After last year’s holiday boom, it was always going to be difficult for Tapestry to top the sales it delivered last year. This challenge was made even harder by unfavorable exchange rates, which are dragging down the contribution from foreign earnings.
In the end, the company saw its second-quarter top line fall by 5.4 per cent over the prior year to $2.03 billion. On a currency-neutral basis, this drop is reduced to around 2 per cent.
All things considered, this is not a terrible outcome. However, it is one that reflects something of a pullback in underlying consumer demand – especially in the core North American market. After yesterday’s softer numbers from Capri, it will also set some alarm bells ringing that the luxury sector is losing some of the momentum that has made it one of the standout areas of the past couple of years.
While Tapestry’s sales line looks a bit battered, the decline is modest – especially on a constant currency basis. Part of this is because, for the most part, Tapestry remains on a very good trajectory. Compared to the same period in 2019, group sales are up by 11.5 per cent, with two of the three divisions – Coach and Kate Spade – now being much larger businesses than they were before the pandemic. Much of this is down to the brand-building and operational improvements that Tapestry has made over that period.
Another reason for optimism is that net income rose by 3.7 per cent over the prior year. Some of this has been helped along by reduced freight expenses, which were very elevated last year. However, a good contribution also came from tight pricing control which meant that discounting was minimal during a period when other retailers were pushing bargains and deals. This, in turn, is a consequence of the strong, desirable brands and ranges Tapestry has built and of good inventory control. On inventory, while there is an elevation over last year the rate of increase is manageable and there has also been a reduction in inventory levels since the summer.
Looking at the brands in more detail, Coach sales declined by 4.9 per cent – a dip of 1 per cent on a constant-currency basis. Given last year’s strong numbers, we consider this a very reasonable outcome. While overall buying levels within North America were a bit more muted, handbags remained a popular gifting and self-purchase category and Coach – with some popular silhouettes and designs – remained in demand. This helped to facilitate an increase in the average purchase price which offset modest volume declines. The brand also continues to attract younger shoppers which bodes well for the quarters and years ahead.
Kate Spade’s sales declined by 2 per cent and were flat on a constant currency basis. Accessories remain a key part of the brand’s success. Apparel too is delivering reasonable numbers, supported by some interesting holiday ranges that were very much attuned to the more lively and outgoing personalities of customers over this season. Overall, we feel that Kate Spade has now successfully rebuilt its brand identity after spending quite some time in the wilderness.
The weak spot of the group remains Stuart Weitzman where sales plunged by 26.3 per cent, or by 24 per cent on a constant-currency basis. This comes despite efforts to improve the assortment. A pullback in consumer demand for footwear, some issues with foreign sales, and the brand simply not having the oomph of its siblings all contributed to a disappointing set of numbers.
