Luxury brands diverge: Tapestry stock rises while Capri slides after earnings

Wealth

In this article

Florida, Orlando Vineland Premium Outlets, Coach leather goods sign outside entrance.
Jeff Greenberg | Universal Images Group | Getty Images

Tapestry, the company behind Coach and Kate Spade, beat analyst expectations Thursday for its second quarter earnings and raised its annual profit forecast. Though, it was a different story for its competitor Capri Holdings, whose brands include Michael Kors and Versace.

Tapestry’s gains, sending the stock up over 3% Thursday, came a day after Capri’s disappointing third quarter earnings report. Capri shares fell more than 25% over the past two days after it lowered its fiscal fourth quarter and fiscal 2024 outlook, and it missed estimates across revenues, EPS and margins.

Tapestry said almost half of its 2.6 million new North American customers were Gen Z and millennials. It posted increased gains in the average selling price of handbags, including Coach’s heart-shaped handbags and Bandit shoulder bags.

Rick Patel, managing director at Raymond James, said both Tapestry and Capri have “done a great job” bringing new, younger customers into their brands through social media and website appeal. Though, he acknowledges the Coach brand has executed its go-to-market strategy better than Michael Kors.

Tapestry has spent years retooling its brands and making them relevant for Gen Z and millennial consumers, said Ian Schatzberg, CEO and co-founder of brand agency General Idea, who has worked with Capri and Tapestry.

Schatzberg told CNBC Tapestry has tried to represent different age groups and stylistic demographics by finding ambassadors for different communities and centering them within their products. He said some competitors have not employed this diversity of cultural context in their marketing strategy.

“What you’re seeing with the Tapestry numbers is an indication of a portfolio of brands that has really focused on modernizing the way in which they behave and connecting with consumers who may be under some degree of pressure but are still looking to buy handbags, apparel, outerwear and footwear,” Schatzberg said.

Tapestry reported per-share earnings of $1.36 on Thursday, topping estimates of $1.27, according to a survey of analysts conducted by Refinitiv. Tapestry beat EPS estimates three times in the last four quarters.

Revenue matched analyst expectations of $2.03 billion for the quarter. This was a 5% year-over-year decrease from $2.14 billion.

Impact of China

China sales, though, declined 20% due to incremental pressures associated with Covid outbreaks.

Capri reported double-digit revenue declines in Asia following slower store traffic as the result of China’s unwinding of its zero-Covid policy.

Patel said the “primary culprit” of Capri’s shortfall was a decline in wholesale business — which has been weak across the board for global brands due to inventory challenges.

“One of the key differences between these two businesses is that Tapestry is about 90% retail and e-commerce, whereas Capri is about 73% retail and e-commerce, and that channel has been significantly outperforming,” Patel said.

Tapestry raised its fiscal 2023 forecast to earnings of $3.70 to $3.75 per share, in contrast to its prior estimate of $3.60 to $3.70. It estimates fiscal 2023 revenue of approximately $6.6 billion, a slight decline from the prior year.

Schatzberg said a crucial component of Tapestry’s success has been its emphasis on creating stories and narratives around its products. He anticipates fierce competition among accessible luxury companies over the next few years to pin down brand marketing and attract younger audiences.

“If the story isn’t aligned, and the product isn’t aligned to where the consumer is, it’s just less successful, which is really a conversation about brand marketing,” Schatzberg said.

The state of luxury

Aspirational luxury companies such as Tapestry and Capri have grappled with competing against larger European companies, whose customers are more affluent and consistent buyers. Some European luxury brands have recently created products at broader price points that encroach at times on those of companies including Capri or Tapestry.

“Given inflation and the other macro headwinds that these companies are facing in this environment, I think the higher-end customers are more resilient than the aspirational luxury customers,” Raymond James’ Patel said. “That ties into the consistent results of these other companies.”

Despite these headwinds, Raymond James holds outperform ratings on Tapestry and Capri, though it has lowered Capri’s price target to $60 from $73 on lower estimates.

“Despite some of the channel issues, I do believe that … brand and product affinity remains favorable, and we also think the expectations for a gradual recovery in China in 2024 are reasonable,” Patel said.

Fashion company Ralph Lauren also beat third quarter expectations Thursday. The company reported a 1% rise in net revenue to $1.83 billion, compared with Refinitiv estimates of $1.76 billion.

Despite a 2% decline in wholesale revenue in North America, Ralph Lauren said same-store sales there grew 2%. The company said it saw growth in acquisition of younger consumers led by rising brand awareness.