Why Tapestry Is Doubling Down on China for Coach, Kate Spade and Stuart Weitzman After Earnings Miss

While China’s economic uncertainty continues to dominate headlines, several fashion companies have reiterated their confidence in the region as a growth opportunity.

One of them is Tapestry Inc. — the parent company of Coach, Kate Spade and Stuart Weitzman — which on Thursday reported fiscal second-quarter results and saw its stock slide 18 percent on weaker-than-expected earnings.

The conglomerate also lowered its full-year forecast, blaming a slowing global economy and a disappointing quarter at Kate Spade, which it acquired in 2017 before overhauling its design team under the leadership of new creative director Nicola Glass. (Glass’ first collection, for spring ’19, is just now hitting stores; Tapestry CEO Victor Luis said there was a “lack of distinctive newness” in the former team’s final seasons, leading to lower sales.)

The company said it now forecasts full-year adjusted earnings of between $2.55 and $2.60 per share, down from the previous range of $2.75 to $2.80. Kate Spade’s comparable store sales for the three months ended Dec. 29 fell 1.6 percent to $428 million, versus the same period last year, while Tapestry’s other holdings saw revenues tick up: Coach’s sales rose 2 percent to $1.25 billion, while Stuart Weitzman’s rose 4 percent to $124 million, recovering from the production issues it faced last quarter.

Despite the struggles at Kate Spade, the company said it expects revenues for fiscal 2019 to be up by low to mid-single digits over fiscal 2018. “Importantly, we remain confident in our long-term roadmap,” said Luis, reiterating the company’s plans to “return to double-digit operating income and earnings per diluted share growth in fiscal 2020.”

On a call with investors, Luis explained that the company’s optimistic projections are supported in part by its momentum in China. At Coach, he said “globally, this past quarter, most of the … outsize growth is coming especially from Asia, China domestically being and continuing to lead.” The brand hosted a buzzy fashion show in Shanghai in December to celebrate 15 years in the market, signed Chinese actress Guan Xiao Tong as a global ambassador and is planning to roll out in-store collaborations with local artists throughout the coming year.

Tapestry also completed buybacks of parts of its Stuart Weitzman and Kate Spade businesses in the Asia-Pacific region, taking back control of distribution in areas of China, Singapore, Malaysia and Australia. In January, prior to Lunar New Year, the company opened seven new Stuart Weitzman locations in mainland China and launched a collaboration with Chinese actress Yang Mi, whose first post for the brand garnered 48 million views and 700,000 reposts.

Luis said he visited the Stuart Weitzman and Kate Spade teams in China in December and was impressed “not only by the strength of the talent that we have on the ground and the investments that we’ve made in structure but the performance that they are already driving for us.”

Despite slowing economic growth and shrinking tourist budgets, China is expected to surpass the United States as the world’s largest fashion market this year.

Tapestry earned $1.07 per share in the second quarter, ended Dec. 29, falling short of the consensus estimate of $1.11 per share.

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