Tapestry sales strong as company repositions

Tapestry sales are on track to ensure the company formerly known as Coach will fulfil its ambition of becoming a strong luxury lifestyle company.

Growth at Tapestry continues to be flattered by the inclusion of Kate Spade, hence the healthy 32.9 per cent increase in total sales. However, when this benefit is removed, underlying performance remains strong with sales up by 5.8 per cent – a favourable growth rate compared to last quarter’s 2.2 per cent rise.

Much of this bounce comes from Coach where sales growth accelerated to 5.9 per cent on a total basis and 3 per cent on a global, comparable basis. Such an outcome is encouraging and indicates 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, we believe that 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, we think that 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.

Weitzman’s woes

Away from Coach, Stuart Weitzman had a more mixed quarter. Sales growth was relatively good, with total revenue up 4.9 per cent – an acceleration on last quarter’s 2 per cent 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 per cent over the prior year. The division also posted a net loss of US$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, we are concerned that production missteps will continue to affect the brand into the fourth quarter.

Kate Spade in transition

The newest part of the business, Kate Spade, remains in transition. This largely accounts for the comparable sales decline of 9 per cent, 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, we believe that 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 fulfil its ambition of becoming a strong luxury lifestyle company.

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