Retail

Coach owner Tapestry posts narrower-than-expected loss, but faces tough turnaround during pandemic

Key Points
  • Coach and Kate Spade owner Tapestry reported a better-than-expected quarter because of strong online sales. 
  • The parent company said it will speed along turnaround plans. 
  • Along with facing challenges from the pandemic, Tapestry's CEO Jide Zeitlin resigned in mid-July as the company's board began a probe into his personal conduct. 
Employees prepare a window display at a Kate Spade shop in The Shoppes at Marina Bay Sands shopping mall in Singapore on June 19, 2020 as retail shops reopen in Singapore following the further easing of restrictions that were in place due to the COVID-19 novel coronavirus.
Roslan Rahman | AFP | Getty Images

Coach and Kate Spade owner Tapestry reported a narrower-than-expected loss Thursday, as a strong online business helped offset the impact of closed stores during the coronavirus pandemic

But investors remain cautious, worried that sales of handbags and other formal accessories won't be rebounding anytime soon, with many consumers still stuck at home and avoiding large gatherings and events. 

"Thanks to dramatic changes in patterns of work and socializing, it suggests that it could be quite some time before buying levels return to pre-pandemic levels," GlobalData Retail Managing Director Neil Saunders said. "Coach is the prime example of this as, from our data, around 67% of its sales were driven by some form of external event whether that be work, going out, or specific events and occasions." 

Shares of Tapestry were falling around 2% in early trading, having jumped more than 8% premarket. 

Here's what the company reported compared with what Wall Street was expecting for the fiscal fourth quarter ended June 27, based on a survey of analysts by Refinitiv: 

  • Losses per share: 25 cents, adjusted vs. 57 cents, expected 
  • Revenue: $714.8 million vs. $663 million, expected 

Investors were initially encouraged by the better-than-expected performance and Tapestry's proppsal to accelerate its turnaround, despite a recent change in leadership. But the stock's reversal reflects concerns about the lingering challenges ahead. 

Tapestry said it will slash expenses and turn its focus to digital growth as it looks to revitalize its brands. It said e-commerce sales shot up by triple digits versus the prior year, as it gained nearly 1 million new customers online in North America during the quarter, many of them younger. 

Tapestry said it will become leaner, and estimates it will reduce expenses by about $300 million, including $200 million projected in fiscal 2021. 

During a conference call, management discussed the company's vision to refresh each of its three brands, including Stuart Weitzman, with the goal of inching back to profitability. The plan is to carve out niche audiences in a crowded market for accessories. Each of the brand's leaders called out past missteps. 

"We have placed too much focus on the customer we wanted, and not enough on who our customer actually is [and] what we as a brand stand," said Todd Kahn, Coach brand president and CEO. "We're ready to reignite the accessible luxury segment by evolving our message." 

While the company is not offering an outlook for the upcoming fiscal year due to the pandemic, it said it expects revenue to be about in-line with the prior year. It added it expects its overall recovery to be "gradual." 

"I'm confident that Tapestry's next chapter of growth is ours to write," Joanne Crevoiserat, Tapestry's interim CEO, said. "The changing landscape has not changed our priorities, [but] it has been a catalyst to accelerate them." 

In the quarter ended June 27, Tapestry reported a net loss of $293.8 million, or $1.06 per share, compared with a profit of $148.9 million, or 51 cents a share, a year ago. Excluding special items, the company lost 25 cents per share. 

Net sales dropped to $714.8 million from $1.51 billion a year ago. 

Analysts had expected a loss of 57 cents per share, on revenue of $663.3 million, based on a Refinitiv survey. 

Coach sales fell 53%, while sales at Kate Spade dropped 51%, and sales at its Stuart Weitzman brand plunged 61% during the quarter. 

Notably, Tapestry returned to positive year-over-year sales growth in Mainland China. Shoppers are returning "slow and steady" to its stores in North America, it said. It has reopened the majority of the stores it operates across the globe. 

At Kate Spade, shoppers splurged on pajamas to wear at home, and accessories for bedrooms and offices. Leather handbags were hot at Coach. Stuart Weitzman chief Giorgio Sarne said the brand is having success designing and selling more casual merchandise during the pandemic. 

Gross margins improved at each of the company's brands due, in part, to fewer markdowns on bags and jewelry. It hopes to keep margins strong, too, by keeping inventory levels lighter. As one example, the Coach brand will have 50% less handbags and items for customers to choose from this upcoming holiday season. 

"This reduction is key to greater productivity and clearer brand messaging to the consumer," Kahn said. 

Despite some of the bright spots in Tapestry's report, the category it competes in will continue to face headwinds. 

"While improved gross margin trends are encouraging, we continue to have concerns with the handbag space, given its discretionary nature, lower e-commerce penetration, and reliance on occasions and travel," Telsey Advisory Group's Dana Telsey said in a note to clients. "Work remains to be done to improve the Stuart Weitzman and Kate brand positioning while the company searches for a new CEO." 

Crevoiserat, a former Abercrombie & Fitch executive, stepped into the CEO role as the company looks for a permanent replacement. It did not name or discuss a permanent fill Thursday. 

Tapestry's CEO Jide Zeitlin resigned in mid-July as the board began a probe into his personal conduct. He had been chairman since 2014 and had just taken over the CEO role in September from Victor Luis. 

To buoy its finances during the pandemic, Tapestry said it cut corporate headcount costs by 20% and made other decisions to reduce operating expenses. The company ended the fiscal year with $1.4 billion in cash and short term investments, including a $700 million revolver draw down. 

Read the complete earnings press release here. 

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William Cohan details his reporting on Tapestry CEO controversy