(Bloomberg) -- Tapestry Inc. raised its guidance for the year on better-than-expected revenue at its Coach brand, while Capri Holdings Ltd. — Tapestry’s proposed acquisition — reported another weak quarter.
The owner of the Coach and Kate Spade brands forecasts revenue of more than $6.75 billion this fiscal year, Tapestry said Thursday in a statement. That would represent growth of as much as 2% versus the prior year, up from the nearly flat annual growth it had forecast in August.
Tapestry also boosted its profit forecast for the full year. It expects annual earnings per diluted share of $4.50 to $4.55. That range is above estimates and an increase from a previous forecast of $4.45 to $4.50.
“We continue to see strength at Coach,” Chief Executive Officer Joanne Crevoiserat said in an interview.
The optimism contrasted sharply with Capri’s plummeting profit and sales in the latest quarter, which were released Thursday after US markets closed. Capri reported profit well below analysts’ estimates and revenue at Michael Kors, Capri’s biggest brand, fell 16% from a year earlier. Versace sales tumbled 28% in the period.
Tapestry’s $8.5 billion bid to buy Capri was blocked by a judge late last month, handing a win to the Federal Trade Commission. Tapestry has appealed the ruling, but Wall Street thinks the acquisition is likely doomed.
Capri’s weakness is making it look like Tapestry may have dodged a financial headache. Analysts think Capri will have to sell off its brands if the Tapestry deal falls through as expected.
Tapestry shares rose 3.6% at the close in New York Thursday, while in extended trading Capri stock declined as much as 6.5%. Tapestry has jumped 40% for the year through Thursday’s close, outpacing the S&P 500 Index over the same period, while Capri’s stock has dropped 56%.
Tapestry executives now have to convince investors they have a credible plan to continue to increase revenue in the coming years without acquiring new brands.
Investors already seem to support the idea: Tapestry shares spiked when the judge blocked the deal in late October. Acquiring Capri had become a bigger financial and administrative challenge the longer the deal dragged on — and a distraction from Tapestry’s successful efforts to elevate the cachet and profitability of its Coach brand.
‘Strong Demand’
At Coach, its Tabby handbags continued to sell well in the most recent quarter and there was “strong demand” for a new line, featuring the Brooklyn and Empire handbags, the company said in an investor presentation. Coach will be able to continue to raise the average price of its products in coming quarters, the company added.
Sales in Europe rose 27% in the three months that ended on Sept. 28 to $94.3 million, fueled by demand from locals, particularly Gen Z. “We have so much runway in Europe,” Crevoiserat said in the interview.
The New York-based company said resuming share repurchases, which were paused after it bid to acquire Capri last year, would be a high priority if the deal falls through. Many on Wall Street are expecting the company to eventually use the debt it raised to finance the acquisition to instead buy back some of its shares.
If the deal fails, “there is meaningful opportunity to resume share repurchases,” Crevoiserat told analysts on an earnings call. “This would be our immediate priority given our free cash flow generation, our growth prospects and our valuation,” she said.
If the Capri deal doesn’t close, “we do not expect any M&A in the near term,” Crevoiserat added.
Tapestry sources less than 10% of its products from China, Chief Financial Officer Scott Roe said in the interview, so the company would face minimal exposure to potential tariffs under the incoming US administration.
(Adds Capri results in fifth and sixth paragraphs. A previous version corrected the status of the Capri bid appeal.)
©2024 Bloomberg L.P.