Strong sales of Coach handbags help Tapestry beat estimates, shares soar

Tapestry Inc, formerly Coach Inc, reported quarterly results that surpassed expectations and raised its profit outlook for the full year, driven by strong demand for its Coach handbags.

The results were underpinned by Tapestry’s success in transforming itself into a multi-brand company and a move to pull inventory from stores and cut back on flash sales to retain brand exclusivity.

While sales of Coach handbags have rebounded, the company is following the same strategy to stanch a decline in sales at Kate Spade, a brand it acquired last year.

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Coach same-store sales rose 3 percent in the latest quarter, compared with analysts’ estimate of 1.83 percent.

Kate Spade’s comparable store sales fell 7 percent but the drop was smaller than the 8.84 percent expected by analysts, according to Thomson Reuters I/B/E/S.

“Tapestry wants to take Kate Spade through the same process used to rebuild Coach,” Neil Saunders, managing director of Globaldata Retail wrote in a note, noting that the brand had become overly reliant on excessive promotions to drive results.

Tapestry said it would continue to significantly restrict surprise and promotional sales and that it would no longer use flash sales widely.

Tapestry’s Coach brand provides a stable platform to drive sales and margins of the company’s newer brands, William Blair analyst Dylan Carden said in a note.

For 2018, the company said it now expects diluted earnings per share in the range of $2.52 to $2.60, compared with its previous forecast of $2.35-$2.40.

Overall revenue rose to $1.79 billion in the second quarter ended Dec. 30, topping the average analyst estimate of $1.77 billion.

The company recorded a one-time charge of $194 million in the latest quarter related to the new tax law that resulted in a decline in net income to $63.2 million from $199.7 million a year earlier.

Excluding items, Tapestry earned $1.07 per share, beating the average estimate of 89 cents for the quarter.

Gross profit margin fell to 66 percent from 68.58 percent a year earlier.