Why Is Tapestry (TPR) Down 25.2% Since Last Earnings Report?

A month has gone by since the last earnings report for Tapestry (TPR). Shares have lost about 25.2% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Tapestry due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Tapestry’s Q2 Earnings Beat Estimates, Increase Y/Y

Tapestry, Inc. came out with its second-quarter fiscal 2020 results, wherein both the top and the bottom lines not only surpassed the Zacks Consensus Estimate but also increased year over year.

The company posted adjusted quarterly earnings of $1.10 per share that beat the Zacks Consensus Estimate of 98 cents. The bottom line also improved 3% from the year-ago period figure of $1.07 on account of higher net sales, lower tax rate and reduced share count.

Net sales of this New York-based company came in at $1,816 million, up 1% year over year on both reported and constant currency basis. The metric also came ahead of the Zacks Consensus Estimate of $1,804.1 million, following a miss in the preceding four quarters. Sales increase in Coach and Kate Spade brands were offset by decline at Stuart Weitzman.

Management highlighted that Coach registered ninth straight quarter of comparable store sales (comps) growth. North America steered the global comp. International business was flat with the prior year with sturdy comps growth in Other Asia, Europe and Mainland China. This was partly offset continued sluggishness in Hong Kong SAR and a marginal decline in Japan. We also note that comps at Kate Spade improved on a sequential basis, courtesy of merchandising actions. However, sales at Stuart Weitzman were hurt by weak demand across channels.

Coronavirus Outbreak Weighs on Outlook

In spite of better-than-expected results, management revisited its fiscal 2020 projection on account of coronavirus outbreak in China, which it believes is considerably impacting its business. The company has to close majority of its outlets on the Mainland.

Given the current scenario in China, Tapestry now expects sales and earnings per share to be hit by approximately $200-$250 million and 35-45 cents a share, respectively, in the second half. The company now envisions fiscal 2020 net sales to be approximately $5.9 billion and earnings per share in the band of $2.15-$2.25.

Margin Discussions

Consolidated adjusted gross profit came in at $1,211.2 million, almost flat with the year-ago period. However, gross margin contracted 30 basis points to 66.7%. Further, adjusted operating income of $373.3 million fell 6% from the prior-year quarter figure, while operating margin shrunk 150 basis points to 20.6%. We note that adjusted SG&A expenses came in at $837.9 million, up 4% from the year-ago period. As a percentage of net sales, the same increased 120 basis points to 46.1%.

Segment Details

Net sales for Coach came in at $1,269.9 million, up 2% year over year on both reported and constant currency basis. Comparable-store sales rose 2%, comprising roughly a 200 basis-point benefit due to a rise in global e-commerce. While adjusted gross margin for the segment increased 20 basis points to 69.1%, adjusted operating margin expanded 10 basis points to 30.1%.

Kate Spade sales came in at $430.4 million, up 0.5% on a reported basis. Comparable-store sales slid 4%, including the benefit of about 300 basis points from global e-commerce. We note that the rate of decline has decelerated sharply from 16% witnessed in the preceding quarter. While adjusted gross margin for the segment shriveled 320 basis points to 61%, adjusted operating margin shrunk 620 basis points to 15.9%.

Net sales for Stuart Weitzman totaled $115.7 million, down 7% on a reported and 6% on a constant currency basis. The segment’s adjusted gross margin expanded 370 basis points to 61.8%, while adjusted operating margin increased 60 basis points to 9.8%.

Store Update

At the end of the quarter, the company operated 393 Coach stores, 222 Kate Spade outlets and 72 Stuart Weitzman stores in North America. Internationally, the count was 596, 205 and 87 for Coach, Kate Spade and Stuart Weitzman, respectively.

During the quarter, the company added a net of 31 locations across Tapestry driven primarily by net openings at Kate Spade and Stuart Weitzman. The company ended the quarter with 1,575 directly operated stores globally.

Other Financial Details

Tapestry ended the quarter with cash, cash equivalents and short-term investments of $1,166.7 million, long-term debt of 1,598 million and shareholders' equity of $ 3,322.4 million. Management incurred capital expenditures of $50 million during the quarter under review. The company plans to return about $700 million to its shareholders in fiscal 2020 via share buybacks and dividends.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates revision. The consensus estimate has shifted -37.19% due to these changes.

VGM Scores

Currently, Tapestry has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. Notably, Tapestry has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.