This story was updated Aug. 15 at 4:36 p.m. ET
Joanne Crevoiserat, chief executive officer of Tapestry Inc., turned in what she described a “successful year” fiscal year on Thursday.
Coach hit $5.1 billion in annual sales. Gross margins for the year expanded by 250 basis points to 73.3 percent of sales, a 15-year high. And fourth-quarter profits and revenues topped expectations.
“We feel like we’re just getting started at Coach,” Crevoiserat told WWD in an interview. “We have tremendous, both strategic and financial flexibility to enhance our growth and drive even more value in the coming year and years.”
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There was some fourth-quarter weakness at the company’s other brands, Kate Spade and Stuart Weitzman, and China is slowing, but still, it was a solid showing for Tapestry.
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Capri Questions
When Crevoiserat met with analysts on a conference call, the first two questions were about Capri Holdings, which has struggled mightily since Tapestry agreed to buy the company in an $8.5 billion deal a year ago. The acquisition, which is being challenged by the Federal Trade Commission, was initially set to close this calendar year.
Ike Boruchow, an analyst at Wells Fargo, asked what “Plan B” looks like if the deal doesn’t go through.
The question was a reminder of just how much is riding on the deal, which is seen as propping up Capri’s stock price in the near term and, if it goes through, potentially giving Tapestry a big top-line boost and a stronger international business.
In the interview, Crevoiserat said wasn’t so sure about describing it as a “Plan A, Plan B” situation, but doubled down on the value of the deal, adding that Tapestry was well positioned either way.
“We have a lot of strength and flexibility,” the CEO said. “We are in a position of strength and we have multiple paths to deliver value creation. This transaction is compelling. It represents a significant value creation opportunity for us, and that is the path that we are focused on.
“Equally important, we have a growing organic business,” she said. “We have strong earnings delivery, significant cash flow, and that does provide optionality for us in terms of capital allocation.”
Investors liked what they saw from Tapestry in the quarter and shares rose 3.3 percent to $39.20 on Thursday.
Fourth-quarter Results
Net income fell 28.9 percent to $159.3 million, or 68 cents a share, from $224.1 million, or 95 cents, a year earlier. However, adjusted earnings of 92 cents a share came in better than the 88 cents analysts projected, according to Yahoo Finance.
Revenues for the three months ended June 29 slipped 2 percent to $1.59 billion — better than the $1.57 billion analysts forecast — with Coach holding steady as the company’s other brands saw declines.
Coach sales were flat at $1.3 billion while Kate Spade fell 6 percent to $290.1 million and Stuart Weitzman was off 19 percent to $50.6 million.
For the full year, Tapestry’s sales were flat at $6.7 billion, with a 3 percent increase in the Coach business overshadowing declines at the other brands.
Inventories at the end of the fourth quarter were down 10 percent from a year earlier, which the company said reflected “strong inventory control as well as a shift in receipt timing into the fiscal first quarter.”
This year, Tapestry is expecting its sales to be about flat at $6.7 billion with earnings per share of $4.45 to $4.50 representing midsingle-digit growth.
Tapestry is widely viewed as doing a good job reinvigorating the Coach business. The hope is to use that expertise elsewhere. Kate Spade has been slow to improve, but Crevoiserat said Michael Kors already has the base it needs in place.
The Michael Kors Comparison
“There are frankly more similarities to the Michael Kors business to Coach than Kate,” Crevoiserat said. “Michael Kors in terms of advantages, it has high awareness. It’s an already strong brand, it has strong brand codes with hardware and signature platforms. Those are things we are working to build at Kate [that] already exist at Michael Kors.
“It has a large ready-to-wear [and] footwear business. It has global reach,” she said. “It’s an over $3 billion brand already achieving high teen operating margins. From a business perspective and a business model perspective, there’s a lot to love at Michael Kors.”
Even so, the brand is having a rough patch while it waits either for the deal with Tapestry to close or for a judge to nix the transaction.
Last week, Capri said Michael Kors’ revenues fell 14.2 percent to $675 million in the most recent quarter as operating income declined 42.3 percent to $75 million.
Scott Roe, Tapestry’s chief financial officer and chief operating officer, said the problems at Kors can be fixed.
“We’ve been surprised and frankly disappointed by some of the executional issues that we see at Michael Kors and the level of flow through to profit and cashflow,” Roe said. “These are things that we as an organization have a lot of strength and competency and, under our ownership, we see a real opportunity to drive long-term value.”
Kate Spade in Focus
In the meantime, Tapestry is working on its own operations, especially Kate Spade, where L’Oréal veteran Eva Erdmann is slated to become CEO and brand president in October, giving the handbag brand a beauty eye.
Crevoiserat said Kate Spade was “distinctive in the market.”
“The actions that you’ve seen us take should be an indication that we have a strong bias for action and a bias for growth,” she said. “We’re investing in the brand and we see the opportunity to build it. It’s not just about delivering great product, and we have a pipeline of innovation coming, it’s also about connecting that with a holistic marketing and brand building campaigns. We think that Ava’s experience and building brands in the beauty industry, but for luxury brands within that industry, will be a nice compliment to the team in place at Kate.”
If Crevoiserat gets her way on Capri, the Kate Spade turnaround effort will only be preamble.