Coach owner Tapestry predicts China troubles will start to ease in June

Customers walk past a Coach store at Shanghai New World Daimaru department store on August 12, 2019 in Shanghai, China.

VCG | Visual China Group | Getty Images

Coach owner Tapestry shares climbed nearly 16% Thursday after the retailer said it’s expecting lockdowns in Shanghai will be lifted at the beginning of June, followed by gradual improvements thereafter.

The stock was initially down after Tapestry trimmed its profit outlook for fiscal 2022, with lockdowns in China poised to dent consumer demand for its high-end purses and accessories. It also reported fiscal third-quarter sales and profit ahead of Wall Street’s estimates.

But management assured analysts and investors, during a post-earnings conference call, that consumer demand remains healthy in North America and other parts of the world, and can offset near-term losses in Asia.

Chief Executive Officer Joanne Crevoiserat said shoppers have responded well to gradual price hikes, even younger customers who are willing to pay more for a high-end hand bag or pair of shoes.

Tapestry joins a growing list of companies, from Apple to Estee Lauder, that have flagged the impact of China’s Covid controls on their businesses. Since March, mainland China has battled an outbreak of the omicron variant by turning to swift lockdowns and travel restrictions. Not only does this hurt demand in the region, but it also fractures manufacturing.

The hope is that these challenges won’t last much longer.

Tapestry acknowledged it will take a hit in its fiscal fourth quarter, resulting in a downbeat outlook for the year. It forecasts annual earnings to be $3.45 per share, compared with a prior estimate of between $3.60 and $3.65 a share. The new guidance includes an expected headwind of 25 cents to 30 cents due to Covid-related pressures in China, it said.

“We started the [third] quarter quite strong, and then as Covid disruptions happened, we saw traffic drop off,” Crevoiserat said in a phone interview, regarding the China business. “The digital business is also pressured because of the logistics challenges in the region.”

In addition to Coach, Tapestry also owns the Kate Spade and Stuart Weitzman brands.

Tapestry reported adjusted earnings for the three-month period ended April 2 of 51 cents per share, on revenue of $1.44 billion. Analysts had been looking for earnings per share of 41 cents on sales of $1.42 billion, according to a Refinitiv survey.

Sales in North America rose 22% in the quarter from a year earlier, fully offsetting a mid-teens decline in China, the company said.

For the year, Tapestry expects revenue to total about $6.7 billion, which would represent a high-teens percentage jump from fiscal 2021. Analysts expect revenue of about $6.75 billion.

“We see growing traction in our brands, really around the world, that more than offset the temporary disruptions we’re seeing in China,” said Crevoiserat.

Tapestry shares are down roughly 24% year to date.