Tapestry, Inc. (TPR), the house of iconic luxury brands including Coach, Kate Spade, and Stuart Weitzman, has once again demonstrated its operational excellence and strategic prowess, delivering impressive financial results in the third quarter of fiscal 2024. The company's unwavering commitment to disciplined brand building, customer-centric initiatives, and operational agility have positioned it for sustainable growth and shareholder value creation.

Financials

In the third quarter, Tapestry reported net sales of $1.48 billion, a slight decrease of 1.8% year-over-year. However, excluding the impact of foreign currency fluctuations, net sales were essentially flat, declining just 0.2%. This resilient performance was driven by strong international growth, particularly in Europe, Japan, and other Asian markets, which offset softer trends in North America and Greater China.

Tapestry's disciplined execution and focus on operational efficiency were evident in its financial results. Gross profit increased 0.8% to $1.11 billion, with gross margin expanding 190 basis points to 74.7%. This impressive margin expansion was primarily attributable to lower freight costs, favorable currency translation, and net pricing improvements across the portfolio.

The company's selling, general, and administrative (SG&A) expenses increased 3.6% to $903.1 million, but excluding acquisition-related costs, SG&A expenses actually decreased 0.4%. This operational agility allowed Tapestry to deliver operating income of $204.3 million, a 9.8% decline from the prior-year period. Excluding the impact of acquisition costs, operating income increased 5.8% to $239.3 million, with operating margin expanding 110 basis points to 16.1%.

Net income for the quarter was $139.4 million, a 25.3% decrease from the prior-year period. However, excluding acquisition-related costs, net income increased 1.9% to $190.1 million. Diluted earnings per share were $0.60, compared to $0.78 in the prior-year quarter. Excluding the impact of acquisition costs, diluted EPS increased $0.03 to $0.81.

Business Overview

Tapestry's strong financial performance was underpinned by the continued success of its strategic initiatives across its portfolio of brands. At the company's largest brand, Coach, net sales increased 0.1% (1.9% on a constant-currency basis) to $1.15 billion, driven by growth in the brand's iconic handbag offerings, such as the Tabby family, as well as strength in footwear and men's categories. Coach's operating margin expanded 170 basis points to 31.6%, reflecting the brand's ability to drive innovation, enhance customer engagement, and maintain pricing discipline.

The Kate Spade brand faced some top-line challenges, with net sales declining 5.6% (4.8% on a constant-currency basis) to $280.7 million. However, the brand's operating margin increased 90 basis points to 3.6%, as it continued to focus on strengthening its core handbag foundation, improving the omnichannel experience, and delivering more emotional marketing campaigns. The company remains confident in Kate Spade's long-term potential and is committed to executing on its strategic initiatives to drive sustainable growth.

The Stuart Weitzman brand experienced a more challenging quarter, with net sales declining 17.8% (16.9% on a constant-currency basis) to $56.1 million. The brand's operating margin decreased 950 basis points to -8.4%, as it navigated headwinds in its key North American and Greater China markets. Tapestry remains focused on supporting Stuart Weitzman's brand health through product innovation, relevant marketing, and strategic adjustments to its distribution channels.

Outlook

Looking ahead, Tapestry provided guidance for fiscal 2024, which does not include the potential impact of the proposed acquisition of Capri Holdings. The company expects revenue to exceed $6.6 billion, representing approximately 1% growth on a constant-currency basis. Gross margin is expected to expand by approximately 230 basis points, driven by moderating freight costs, while operating margin is projected to increase by 110 basis points. Earnings per share are forecasted to be in the range of $4.20 to $4.25, reflecting 8% to 9% growth compared to the prior fiscal year.

Recent Developments

Tapestry's strong financial performance and strategic execution have positioned the company well to navigate the current macroeconomic environment. The company's focus on customer-centricity, digital transformation, and brand building has enabled it to acquire new customers, particularly among younger demographics, and drive sustainable growth. Additionally, Tapestry's disciplined approach to inventory management and cost control has allowed it to maintain profitability and generate robust free cash flow, which stood at $791 million in the fiscal year ended June 29, 2024.

The proposed acquisition of Capri Holdings, if completed, is expected to further enhance Tapestry's market position and financial profile. The transaction is anticipated to be double-digit accretive to Tapestry's earnings per share on an adjusted basis in the first year, while also generating over $200 million in cost synergies and compelling returns on invested capital.

Tapestry's geographic diversification has been a key strength, with the company reporting strong performance in international markets, particularly Europe, Japan, and other Asian regions, which offset softer trends in North America and Greater China. In the third quarter, Tapestry's international sales grew 3% on a constant-currency basis, driven by a 19% increase in Europe, a 15% rise in Other Asia, and a 2% gain in Japan. These results highlight the company's ability to adapt its strategies and product offerings to local consumer preferences and market dynamics.

Conclusion

The company's portfolio of iconic brands, coupled with its focus on innovation, customer engagement, and operational excellence, has positioned Tapestry for continued success. As the company navigates the evolving luxury landscape, its disciplined approach to brand building, digital transformation, and financial management will be crucial in driving sustainable growth and shareholder value creation.

Tapestry's impressive third-quarter performance, underpinned by its strategic initiatives and operational agility, underscores the company's ability to deliver consistent results and create long-term value for its shareholders. With a strong financial foundation, a diversified global footprint, and a clear vision for the future, Tapestry is well-positioned to capitalize on the opportunities in the dynamic luxury market.