Tapestry (TPR) Tops Q2 EPS by 18c, Beats on Revenues; Offers FY18 EPS Outlook Above Consensus, FY18 Revenue Mid-Point Guidance Above Consensus

Tapestry (NYSE: TPR) reported Q2 EPS of $1.07, $0.18 better than the analyst estimate of $0.89. Revenue for the quarter came in at $1.79 billion versus the consensus estimate of $1.77 billion.

• Net sales totaled $1.79 billion for the second fiscal quarter as compared to $1.32 billion in the prior year, an increase of 35% on both a reported and constant currency basis.
• Net income for the quarter was $63 million on a reported basis, with earnings per diluted share of $0.22. This compared to reported net income of $200 million with earnings per diluted share of $0.71 in the prior year period. On a non-GAAP basis, net income for the quarter totaled $306 million, with earnings per diluted share of $1.07. This compared to non-GAAP net income of $211 million with earnings per diluted share of $0.75 in the prior year period. The tax rate for the quarter was 80.5% and 21.3% on a reported and non-GAAP basis, respectively, reflective of the impact of the tax legislation changes, as noted. This compared to a tax rate of 26.6% and 27.0% in the prior year on a reported and non-GAAP basis, respectively.
• Gross profit totaled $1.18 billion on a reported basis, while gross margin for the quarter was 66.0% on a reported basis compared to 68.6% in the prior year. On a non-GAAP basis, gross profit totaled $1.20 billion, while gross margin was 67.0% as compared to 68.6% in the prior year.
• SG&A expenses totaled $831 million on a reported basis and represented 46.6% of sales compared to 47.6% in the year-ago quarter. On a non-GAAP basis, SG&A expenses were $785 million and represented 44.0% of sales as compared to 46.3% in the year-ago period.
• Operating income for the quarter was $346 million on a reported basis, while operating margin was 19.4% versus 21.0% in the prior year. On a non-GAAP basis, operating income was $411 million, an increase of 40% versus prior year, while operating margin was 23.0% versus 22.3% in last year’s second quarter.
• Net interest expense was $22 million in the quarter as compared to $5 million in the year ago period.

Fiscal Year 2018 Outlook

The following fiscal 2018 guidance is provided on a non-GAAP basis and includes projected Kate Spade results subsequent to the closing of the transaction on July 11, 2017.

The Company continues to expect revenues for fiscal 2018 to increase about 30% versus fiscal 2017, to $5.8 to $5.9 billion, with low-single digit organic growth and the acquisition of Kate Spade adding over $1.2 billion in revenue.

In addition, the Company continues to project operating income growth of 22% to 25% versus fiscal 2017 driven by mid-single-digit organic growth, the acquisition of Kate Spade, and estimated synergies of $30 to $35 million. These synergies are expected to offset in part the reduction in profitability from the strategic and deliberate pullback of Kate Spade wholesale disposition and online flash sales channels. Taken together, the Kate Spade business and resulting synergies are expected to contribute approximately $130 to $140 million to operating income.

Net interest expense is now expected to be $75 to $78 million for the year, while the full year fiscal 2018 tax rate is projected at about 19.5% to 21%. The changes from prior guidance is reflective of the third quarter debt repayment of $1.1 billion and the recent revisions to the U.S. tax code as noted above.

Overall, the Company now projects earnings per diluted share in the range of $2.52-$2.60, an increase of about 17% to 21% for the year, including mid-to-high single digit accretion from the acquisition of Kate Spade.

GUIDANCE:

Tapestry sees Q3 2018 EPS of $2.52-$2.60, versus the consensus of $2.41. Tapestry sees Q3 2018 revenue of $5.8-5.9 billion, versus the consensus of $5.82 billion.

For earnings history and earnings-related data on Tapestry (TPR) click here.

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