8-K: Tapestry Inc. Reports Record Q2 Revenue and EPS, Raises Fiscal 2024 Outlook

Tapestry, Inc. announced record second-quarter revenue and earnings per share, leading to an increased full-year EPS outlook.

Summary

• Tapestry, Inc. reported a strong second fiscal quarter, with revenue reaching $2.1 billion, a 3% increase year-over-year.
• The company's gross margin expanded by 300 basis points compared to the previous year.
• Operating profit grew by 7% on a reported basis and 14% on a non-GAAP basis.
• Diluted earnings per share (EPS) were $1.39 on a reported basis, up 3% year-over-year, and $1.63 on a non-GAAP basis, a 20% increase.
• Tapestry generated over $800 million in operating and free cash flow, exceeding the prior year's figures.
• The company acquired approximately 2.5 million new customers in North America, with about half being Gen Z and Millennials.
• International revenue grew by 12% at constant currency, with significant growth in Greater China (19%).
• Direct-to-Consumer revenue increased by 4% at constant currency, with growth in both stores and digital channels.
• Inventory levels were reduced by 15% compared to the prior year, reflecting disciplined inventory management.
• The company has raised its full-year EPS outlook to $4.20 to $4.25, representing an 8% to 9% growth compared to the prior year.
• Tapestry expects to return approximately $325 million to shareholders through dividend payments for an anticipated annual dividend rate of $1.40 per share, a 17% increase from the prior year.
• The acquisition of Capri Holdings Limited is expected to close in calendar 2024 and is projected to deliver strong double-digit EPS accretion on an adjusted basis.

Sentiment

Score: 8

Explanation: The document conveys a positive sentiment due to strong financial results, increased guidance, and strategic growth initiatives. The company's performance exceeded expectations, and the acquisition of Capri Holdings is viewed favorably. However, there are some risks and challenges mentioned, preventing a perfect score.

Positives

• Tapestry's revenue and EPS exceeded expectations for the second quarter.
• The company demonstrated strong growth in international markets, particularly in Greater China.
• Tapestry successfully expanded its gross margin and improved operational efficiency.
• The company's focus on customer engagement led to the acquisition of 2.5 million new customers in North America.
• Tapestry's strong cash flow generation supports its strategic growth agenda and shareholder returns.
• The company is making progress on the acquisition of Capri Holdings Limited, which is expected to be accretive to earnings.
• Tapestry has increased its dividend payout by 17% from the prior year.

Negatives

• Net interest expense increased to $49 million on a reported basis due to debt incurred for the Capri Holdings acquisition.
• SG&A expenses increased to $1.05 billion, representing 50.2% of sales on a reported basis.
• Kate Spade and Stuart Weitzman brands experienced a decline in sales compared to the prior year.

Risks

• The company faces risks related to economic conditions, including potential recession and inflationary pressures.
• The COVID-19 pandemic could still impact operations and consumer behavior.
• Tapestry is exposed to risks associated with operating in international markets and global sourcing activities.
• The company must anticipate consumer preferences and maintain brand value in a competitive marketplace.
• There are risks associated with cybersecurity threats and data breaches.
• The acquisition of Capri Holdings Limited is subject to regulatory approvals and integration risks.
• The company's financial results could be affected by changes in international trade agreements and tax legislation.
• The company's forward-looking statements are subject to various risks and uncertainties.

Future Outlook

Tapestry has raised its full-year fiscal 2024 revenue outlook to approximately $6.7 billion, representing an increase of 1% on a reported basis and 2% on a constant currency basis. The company expects earnings per diluted share of $4.20 to $4.25, representing 8% to 9% growth compared to the prior year. Free cash flow is expected to be approximately $1.1 billion, excluding deal-related costs. This outlook does not include any contribution from the proposed acquisition of Capri Holdings Limited.

Management Comments

• Joanne Crevoiserat, Chief Executive Officer of Tapestry, Inc., said, 'Our second quarter results exceeded expectations, highlighting the power of brand building and disciplined execution.'
• She also stated, 'Based on these results, we are raising our EPS outlook for the fiscal year.'
• She added, 'We are confident in our vision and our ability to realize it, with significant runway for long-term growth.'

Industry Context

Tapestry's results reflect a positive trend in the luxury goods sector, with strong international growth and a focus on customer engagement. The acquisition of Capri Holdings Limited is a significant move to consolidate market share and expand brand reach, aligning with industry trends of consolidation and diversification.

Comparison to Industry Standards

• Tapestry's 3% revenue growth is solid, but some luxury brands have seen higher growth rates in the same period, such as LVMH which reported 10% organic revenue growth in Q4 2023.
• The 300 basis point gross margin expansion is impressive and indicates strong operational improvements, comparable to companies like Hermes which consistently maintain high margins.
• Tapestry's 20% non-GAAP EPS growth is strong, but some competitors like Kering have faced challenges in profitability, making Tapestry's performance stand out.
• The $800 million free cash flow generation is robust and positions Tapestry well for future investments and acquisitions, similar to the cash flow strength of Richemont.
• Tapestry's focus on digital growth and customer acquisition aligns with industry trends, but companies like Farfetch are more focused on pure-play e-commerce.
• The acquisition of Capri Holdings is a bold move, similar to LVMH's acquisition of Tiffany, aiming to create a larger and more diversified luxury group.

Stakeholder Impact

• Shareholders will benefit from increased dividends and potential long-term value creation.
• Employees may experience opportunities for growth and development within the expanded company.
• Customers will have access to a broader range of brands and products.
• Suppliers may see increased business opportunities with the combined entity.
• Creditors will be impacted by the company's debt levels and cash flow generation.

Next Steps

• Tapestry will continue to work towards closing the acquisition of Capri Holdings Limited in calendar 2024.
• The company will focus on integrating Capri Holdings and achieving cost synergies.
• Tapestry will continue to execute its strategic priorities, including building customer relationships, powering global growth, and delivering compelling omni-channel experiences.
• The company will report its Fiscal 2024 third quarter results on May 9, 2024.

Key Dates

Keywords

Tapestry, Financial Results, Earnings, Revenue, EPS, Gross Margin, Operating Profit, Cash Flow, Acquisition, Capri Holdings, Retail, Luxury Goods, Dividends, International Growth, Direct-to-Consumer