Tapestry(NYSE: TPR) is the umbrella company that owns Coach, Kate Spade, and Stuart Weitzman. It is also looking to buy peer Capri Holdings(NYSE: CPRI), adding nameplates Versace, Jimmy Choo, and Michael Kors to the mix to create a giant luxury brand company.
It seems Tapestry is working from a position of strength, as well, given a strong top and bottom line showing in the fiscal first quarter of 2024. But dig a little, and there are some issues to worry about.
Tapestry had a "record" quarter
Sales chimed in at $1.5 billion at Tapestry in the fiscal first quarter of 2024. Gross margin improved by 250 basis points. Adjusted earnings of $0.93 per share were up 18% year over year. According to the headline of the earnings release, "Tapestry, Inc. delivers record first quarter revenue and EPS."
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That sounds great. And to be fair, there was some good news there. It is hard to complain about an 18% increase in adjusted earnings. Meanwhile, the company's ability to expand gross margin by 2.5 percentage points shows that it has been doing well as it looks to deal with the supply chain upheavals and inflation left over from the pandemic. But there was something interesting left out.
When the company highlighted its top-line figure ($1.5 billion), it said only that this represented "growth compared to the prior year." No percentage figure was offered, like the 18% number highlighted with earnings. You have to read further in the release to see that sales were basically in line with the prior year.
So, sales weren't as robust as hoped, and the bottom line strength was really driven by improved margins. There's nothing wrong with that, but it makes those record results seem a little less compelling.
There are more problems at Tapestry
When you dig in a little further, you start to see even more trouble brewing. For example, the Coach nameplate had a strong quarter, with sales up 3% year over year. But sales at Kate Spade were down 6%. And the 19% sales decline at Stuart Weitzman was even worse.
Basically, this fashion house has one strong brand right now and two weak ones. Luckily, the Coach brand is much larger than the other two, accounting for roughly 75% of the company's top line.
But there's more bad news here if you continue to pick apart the company's earnings results. Stuart Weitzman is actually bleeding red ink. It is literally dragging down the company's financial performance.
There's also some trouble when you look at the geographic makeup of sales. In the United States, sales were basically flat year over year. Sales fell 1% in Europe. In China and Japan, sales were higher by 9% and 12%, respectively, but were flat elsewhere in the region. In other words, just two countries drove Tapestry's "record results." And within that, only one brand.
All in, the first quarter 2024 earnings suggest that Tapestry isn't actually working from as strong a position as portrayed. And that's a worrying issue as the company looks to take on three additional luxury brands via the acquisition of Capri. Indeed, if the company is having trouble driving growth at its own trio of brands, how will it do when it has six brands to manage?
I'm not convinced by Tapestry's results
During the company's first-quarter conference call, management noted multiple times that brands matter because it is selling emotionally driven products. If that's the case, then the only brand that seems to be connecting today is Coach, and the only notable success is taking place in China and Japan. I think investors should be treading cautiously here until Tapestry can start to show broader strength across more of its business.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Tapestry. The Motley Fool has a disclosure policy.
