Coach powers Tapestry profit beat, tariffs to weigh on Kate Spade brand

Tapestry Inc reported quarterly profit above market expectations on Tuesday, but warned of weakness at its Kate Spade business due to tariffs on apparel and jewelry imported from China.

The New York-based fashion house, which bought Kate Spade in 2017, has struggled to integrate it as out-of-touch designs have made it difficult for the brand to sell its handbags at full-price to millennial shoppers.

The brand makes a large portion of its ready-to-wear apparel and jewelry in China, leaving its margins more heavily exposed to recently imposed tariffs than Tapestry’s more high-end Coach and Stuart Weitzman units.

Chief Executive Officer Jide Zeitlin said he would review the Kate Spade business, hoping to turn around same-store sales that have been falling since the company bought the brand.

Tapestry had hired Nicola Glass, a Gucci and Michael Kors alumnus, last year to revamp its Kate Spade’s handbags.

But according to Jessica Ramirez, a retail analyst at Jane Hali & Associates, the new designs haven’t caught on.

“Kate Spade doesn’t know who its customer is anymore,” she said. “I can’t say that the product isn’t nice, but I don’t know who would wear it.”

Same-store sales for the brand fell 16% in the first quarter and the company said it expected sales to drop in the high-single digits in the current quarter.
However, improved sales in China and Europe for the high-margin Coach brand helped cushion weakness at Kate Spade and pushed adjusted profit higher than expectations.

Global same-store sales at Coach, which started as a wallet maker in 1941, rose 1% in the quarter.

Tapestry forecast second-quarter earnings between 95 cents and $1 per share, below analysts’ estimates of $1.09, according to IBES data from Refinitiv.
Excluding items, it earned 40 cents per share in the first quarter ended Sept. 28, beating expectation of 37 cents. However, the company missed net sales estimates.

Shares of the New York based company were up about 2% in early trading.