Tapestry Tops Earnings and Sales Estimates. Why the Stock Is Sinking.

Coach revenue rose 8% year over year in its fiscal fourth quarter. (Brent Lewin/Bloomberg)

Tapestry’s fiscal-fourth-quarter results prove that the company’s effort to turn the Coach brand around has been a resounding success, boosting both sales and revenue. Yet the stock dropped Thursday morning after the company’s new full-year earnings guidance fell short of analysts’ expectations.

Tapestry revenue for the quarter ended June rose 8% year over year to $1.72 billion. Wall Street had factored in $1.68 billion for the quarter. Coach sales jumped 14% from a year ago, while Kate Spade’s revenue dropped 13%.

The company posted adjusted earnings of $1.04 a share, topping analysts’ estimates for $1.02, according to FactSet.

The adjusted figure strips out certain one-time expenses incurred throughout the quarter, including fees tied to the canceled acquisition of Capri Holdings , costs related toward selling the Stuart Weitzman brand, and over $800 million of impairment charges tied to the Kate Spade brand. On an unadjusted basis, Tapestry reported a loss of $2.49 per share.

Kate Spade’s impairment charges resulted from a decline in both current and future expected cash flows, partially due to changes in tariff and trade policies, as well as investments the company is making to give Kate Spade the Coach-turnaround treatment.

“We know from work that we’ve done that there’s great demand for the Kate Spade brand, we just frankly haven’t executed very well over the last several years, but as we said here today, we’re smarter from a brand-building capability standpoint,” said Scott Roe, Tapestry’s chief financial officer, on a call with Barron’s. He added that despite the unadjusted loss, the fundamentals of the business were strong, evidenced by strong revenue growth and the adjusted earnings beat.

“We’re also investing in future growth vectors, and we believe that Kate Spade over time will be a really compelling return for shareholders based on strong position in brand and the consumer demand we see out there,” he said.

Tapestry also gave investors a first look at its forecast for the current fiscal year. Revenue will be around $7.2 billion, slightly ahead of analysts’ projections for $7.1 billion. The company’s range for adjusted earnings per share—$5.30 to $5.45—is lower than the $5.49 Wall Street had penciled in. The outlook factors in trade and tax policies as of Aug. 1.

Tapestry stock was falling 12% in premarket trading to $99.70, reflecting analysts’ disappointment at the conservative earnings range. Shares have gained 74% this year as of Wednesday’s close, bucking the slowdown trends that have afflicted other luxury stocks and setting a very high bar for Tapestry to clear.

“With high [market] expectations going into the print, we expect the stock to be down today, though [management] comments on the call related to 1Q may inform how much conservatism is built into guidance (which may ultimately limit the stock decline),” wrote Paul Lejuez, an analyst at Citi, in a research note Thursday. He rates Tapestry stock at Buy with a $124.00 price target.

Long-term, however, analysts still think the company has several factors working in its favor, all a result of the Coach brand’s successful reset that has attracted younger, trend-focused shoppers.

“Coach continues to find momentum with younger consumers, who tend to shop more often and spend more, and category expansion like footwear are performing well,” wrote Dana Telsey, CEO of Telsey Advisory Group, in a note previewing Tapestry’s results. She rates Tapestry stock at Outperform with a $125 price target.

Roe said the company plans to keep expanding the Coach franchise to tap into the Gen-Z consumer, which is one of the brand’s key growth drivers. Tapestry also plans to grow Coach’s presence abroad, particularly in China and Europe. Indeed, the company saw revenue in Greater China jump 18% from the year-ago quarter, while sales in Europe rose 13%.

“Our price-value relationship is really resonating with consumers, and the brand heat that is building in that market gives us a tremendous amount of confidence in our growth potential,” Roe said.

Oliver Chen, an analyst at TD Cowen, reiterated a Buy rating on Tapestry stock with a $130 price target after the results, noting that the company’s earnings guidance for the fiscal year could prove conservative if management successfully executes on strategies to offset the tariff impact.

“We believe the Coach brand momentum will continue, lifestyle execution can drive pricing, and transactions and investments into China marketing will support growth,” he wrote in a research note Thursday morning.

The company’s board of directors increased its quarterly dividend by 14% to 40 cents per share, from 35 cents, payable on Sept. 22. The anticipated annual dividend rate is $1.60 per share.

Write to Sabrina Escobar at sabrina.escobar@barrons.com