10 May

Why Tapestry’s Operating Margin Fell in Q3

WRITTEN BY Sharon Bailey

Gross margin expansion

Tapestry’s (TPR) gross margin expanded 20 basis points to 68.8% in the third quarter of fiscal 2019, which ended on March 30. On an adjusted basis, Tapestry’s gross margin expanded 30 basis points to 69.2% in the third quarter.

Tapestry’s gross margin improvement was driven by higher adjusted gross margins of the Kate Spade and Coach brands, partially offset by the lower margin of Stuart Weitzman. Kate Spade’s adjusted gross margin expanded by 90 basis points driven by synergies in costs of goods sold. Coach brand’s gross margin improved 30 basis points, including a 20 basis-point favorable impact from currency movements. The gross margin of Stuart Weitzman fell 150 basis points mainly due to currency headwinds.

Why Tapestry’s Operating Margin Fell in Q3

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Contraction in operating margin

Tapestry’s operating margin declined to 7.9% in the third quarter of fiscal 2019 from 12.0% in the third quarter of fiscal 2018. The company’s adjusted gross margin declined to 10.6% in the fiscal 2019 third quarter compared to 13.9% in the third quarter of fiscal 2019.

Tapestry’s operating margin was adversely impacted by higher SG&A (selling, general, and administrative) expenses resulting from new store distribution, a higher marketing expense associated with the Kate Spade brand, costs associated with buybacks of regional distributors, and higher depreciation expenses associated with systems implementation.

Margin outlook

Tapestry expects its gross margin to decline in the fourth quarter but expand in full-year fiscal 2019. Tapestry’s operating margin is expected to be adversely impacted by the deleverage in SG&A expenses due to the impact of investments associated with distributor buybacks and continued investments in systems.

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