Coach owner Tapestry's profit beats on lower costs, taxes

Tapestry Inc, formerly Coach, reported a first-quarter profit that beat estimates on lower-than-expected costs and a smaller tax bill, and said savings from its Kate Spade acquisition would be more than double its previous forecast.

Tapestry bought Kate Spade in May to tap millennials who are drawn to the company’s quirky satchels and colorful tote bags. The deal also turned Coach into a multi-brand fashion house, a strategy that European counterparts such as Louis Vuitton have built their businesses on.

Shares of the company, which also houses shoemaker Stuart Weitzman, were up 1.3 percent at $42 before the bell on Tuesday.

The New York-based company said it now expects to achieve synergies of about $100 million to $115 million in fiscal 2019, compared with its previous forecast of $50 million.

The increased cost savings forecast is a result of better terms with vendors on raw materials and shifting Kate Spade production to lower cost countries, Chief Executive Victor Luis told Reuters.

Some analysts said the results showed that the company’s recovery was on track after it rapidly pulled back inventory at department stores as part of a strategy to limit discounting and regain the brand’s prestige.

“We believe that the Coach brand turnaround continues, and coupled with the Kate Spade acquisition will deliver strong earnings growth,” Bernstein analyst Jamie Merriman said.

Overall sales, however, missed estimates due to a surprise drop in same-store sales in its legacy Coach unit, partly because of store closures due to hurricanes in the United States and the shift of a key Chinese festival to the next quarter.

Same-store sales at the Coach business fell 2 percent, while analysts had expected a 2 percent rise, according to research firm Consensus Metrix.

Kate Spade’s comparable sales also fell 9 percent as it reduced online flash sales and tried to sell more full-price items.

This resulted in a higher-than-expected build-up in inventory levels for the brand ahead of the holiday quarter, Luis said.

Analysts had expected Kate Spade sales to fall 8.8 percent, according to Consensus Metrix.

Still, Luis was upbeat about the holiday quarter. “We have returned to growth thus far in the second quarter and are well positioned for holiday.”

RBC analyst Brian Tunick said commentary on improving second-quarter trends, maintaining full-year forecast and raising Kate Spade synergies were encouraging.

Tapestry’s net revenue rose 24.2 percent to $1.29 billion, while analysts on average had expected $1.31 billion, according to Thomson Reuters I/B/E/S.

The company posted net loss of $17.7 million, or 6 cents per share, in the quarter ended Sept. 30, mainly due to a $188 million charge related to its acquisition of Kate Spade.

Excluding one-time items, the company earned 42 cents, beating analysts’ average estimate of 36 cents.

The results were helped by a 17 percent tax rate in the quarter, much below the 26 percent expected by some analysts, as well as lower than expected SG&A costs.