Tapestry (NYSE: TPR) reported Q3 EPS of $0.54, $0.04 better than the analyst estimate of $0.50. Revenue for the quarter came in at $1.32 billion versus the consensus estimate of $1.3 billion.

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 is now projecting operating income growth of at least 22% versus fiscal 2017 driven by mid-single-digit organic growth, the acquisition of Kate Spade, and estimated synergies of approximately $45 million. These synergies are expected to offset 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 $145 million to operating income.

Net interest expense is now expected to be approximately $75 million for the year, while the full year fiscal 2018 tax rate is now projected at about 18% to 19%.

Overall, the Company now projects earnings per diluted share in the range of $2.57-$2.60, an increase of about 19% to 21% for the year, including high single digit accretion from the acquisition of Kate Spade.

Overview of Third Quarter 2018 Tapestry, Inc. Results:

Fiscal 2018 third quarter performance includes the contribution of Kate Spade, which the Company acquired on July 11, 2017 and therefore is not included in the prior year results.

• Net sales totaled $1.32 billion for the third fiscal quarter as compared to $995 million in the prior year, an increase of 33% on reported basis. On a constant currency basis, total sales increased 30%.
• Gross profit totaled $909 million on a reported basis, while gross margin for the quarter was 68.7% on a reported basis compared to 70.9% in the prior year. On a non-GAAP basis, gross profit totaled $913 million, while gross margin was 69.0% as compared to 70.9% in the prior year.
• SG&A expenses totaled $750 million on a reported basis and represented 56.7% of sales compared to 55.7% in the year-ago quarter. On a non-GAAP basis, SG&A expenses were $729 million and represented 55.1% of sales as compared to 54.6% in the year-ago period.
• Operating income for the quarter was $159 million on a reported basis, while operating margin was 12.0% versus 15.2% in the prior year. On a non-GAAP basis, operating income was $184 million, an increase of 14% versus prior year, while operating margin was 13.9% versus 16.3% in last year’s third quarter.
• Net interest expense was $17 million in the quarter as compared to $4 million in the year ago period.
• Net income for the quarter was $140 million on a reported basis, with earnings per diluted share of $0.48. This compared to reported net income of $122 million with earnings per diluted share of $0.43 in the prior year period. On a non-GAAP basis, net income for the quarter totaled $158 million, with earnings per diluted share of $0.54. This compared to non-GAAP net income of $130 million with earnings per diluted share of $0.46 in the prior year period. The tax rate for the quarter was 1.3% and 5.6% on a reported and non-GAAP basis, respectively, reflective of the impact of the tax legislation changes, as previously disclosed, as well as the adoption of Accounting Standards Update (ASU) 2016-09 for the accounting of employee share-based payments which cannot be forecasted. This compared to a tax rate of 16.9% and 17.5% in the prior year on a reported and non-GAAP basis, respectively.
• Inventory was $714 million at the end of quarter versus ending inventory of $479 million in the year ago period. Excluding the impact of Kate Spade as well as the inventory associated with regional buyback activity in the quarter, total inventory increased 7% versus prior year, consistent with organic sales growth.

GUIDANCE:

Tapestry sees FY2018 EPS of $2.57-$2.60, versus the consensus of $2.59. Tapestry sees FY2018 revenue of $5.8-5.9 billion, versus the consensus of $5.86 billion.

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