Ever since a federal judge blocked Tapestry’s $8.5 billion acquisition of Michael Kors-parent Capri with a preliminary injunction last month, the rumor mill has been buzzing about what chief executive officer Joanne Crevoiserat could go after next.
And while she didn’t rule out another deal — eventually — she did sketch out Tapestry’s priorities while reporting first-quarter results, which topped expectations and were led by the company’s biggest brand: Coach.
“We raised our outlook for the fiscal year and we have a bias for action and we’re looking to drive accelerated top-line growth as we go into the rest of the year,” Crevoiserat told WWD. “We’re confident in the runway for long-term growth. The best is yet to come for Tapestry.
“Yes, the Capri deal is a nice fit strategically based on the diversification of their business. But we’re not sitting still in our organic business,” she said. “We have a lot of growth opportunities here in North America as well as around the world.”
Joanne C. Crevoiserat
The Federal Trade Commission sued to stop the acquisition in April, arguing that putting Capri’s Michael Kors business under the same umbrella as Coach and Kate Spade would create an accessible luxury giant that could unilaterally raise prices, sticking consumers with an extra $365 million in costs annually.
That argument won and the court put the deal on pause last month, likely killing it outright as the contract will expire before the trial finishes.
Crevoiserat told analysts on a conference call that, in the absence of the Capri acquisition, Tapestry’s capital allocation priorities would be to maintain its investment grade credit rating; buy back stock, and then pursue “strategic portfolio management.”
“But to be clear, if this deal does not close, we do not expect any M&A in the near term,” Crevoiserat said, using shorthand for any merger and acquisition activity. “And before moving forward with M&A, we will ensure Coach remains strong and that we’ve returned to sustainable top line growth at Kate Spade.”
For the first quarter ended Sept. 28, Kate Spade, which is in the midst of a turnaround and is now led by L’Oréal veteran Eva Erdmann, saw revenues fall 7 percent to $283.2 million with operating profits of $27 million.
Crevoiserat told WWD: “As we think about the business at Kate Spade, we’re building off of a foundation that we see tremendous opportunity to grow and we have a lot of potential and we need to strengthen our execution behind brand building. We’re acting with intention and urgency on the things that we can immediately fix.”
Stuart Weitzman pushed sales up 2 percent to $53.7 million, although operating losses tallied $7.4 million.
According to sources, Tapestry has been in talks to divest the Stuart Weitzman business, although no deal has materialized.
Crevoiserat said: “We are unsatisfied with the brand’s financial performance, although we are making progress. We grew the brand in the quarter and we’re seeing momentum particularly behind wholesale and with some of the brand building work we’re doing….With any capital allocation decision, we’re going to take a disciplined approach as we always do.”
Coach, meanwhile, has been the company’s rock and grew revenues 1 percent to $1.2 billion with operating profits of $386.6 million.
The brand has been building in its home market and overseas while also working in new channels, like Amazon, which Coach started to test last year with a dedicated shop.
Todd Kahn, CEO and brand president of Coach, said: “We’re really pleased with Amazon because, at the end of the day, it is a search vehicle, particularly for young Millennials. That’s where they may start the search. That’s where they may end their search.
“What I also am very pleased with is we haven’t seen any cannibalization in any other channel by having Amazon, our wholesale channel and our direct-to-consumer channels,” he said. “So that’s really impressive and was great learnings for us.”
Kate Spade has also recently started selling on Amazon, adding momentum to the online platform’s efforts to build in fashion.
Overall, Tapestry’s net income in the quarter slipped to $186.6 million, or 79 cents a diluted share, from $195 million, or 84 cents a year earlier. However, the bottom line was held down by $31 million paid for interest expense, most of that supporting debt that Tapestry took on to buy Capri. That debt will get paid back if the deal does fall through.
Tapestry’s adjusted earnings per share tallied $1.02 — 7 cents ahead of the 95 cents analysts projected, according to Yahoo Finance.
Investors approved and sent shares of the company up 3.6 percent to $51.54 on Thursday.
The election of Donald Trump as president has injected uncertainty to the fashion supply chain again, given his habit of starting trade wars in his first term, but Crevoiserat said Tapestry has grown used to some uncertainty.
“If we’ve learned anything over the last four or five years, we have to be agile,” the CEO said. “The environment is always changing. We feel very well positioned. I would say, regardless of who’s leading the federal government, our focus remains on meeting the consumer where they are and delivering the magic of our brands to consumers in the U.S. and around the world. And so with any new cycle or with any change in the environment, we’re staying close to our customers to understand it.”
For the full fiscal year, Tapestry is feeling slightly more bullish than it was a few months ago.
Earnings diluted share are now expected to total $4.50 to $4.55, a nudge up from the $4.45 to $4.50 previously forecast.
And annual revenues are slated for a 1 percent to 2 percent increase in constant currencies, where the company had been looking for growth of approximately 1 percent.
