Economic conditions are good for spending on luxury lifestyle brands. Asset prices have risen sharply, global economic growth is picking up, consumer confidence is high, and wages and disposable personal income are increasing.
Tapestry (TPR 47.49, +2.52, +5.6%), which manages a portfolio of brands that includes Coach, Kate Spade, and Stuart Weitzman, managed to capitalize on these favorable economic conditions, and its acquisition of Kate Spade, in its fiscal second quarter ended December 30.
Net sales for the period surged 35% to $1.78 billion. That growth was fueled by the addition of Kate Spade and organic growth as well.
Coach brand sales increased 2% to $1.23 billion, paced by a 3% increase in global comparable sales. Net sales for Stuart Weitzman also increased 2% to $121 million.
Kate Spade contributed $435 million to Tapestry's total net sales, although global comparable sales for Kate Spade declined 7% as Tapestry made the strategic decision to pullback on the brand's wholesale distribution and online flash sales. The latter is consistent with Tapestry's aim to maintain its premium brand equity among lifestyle brand products.
Tapestry said it enjoyed better than expected gross margins in the period, which helped drive significant operating income growth. On a non-GAAP basis, Tapestry's gross margin rate was 67.0%, versus 68.6% in the prior year, yet the net sales growth and solid expense control enabled its non-GAAP operating margin to expand 70 basis points to 23.0%.
The company's adjusted earnings of $1.07 per diluted share were up 43% from the year-ago period on a comparable basis and were well ahead of analysts' average expectation.
Looking to fiscal 2018, Tapestry expects revenues to increase about 30% year-over-year, with low-single digit organic growth. Its earnings, meanwhile, are projected to be between $2.52 and $2.60, which translates to a year-over-year increase of 17% to 21%, including mid-to-high single digit accretion from the Kate Spade acquisition.
Tapestry's prior fiscal 2018 earnings guidance was $2.35 to $2.40, so the updated guidance is a nice surprise for shareholders.
Including today's gain, TPR is up 7.4% year-to-date and trades at approximately 18.6x estimated fiscal 2018 earnings, which is relatively attractive when pitted against the projected growth rate of 17% to 21%.