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Why Tapestry Has Raised Its Fiscal 2018 Earnings Guidance

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Discussing Tapestry’s recent strategic initiatives

In its fiscal 2Q18 earnings report, Tapestry’s (TPR) management announced some of the company’s business development initiatives aimed at increasing direct control over its international distribution.

The company said that it had expanded operational control over its Kate Spade joint ventures in China, Hong Kong, Macau, and Taiwan. It is also in the process of acquiring Stuart Weitzman’s northern China business from the distributor.

“These transactions are in keeping with our strategic priority to maximize the opportunity with Chinese consumers globally across our brands,” said Victor Luis, Tapestry’s CEO.

The company is also buying back its Coach business in Australia and New Zealand. “As a result, we will be creating a Tapestry hub and center of excellence in Sydney to drive growth across our portfolio, further unlocking the value of a multi-brand operating model,” added Luis.

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Guidance update

Tapestry’s management continues to expect a 30% YoY (year-over-year) rise in the company’s fiscal 2018 sales. Its total revenue is likely to land in the range of $5.8 billion–$5.9 billion, including $1.2 billion from its Kate Spade acquisition and low-single-digit organic growth. Coach’s global comps are expected to rise at a low-single-digit rate.

“As we look forward to the balance of our fiscal year, we are well positioned to drive continued positive comparable store sales for Coach,” said Luis. “And for Kate Spade, our priority remains integration and executing the strategic initiatives to build the foundation for growth under the creative direction of Nicola Glass in FY19 and beyond,” he added.

Management has lifted its outlook for Tapestry’s full-year earnings. It now expects 17%–21% adjusted EPS (earnings per share) growth driven largely by a lower tax rate and interest expenses. This expectation compares to the 10%–12% EPS increase it guided at the beginning of the year.

Net interest expenses are now expected to be $75 million–$78 million compared to earlier guidance of $80 million–$85 million, reflecting the company’s recent debt payment of $1.1 billion.

Tapestry’s fiscal 2018 tax rate is now projected to be between 19.5% and 21% compared to earlier guidance of 25%–26%. The company’s lower tax rate reflects the recent revisions in the US tax code.

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