Coach, Kate Spade parent's stock bounces back, as profit beat offsets sales miss

By Tomi Kilgore

Tapestry expressed confidence in its proposed buyout of Capri, with the deal still expected to close in 2024

Shares of Tapestry Inc. pulled a sharp intraday U-turn to trade higher Thursday, after the fashion company reported fiscal third-quarter profit that beat expectations, to offset revenue that fell short of forecasts.

Regarding the company's (TPR) proposed acquisition of Michael Kors and Versace brands' owner Capri Holdings Ltd. (CPRI), Tapestry is still planning to close the deal this year even after U.S. regulators filed suit last month to block the merger.

"We remain confident in the merits and pro-competitive pro-consumer nature of the transaction and look forward to presenting our strong legal arguments in court," said Chief Executive Joanne Crevoiserat on the post-earnings call with analysts, according to a FactSet transcript. "Timeline always contemplated the potential for litigation and we continue to expeditiously work to close the transaction and calendar year 2024."

The stock was down as much as 3.8% at a four-month low in intraday trading, before pulling a sharp U-turn to be up 3% in recent afternoon trading. The turnaround means the stock headed for a one-day, post-earnings gain for the 11th straight quarter, according to FactSet data.

CFRA Analyst Zachary Warring upgraded the stock to buy from hold after the results. He kept his price target at $47, which implied about 17% upside from current levels.

Warring said he believes the stock is "significantly undervalued with or without the merger."

Net income for the quarter to March 30 fell to $139.4 million, or 60 cents a share, from $186.7 million, or 78 cents a share, in the same period a year ago.

Excluding nonrecurring items, such as acquisition costs, adjusted earnings per share of 81 cents beat the FactSet consensus of 68 cents. That marked the third straight quarterly beat and the 15th beat in the past 16 quarters.

Gross margin improved to 74.7% from 72.8%, helped by lower freight expenses, favorable currency moves and operational improvements.

But sales slipped 1.8% to $1.48 billion to miss the FactSet consensus of $1.50 billion, the third miss in the past four quarters.

North America sales fell 3% "amid a challenging consumer backdrop," the company said.

On a bright note, the company said it acquired about 1.2 million new customers in North America, half of which were Gen Z and millennials. , that the customer gains were "consistent with our strategy to recruit younger consumers to our brands."

International sales, excluding the impact of currency translation, rose 3%, with Europe sales jumping 19%, Asia sales climbing 15% and Japan sales up 2%. Sales in greater China fell 2%.

"We remain confident in the long-term opportunity in China despite a more gradual recovery in the region than originally expected, and we continue to invest in our brands, teams and platforms to support our growth," said Crevoiserat.

Coach sales inched up 0.1% to $1.15 billion to match the FactSet consensus of $1.15 billion, while Kate Spade sales fell 5.6% to $280.7 million to miss expectations of $284 million.

Stuart Weitzman sales slumped 17.9% to $56.1 million, well below expectations of $64.9 million.

For the full fiscal year, the company kept its outlook for EPS unchanged at $4.20 to $4.25. But the company trimmed its revenue outlook to "over" $6.6 billion from "approximately" $6.7 billion, citing "more moderate trends" in both North America and China.

During the quarter, the company's total count of directly operated stores fell by a net 22 stores, with seven fewer Coach stores and 16 fewer Kate Spade stores, while Stuart Weitzman stores increased by one.

The stock has gained 9.1% year to date, while the S&P 500 has advanced 9.2%.

-Tomi Kilgore

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05-09-24 1259ET

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