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Kate Spade Acquisition Pressures Tapestry’s 1Q18 Margins

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Nov. 9 2017, Updated 5:15 p.m. ET

Tapestry does better than expectations in 1Q18

Tapestry (TPR) reported a 7% YoY (year-over-year) fall in 1Q18 earnings, which stood at 42 cents during the quarter. The company outperformed consensus 1Q18 earnings expectations of 36 cents. This was the fifteenth consecutive earnings beat for the company.

Rival Michael Kors (KORS), which reported quarterly results a day before Tapestry, posted a 37% YoY increase in EPS to $1.33. The company outperformed Wall Street expectations by a good 50 cents.

Ralph Lauren (RL) also delivered an earnings beat recently. The company’s adjusted profit per share rose 4.7% YoY to $1.99—10 cents more than expectations. It reported its quarterly results on November 2.

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How were Tapestry’s 1Q18 margins?

Tapestry’s reported gross profit totaled $764 million, up 6.9% compared with 1Q17. The gross margin stood at 59.3%, compared with 68.9% in 1Q17. In comparison, Ralph Lauren and Michael Kors posted margins of 59.8% and 60.2%, respectively.

Adjusted gross margin was down 270 basis points to 66.2% of sales. Kate Spade integration pressured the overall margin by ~130 basis points due to the Kate Spade brand’s lower margin profile.

Coach brand’s gross margin plunged 140 basis points to 68.4%, including a 70 basis point fall from currency pressures. Kate Spade’s gross margin stood at 61.3% during the quarter.

Operating income stood at $169 million, down 4% YoY. Its operating margin fell 390 basis points to 13.1% of sales, including a 140 basis point pressure from the addition of Kate Spade.

Guidance reaffirmed after 1Q18 results

The company maintained its fiscal 2018 guidance. It continues to expect a 30% increase in total sales to $5.8 billion–$5.9 billion. This rise includes $1.2 billion in revenue from the Kate Spade acquisition and low-single-digit organic growth.

Earnings per share are projected to land in the $2.35–$2.40 range, a 10%–12% rise over last year.

Read the next part of this series to learn about the company’s stock market performance and recent analyst actions.

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