By Neil Saunders
While sales growth of 35.1% looks impressive for Tapestry, most of this is due to the inclusion of Kate Spade in Tapestry’s numbers. When this is excluded, growth falls back to a more modest 2.2%. Although this may appear soft in the context of healthy trading over the holiday season, in our view it represents a significant step forward for the group.
In producing growth, Coach deserves credit for an on-trend holiday lineup, a compelling marketing campaign, and great in-store execution. Tapestry wants to take Kate Spade through the same process used to rebuild Coach. This is a necessary step to bolster brand value as Kate Spade had become too value-oriented and overly reliant on excessive, and margin-depleting, promotions to drive results.
Coach presents stable platform
Most pleasing is the return to growth of the Coach brand which has, for some time, seen revenue slide as the result of a pullback from a number of sales channels, including department stores. The 2.2% increase signals that this period of painful adjustment is mostly over and that Coach has a stable platform from which to expand. A more disciplined approach to discounting and promotions helped margins at the brand, which flowed through to some healthy gains in operating income. Coach’s game plan of becoming less ubiquitous and selling more at higher price points is now delivering.
In producing growth, Coach deserves credit for an on-trend holiday lineup, a compelling marketing campaign, and great in-store execution. Gains were aided by a confident consumer and flattered by a very soft prior year comparative. Both factors were particularly influential in the key North American market. This leads us to be a bit more cautious about prospects over the upcoming quarters, especially as comparatives become tougher and gifting sales are less significant.
But prospects for the brand remain good. Any softness in the North American market can be offset by a more aggressive and coordinated approach to international expansion. Tapestry is taking back direct control of the Coach business in Australia and New Zealand, which will help to improve the brand’s presence and influence in the region.
Kate Spade numbers reflect strategy change
Tapestry’s newest brand, Kate Spade, performed less well. Global comparable sales declined by 7% over the period, driven in part by a fall in e-commerce. The dip is mostly the result of a deliberate change in strategy, with Tapestry pulling back from the flash sales and heavy discounting that Kate Spade previously used to drive revenue. Predictably, this has resulted in a dramatic volume decline and waning interest among some consumer segments.
The intention is clear: Tapestry wants to take Kate Spade through the same process used to rebuild Coach. This is a necessary step to bolster brand value as Kate Spade had become too value-oriented and overly reliant on excessive, and margin-depleting, promotions to drive results. Weaning Kate Spade off the discounting drug will be far from easy. Better numbers will only come through over the medium to longer term. But, the appointment of Nicola Glass as the brand’s creative director signals a serious intent to grow the division. We remain fully supportive of Tapestry’s vision and strategy.
Unfortunately for Tapestry, while results were good at Coach and Stuart Weitzman – where a new store concept and new ranges by Giovanni Morelli were both well received – net income was less impressive. Higher tax provisions and some integration costs more than depleted gains in gross margin and operating profit. This is a short-term issue, but it underlines the fact that Tapestry still has much reengineering to do.
Neil Saunders is managing director of GlobalData Retail.