Sometimes a great quarter just isn't enough. That's the lesson Tapestry (Tapestry (TPR)) investors delivered Thursday, sending shares down sharply even after the company posted a beat-and-raise fiscal fourth quarter. The culprit? A fiscal 2027 sales outlook that came in just a hair below what Wall Street had penciled in, plus a candid admission that Kate Spade's recovery is moving slower than hoped.
Let's start with the numbers that were good. Net sales rose 9% year over year to $1.88 billion (8% on a constant-currency basis), matching estimates. Adjusted earnings per share jumped 28% to $1.32, beating the $1.28 consensus. GAAP diluted earnings came in at $1.68 per share, a dramatic swing from the $2.49 per share loss a year earlier. Margins expanded nicely too, with adjusted gross margin up 180 basis points to 78.1% and adjusted operating margin up 250 basis points to 19.3%.
But the market is a forward-looking beast, and Tapestry's guidance for fiscal 2027 didn't quite hit the mark. The company expects sales of $8.4 billion to $8.5 billion, with the $8.45 billion midpoint slightly below the $8.464 billion analysts were looking for. Adjusted earnings guidance of $7.80 to $7.90 per share brackets the $7.84 estimate. Management also guided to about 50 basis points of operating margin expansion and adjusted free cash flow approaching $1.7 billion.
Coach Is the Star, Kate Spade Is the Problem
The real story here is the widening gap between Tapestry's two main brands. Coach, the company's crown jewel, continues to fire on all cylinders. Revenue climbed 15% to $1.64 billion (14% constant-currency), and the brand generated $546.1 million in adjusted operating income. Kate Spade, on the other hand, is struggling. Revenue fell 7% to $235.1 million, and the brand posted an adjusted operating loss of $28.9 million.
CEO Joanne Crevoiserat was refreshingly honest about the situation, noting that Kate Spade's "top-line progress was more gradual than we planned." That's a polite way of saying the turnaround is taking longer than expected. The performance gap between the two brands is stark, and investors are clearly worried about how long Kate Spade will continue to be a drag.
It's not all doom and gloom on the brand front. Tapestry added more than 2.5 million new customers during the quarter and about 11 million over the full fiscal year, with roughly 35% of them being Gen Z consumers. That's a good sign for future growth, especially as the company focuses on direct-to-consumer channels. Pro forma constant-currency DTC revenue rose 11% in the quarter and 16% for the full year. Digital revenue grew at a mid-single-digit rate, while store revenue grew at a mid-teens rate.
Cash Flow and Shareholder Returns
Financially, Tapestry remains in solid shape. Operating cash flow for fiscal 2026 totaled $1.98 billion, and adjusted free cash flow hit $1.86 billion. The company ended the year with $1.15 billion in cash and short-term investments, inventory of $826 million, and total debt of $2.38 billion. The leverage ratio stands at a comfortable 1.1 times.
Shareholders are being rewarded handsomely. Tapestry returned $1.7 billion to shareholders during fiscal 2026, including $1.35 billion through share repurchases. The board also approved a 16% dividend increase, which is a nice vote of confidence in the company's cash-generating ability.
Tariffs and the Road Ahead
The fiscal 2027 outlook assumes a tariff rate in the mid-20% range on U.S. inventory receipts, which would result in a neutral year-over-year net tariff impact. That's a key assumption, given how much tariffs have been a wildcard for consumer companies. The guidance also assumes no significant deterioration in inflationary pressures or consumer confidence, which is a reasonable baseline but worth watching.
Geographically, the company saw strong pro forma constant-currency revenue growth in Greater China (up 28%), Europe (up 19%), and Other Asia (up 22%). That international strength is a positive, but it also means Tapestry is exposed to any global slowdown.
As of Thursday's premarket session, Tapestry shares were down 16.17% at $128.88. The market's message is clear: even a great quarter can be overshadowed by a cautious outlook and a struggling brand. The question now is whether Kate Spade can catch up to Coach, or if Tapestry will need to make some tough decisions about its portfolio.
