Dive Brief:
- The Coach brand took market share, expanded margins and grew sales in Q3, thanks to enthusiasm among Gen Z consumers, executives from owner Tapestry told analysts Thursday.
- Excluding Stuart Weitzman, which was sold last year, overall net sales rose 25% year on year to $1.9 billion. Coach sales rose more than 31% to $1.7 billion as Kate Spade fell 10% to about $220 million.
- Tapestry’s gross margin expanded by 80 basis points to 76.9% in a profitable quarter. Net income soared nearly 70% to $343.8 million.
Dive Insight:
Tapestry executives’ confidence in Coach led them to boost their expectations for the year, and their Gen Z consumers got a lot of credit, in part for influencing consumers of all generations.
Since last year, Coach rang up transactions from 800,000 new Gen Z customers, plus added about 1.6 million new customers from other generations, per GlobalData research. Coach brand CEO Todd Kahn said the point of entry to its total addressable market is with Gen Z “and, soon, Gen Alpha.”
“And this group is just massive,” he told analysts. “We can literally add millions of new customers every quarter for the next 10 years, and we’ll just scratch the surface.”
Assuming U.S. trade policies remain as they were on May 1, the company now expects revenue to grow about 17% year over year to about $7.95 billion, again excluding the Stuart Weitzman business. This is up from its previous expectation for revenue to reach over $7.75 billion. Operating margin, previously expected to expand by about 180 basis points, could now expand by 300 basis points to 23%. And the company said it will likely more than offset an expected 120 basis point hit to gross margin from tariffs.
The new guidance also “assumes no material worsening of inflationary pressures or consumer confidence,” the company said in a press release.
Coach’s opportunity is not just about generational appeal, but also in expanding its assortment, Tapestry CEO Joanne Crevoiserat said Thursday. Footwear grew about 20% in the quarter, dominated by sneaker sales.
“Footwear remains a long-term growth opportunity for Coach, given our brand strength, low share of the market and the category’s relevance to our target consumer,” she said. More broadly, Coach is on its way to becoming “a $10 billion brand over time, with best in class margins, grounded in our commitment to nurture and build on what makes the brand iconic, enduring and loved by consumers around the world.”
Tapestry powered through Q3 despite losing $46 million that would have come from Stuart Weitzman and the $25 million sales decline at Kate Spade, according to GlobalData Managing Director Neil Saunders. Meanwhile Coach delivered about $408 million more in revenue compared to the same period last year, he said in emailed comments.
The quarter was further indication that Kate Spade’s slump matters little to the company’s performance and trajectory.
“Indeed, while Tapestry once wanted to become a bigger house of brands with the Capri acquisition, it has now become a pure-play company dominated by Coach,” Saunders said. “There is nothing wrong with this, even if it remains important to fix Kate Spade.”
