Tapestry Shares Soar on Beating Q2 Sales Expectations, Boosting Outlook

Shares of Coach parent Tapestry surged approximately 15% in premarket trading following the company's announcement that it exceeded holiday-quarter sales expectations and raised its full-year forecast. This positive news has sent ripples through the market, with investors showing renewed confidence in Tapestry's future performance.

The fashion and accessories giant revealed that it now anticipates full-year revenue to exceed $6.85 billion, representing a growth of about 3% compared to the previous year. Furthermore, Tapestry projects earnings per share to range between $4.85 and $4.90, surpassing its earlier forecast of $4.50 to $4.55.

A Boost in Confidence Following a Merger Fallout

Tapestry's strong results come on the heels of a significant development less than two months ago: the company's decision to call off a merger with Capri, despite previously fighting for the deal in court. The proposed agreement aimed to unite America's two largest luxury houses, bringing together Tapestry's Coach, Kate Spade, and Stuart Weitzman brands with Capri's Versace, Jimmy Choo, and Michael Kors under one umbrella.

The contrasting performance of Tapestry and Capri further highlights the disparity in their fortunes. While Tapestry is celebrating its successes, Capri reported a decline in sales for both Versace and Michael Kors during its holiday quarter, as revealed on Wednesday. Capri's CEO, John Idol, acknowledged some missteps within the company, including the reduction of lower-priced accessories that had attracted newer customers.

Tapestry's Strong Performance in the Second Quarter

During Tapestry's fiscal second quarter, which concluded on December 28, the company surpassed Wall Street's expectations across various key metrics. Earnings per share reached $2.00 adjusted, exceeding the anticipated $1.75. Additionally, revenue amounted to $2.20 billion, surpassing the projected $2.11 billion.

Coach Leads the Way, While Kate Spade and Stuart Weitzman Face Challenges

Among Tapestry's brands, Coach emerged as the top performer in the holiday quarter, with a notable 11% year-over-year revenue increase. However, Kate Spade and Stuart Weitzman experienced weaker results, with revenue declines of 10% and 15%, respectively.

Navigating Tariffs and Driving Growth Internally

During Tapestry's earnings call on Thursday, CFO Scott Roe addressed the anticipated impact of an additional 10% tariff on goods imported from China into the U.S., effective February 4. Roe stated that this is not expected to have a material effect on the company's results due to its limited manufacturing in China.

Tapestry emphasized its focus on internal growth strategies, including revitalizing popular styles at Coach, investing in Kate Spade's turnaround efforts, and targeting customer acquisition in Europe. CEO Joanne Crevoiserat highlighted the success of Tapestry's accessories in resonating with new and younger shoppers, attracting approximately 2.7 million new customers in North America during the quarter.

Success with Younger Shoppers: The Tabby Bag and New York Collection

Crevoiserat pointed to specific products that have proven popular, particularly among newer and younger consumers, such as the Tabby shoulder bag, available in various colors and materials, and the New York collection of bags, including the Brooklyn shoulder bag priced at $295 and the Soft Empire Bag priced at $495.

Global Market Performance: Europe's Rise and Japan's Decline

North America remains Tapestry's largest market, accounting for nearly 70% of its quarterly sales. However, Europe stood out with a remarkable 45% revenue increase in the holiday quarter. Greater China experienced a 3% growth, while North America saw a 4% rise. Conversely, Japan reported a 5% year-over-year decline in sales during the same period.

Crevoiserat expressed optimism about Tapestry's growth potential in Europe, citing its lower sales and customer base compared to other regions. The company has intensified its focus on Kate Spade, aiming to revive the brand through strategic initiatives.

Restructuring Kate Spade: Fewer Styles and Focus on Blockbuster Families

Tapestry is implementing a restructuring plan for Kate Spade, which includes reducing the number of handbag styles by more than 15% this fall. The company aims to "build blockbuster handbag families" and prioritize compelling new items over discounts to drive sales growth.

"Decreasing our level of promotional activity will be a key building block of solidifying our brand and positioning it to scale in a healthy way globally over the long term," Crevoiserat stated, emphasizing Tapestry's commitment to Kate Spade's sustainable success.