By Neil Saunders
With the benefit of the acquisition of Kate Spade almost completely annualized out, Tapestry’s overall sales growth has moderated to 7.2%, down from the double-digit uplifts posted over the past year. However, this remains a respectable performance that underlines the progress made by both the Coach and Kate Spade brands.
The growing personalization business—where items are customized in stores by a Coach craftsman—will help ensure the brand continues to deliver good growth.
Gross margins have increased to 67.7% from 59.2% in the prior year. These, along with synergistic savings from the integration of Kate Spade, have helped Tapestry to a healthy net income of $122.3 million— a vast improvement on last year’s net loss of $17.7 million. A few more operational efficiencies can be eked out over the next couple of quarters, which will help boost income further.
Coach puts in good performance
At the brand level, Coach put in a good performance with a 4% uplift in total sales, with an identical 4% increase in comparables. Although the market for handbags, both within the U.S. and globally, remains reasonably strong, we are encouraged by Coach’s ability to execute well and capitalize on this growth. Our data shows that Coach’s brand perception continues to strengthen in bags, and it is gaining particular traction with younger Millennials. This is helping to improve sales volumes of higher-priced, higher-margin product.
Evidence also suggests that Coach is increasingly viewed as a general lifestyle brand. The marketing campaigns and exclusive product launches with Selena Gomez have no doubt helped to elevate the proposition, but so too has the decision to increase focus on new categories. Both clothing and footwear have been particularly successful and are now being purchased by a growing number of core and non-core customers alike.
Men’s collection gaining ground
The men’s collection is also gaining ground. A few years ago, Coach was perceived as a largely feminine brand, but this is now becoming more balanced and the label is seen favorably by men. This gives Coach an opportunity to develop a $1 billion men’s business over the next couple of years.
These areas of trade are important, as they will give uplift to Coach’s numbers as it starts to hit tougher prior-year comparatives. This, along with the growing personalization business—where items are customized in stores by a Coach craftsman—will help ensure the brand continues to deliver good growth.
Kate Spade makes progress
With Kate Spade, we are encouraged by the progress being made. At first glance, a comparable sales decline of 5% does not look good. However, this number is largely a function of reduced volume, as Tapestry has cut back on promotions and discounts. While the measures have caused some sales pain, they have resulted in a good uplift in gross margins and underlying profit. And e-commerce is showing signs of growth.
Kate Spade is developing a clearer brand identity under Nicola Glass, and the new lines collection for Spring 2019 have been well received. The bright colors and chic feminine patterns are a modern twist on Kate Spade’s brand heritage that should resonate with consumers.
Despite good numbers from the other two brands, Stuart Weitzman continued its run of poor performance this quarter. Development and delivery delays are still causing issues, although the impact is less negative than it was last quarter. Investments to increase manufacturing capacity and new processes should help remedy the issues as the brand moves into the critical holiday quarter.
Overall, this is a strong set of numbers from a house of brands that is executing well. This may well give Tapestry the confidence to make further acquisitions over the next calendar year.
Neil Saunders is managing director of research firm GlobalData Retail.