By Neil Saunders
Growth at Tapestry continues to be flattered by the inclusion of Kate Spade, hence the healthy 32.9% increase in total sales. However, when this benefit is removed, underlying performance remains strong with sales up by 5.8% — a favorable rate of increase compared to last quarter’s 2.2% uplift.
The next step in the evolution of Kate Spade is to rebuild the brand with a much more distinct image and to ensure that collections align with this. Brand reinvention is a slow process, so do not expect any significant results for at least the rest of this calendar year.
Much of this bounce comes from Coach where sales growth accelerated to 5.9% on a total basis and 3% on a global comparable basis. Such an outcome is encouraging and indicates that the Coach brand continues to gain ground across the demographic spectrum. From our own brand tracking, we are particularly encouraged to see growing interest among younger consumers — something that is helping to fuel strong numbers in the e-commerce division.
The above average rate of growth at Coach was also aided by a tax refund season in which corporate bonuses and tax cuts helped to push up discretionary income. Although these dynamics provide an environment in which it should be easy to prosper, Coach deserves credit for having a product lineup and marketing efforts that persuaded people to spend some of their windfalls with the brand.
On the product front, the current range is compelling. The recent relaunch of the Signature collection — which features an interlocking ‘C’ motif — has been particularly successful, with popular products like the Charlie Carryall tote doing well. The popularity of the iconic ‘C’ signature design shows how much the brand image of Coach has strengthened over the past year or so.
Looking ahead, the economic environment will continue to be supportive into the next quarter, as residual tax refunds and bonuses come through. However, thereafter these benefits will wane, putting some downward pressure on growth. However, as the underlying fundamentals of Coach remain strong, growth will remain good — with a possible boost in fall thanks to an expanded collaboration with Selena Gomez.
Stuart Weitzman gets global boost
Away from Coach, Stuart Weitzman had a more mixed quarter. Sales growth was relatively good, with total revenue up 4.9% — an acceleration on last quarter’s 2% growth. Most of this was down to a more robust consumer and an increase in international store numbers. However, bottom line performance was far less impressive with gross profit down 8.7% over the prior year. The division also posted a net loss of $11.6 million.
Most of the issues at Stuart Weitzman stemmed from production problems, which delayed some key seasonal styles. Not only did this reduce sales of those products, it also weakened overall interest in the brand which meant core products had to be discounted to stimulate demand. Ultimately, this put pressure on margins and the bottom line. Looking ahead, there is concern that production missteps will continue to affect the brand into the fourth quarter.
Next step in Kate Spade’s evolution
The newest part of the business, Kate Spade, remains in transition. This largely accounts for the comparable sales decline of 9%, including an 800 basis points dip in global e-commerce. As Tapestry pulls back on wholesale distribution and reduces flash sales, revenue is bound to suffer. Nevertheless, we support the strategic direction and believe that this corrective action is ultimately necessary to strengthen the brand.
The next step in the evolution of Kate Spade is to rebuild the brand with a much more distinct image and to ensure that collections align with this. The appointments of Anna Bakst as CEO and brand president and Nicola Glass as creative director are good first steps. However, brand reinvention is a slow process, so do not expect any significant results for at least the rest of this calendar year.
Overall, Tapestry is currently a mixed bag of businesses. However, all are headed in the right direction and this gives us confidence the group will fulfill its ambition of becoming a strong luxury lifestyle company.
Neil Saunders is managing director of GlobalData Retail.