Reuters US Business
By Juveria Tabassum
(Reuters) -Tapestry raised its annual targets but forecast holiday-quarter earnings below expectations on Thursday, joining other retailers in treading carefully around tariffs and shaky spending ahead of the crucial shopping period.
Shares of the Kate Spade parent dropped 11% in early trading, as investors signaled the annual forecasts were conservative coming after a blowout quarter driven by wealthier Gen-Z shoppers snapping up Coach's Tabby handbags at full price.
Apparel makers such as Under Armour and Canada Goose also warned of some earnings softness during the holidays, as consumers worried about inflation and an uncertain economic outlook reconsidered big purchases.
Tapestry is choosing to be prudent with its expectations, with some profit volatility possible due to tariffs through the year, CFO Scott Roe said on a call with investors.
The company forecast second-quarter earnings per share of around $2.15, below estimates of $2.17, according to data compiled by LSEG.
TABBY VS TARIFFS
Tapestry imports from countries such as India, Vietnam and Cambodia that have been hit with steep U.S. tariffs, but the company has managed these pressures without price hikes, thanks in part to demand for its higher-margin Tabby bags that retail for up to $750, CEO Joanne Crevoiserat told Reuters.
"We're seeing a customer who is resilient. They are being choiceful and cautious, but they're active around the world."
Affordable luxury companies are leaning into demand from wealthier customers, especially teens and younger shoppers, who are saving their dollars for nice-to-have items like Tabby handbags and Ralph Lauren's premium apparel.
On the other hand, brands serving more low-income shoppers are seeing a pullback due to economic uncertainty and issues such as the return of student loan repayment.
Tapestry, whose shares have risen about 67% so far this year, is also trying to drive more demand in key markets outside North America. Its China sales rebounded to 19% in the quarter, while Europe saw a 32% jump.
KATE SPADE MAKEOVER
At Kate Spade, where sales have fallen for nearly three years, Tapestry is cutting the number of handbags it offers by about 30%, but is investing in fresher product lines such as the cross body bags in its fall collection this year, priced at over $300.
In the first quarter, net sales dropped 9% at Kate Spade, but improved sequentially. However, with reduced discounting still a priority, sales could come under pressure in the holiday quarter, executives said.
"We're being disciplined on discounting (at Kate Spade). We know that erodes brand health and brand desire, and we know that will impact the top line, but we're ... taking the steps necessary to reset the foundation of the brand," CEO Crevoiserat said.
CONSERVATIVE OUTLOOK
Some analysts felt the annual outlook was somewhat disappointing after the strong quarter.
The company forecast adjusted earnings per share for fiscal 2026 of $5.45 to $5.60, compared with $5.30 to $5.45 expected earlier. It raised its annual sales target by roughly $100 million.
Market expectations for Tapestry were also very high heading into the quarterly report, said Paul Lejuez, analyst at Citi Research.
The company nudged up its annual margin target despite a 200-basis-point rise in adjusted operating margins in the first quarter. It stuck to its earlier expectation of a roughly 230 basis points impact on its annual operating margin from tariffs.
Quarterly net sales came in at $1.70 billion, beating expectations of $1.64 billion, while adjusted earnings were about 12 cents higher than estimates.
Tapestry is still operating from "a position of strength" despite an uncertain global macro environment and a fluid trade policy situation, said Dana Telsey, analyst at Telsey Advisory Group.
(Reporting by Juveria Tabassum in Bengaluru; Editing by Devika Syamnath)
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