductions in SG&A expenses. Again, we note that given a stellar start to the fiscal year and anticipating a sustained recovery, Tapestry continues to expect a top-line inflection in the second half of the fiscal year. It now envisions top and bottom-line growth for fiscal 2021.

Margin Discussions

Consolidated adjusted gross profit came in at $830.2 million, down 10% from the year-ago period. However, gross margin expanded 320 basis points to 70.8% owing to lower and more disciplined promotional activity. Further, the company reported adjusted operating income of $228.8 million, up 37% year over year, while adjusted operating margin increased 720 basis points to 19.5%.

We note that adjusted SG&A expenses fell 20% to $601.4 million, reflecting cost containment efforts and earlier announced actions to transform the company’s operating model, including 20% reduction in the global corporate headcount expense on a run rate basis. Again, as a percentage of net sales, SG&A decreased 410 basis points to 51.3%.

Segment Details

Net sales for Coach came in at $875.4 million, down 9% year over year. Adjusted gross margin for the segment expanded 350 basis points to 73.7%. We note that adjusted operating margin increased to 32.1% from 25% in the year-ago quarter.

Kate Spade sales came in at $240.4 million, down 21% from the year-ago period. Adjusted gross margin for the segment increased 100 basis points to 64.1%. The segment reported adjusted operating margin of 10.1%, up 380 basis points from the year-ago quarter.

Net sales for Stuart Weitzman totaled $56.4 million, down 35% year over year. The segment’s adjusted gross margin shrunk 40 basis points to 55.3%. Adjusted operating loss for the segment was $2 million compared with adjusted operating loss of $10 million in the prior-year period.

Store Update

At the end of the quarter, the company operated 374 Coach stores, 216 Kate Spade outlets and 55 Stuart Weitzman stores in North America. Internationally, the count was 583, 208 and 58 for Coach, Kate Spade and Stuart Weitzman, respectively.

Other Financial Details

Tapestry ended the quarter with cash, cash equivalents and short-term investments of $1,522.4 million, long-term debt of 1,588.6 million and stockholders' equity of $2,530.1 million. The company generated positive free cash flow of $64 million during the quarter.

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