Analysis: Tapestry needs more compelling product to drive up revenue

Although Tapestry traded well in 2018, these results show that it stumbled during the most important retail period at the end of the year. By the company’s historic standards, revenue growth of 0.9% is a spiritless performance. That this came at a time of high consumer spending growth makes the outcome even more concerning as it points the finger of blame firmly at Tapestry.

While the top line numbers were poor, the bottom line provided some relief. Here, operating income grew by almost 10%, largely thanks to margin gains. Net income rose by a spectacular 303%, helped along by lower interest and tax provisions. In our view, this underscores the fact that the slowdown at Tapestry is solely down to issues at the front end of the business – and what it put in front of consumers was not compelling enough to drive up revenue.

For the quarter, Coach sales grew by 1.6% – a material slowdown on the levels of increase the company attained over the past year. Comparable sales rose by 1% on a global basis but all of this was driven by e-commerce, leaving physical same-store sales flat. Given the stronger global performance, we believe that Coach’s physical same-store sales in the U.S. were in negative territory.

One of the issues at Coach over the holiday period was a relatively lackluster line up of products. While the range was not terrible, neither was it particularly compelling. There was a distinct lack of ‘must have’ items and bag silhouettes, and most of the assortment looked very similar to that offered earlier in the year. In a market where consumers had money to spend and were actively shopping around, such an approach was not good enough. In our opinion, the range of gifting options was also poor and not nearly enough effort was put into producing holiday lines to appeal to different price points and types of consumer. Ultimately, these missteps cost Coach sales and market share.

Most of these issues were confined to the U.S. rather than international markets, where Coach is seen as a newer and fresher brand. The runway show in Shanghai, for example, was well received and helped to boost sales in China. This international growth helped raise performance and should continue to have a positive impact as the company moves into 2019.

Performance at Kate Spade was disappointing, with overall revenue down by 1.6%. Admittedly some of this is down to a pullback on promotions and distribution into wholesale channels. However, as this process has been underway for over a year, its impact should now be fading. Similar to Coach, the issues seem to be product related. The holiday assortment did not feel particularly compelling and much of the momentum Kate Spade built up in the prior quarter simply fizzled out. Fortunately, there is an opportunity to remedy this in the second half of the fiscal year as new collections by Nicola Glass start to come through.

After a bumpy run of performance, Stuart Weitzman did relatively well this holiday season, with sales growth bouncing back into positive territory. This hopefully signals an end to the various production problems the division faced in 2018.

Overall, these numbers represent a roadblock on Tapestry’s journey to becoming a much larger brand powerhouse. We believe that the company has the potential to overcome such an obstacle — but only if it quickly gets back to delivering strong collections that engage and inspire customers.


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