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Tapestry (TPR 1.67%) reported record revenue in the first quarter of fiscal 2023 (ended Oct. 31), achieving earnings ahead of the Wall St. analyst consensus. That’s good news, but management also made a tweak to the company’s full-year guidance, pulling down both its revenue and earnings outlook. Investors need to consider the changes carefully.
Tapestry — the retailer behind high-end brands Coach, Kate Spade, and Stuart Weitzman — reported sales of $1.5 billion, up a modest 2% year over year, in the fiscal first quarter. Earnings of $0.79 per share were basically flat compared to the prior year, which isn’t terrible given the inflationary backdrop. So, based on the headline numbers, Tapestry’s results seem pretty solid.
Image source: Getty Images.
However, when you dig into the earnings statement, things look a little more tentative. For example, the cost of sales rose 9.6% year over year, bringing gross margin down about 215 basis points. Moving down the income statement, the company’s selling, general, and administrative expenses also outpaced revenue growth, driving Tapestry’s operating margin down more than three percentage points. Management attributed much of the hit to margins to higher freight costs and foreign-exchange headwinds. Simply put, the company’s costs are rising faster than its ability to pass on cost increases.
To be fair, it can take some time to pass rising costs on to consumers. And premium brands like the ones Tapestry owns have historically been considered more resilient to economic downturns, because their target market is made up of wealthy consumers who can maintain their spending even in the face of a recession. Such consumers could also absorb higher prices more easily.
On the bottom line, Tapestry posted net income of $195.3 million, down from $226.9 million in the prior-year period. That’s not a shock given the above comparison of the modest sales improvement to the cost increases the company faced. So how did earnings stay flat? The answer is that Tapestry reduced its share count by nearly 13.5% in the past year. Overall, the company is probably performing less well than a quick glance at earnings suggests.
On top of that, Tapestry lowered both its revenue and earnings guidance for fiscal 2023. Heading into the fiscal year, management was calling for sales of roughly $6.9 billion and earnings per share between $3.80 and $3.90. After just one quarter, those figures were down to sales of $6.5 billion to $6.6 billion and earnings of between $3.60 and $3.70 per share.
To be fair, there are material headwinds in the market, including both inflation and a strong dollar. So this probably isn’t as bad as it sounds, but given the underlying weakness in the fiscal first-quarter results, it certainly isn’t a positive change.
Notably, the company explained that “a more modest revenue outlook in North America and Greater China is expected to be fully offset by outperformance in Rest of Asia and Europe.” That would be fine if Europe and Asia weren’t facing their own risks of a recession, with ongoing geopolitical strife a very real headwind as well.
Meanwhile, China and the North America are the company’s two largest markets. There’s probably more downside potential here than it would seem from a cursory reading of the company’s latest guidance, especially if Europe and other Asian markets don’t live up to current expectations.
Tapestry was able to cobble together a decent fiscal first quarter, but given the weak economic backdrop and the company’s projection for its biggest markets going forward, it’s prudent for conservative investors to take a wait-and-see approach here. There’s no question that Tapestry owns great brands, but the risk of the company falling short of its goals seems high right now — something Wall Street has viewed very negatively at other retailers.
Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Tapestry. The Motley Fool has a disclosure policy.
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