Tapestry CEO Jide Zeitlin — a long-time director who took over as CEO last September — has a lot on his plate right now to say the very least.
Whereas he was once just developing a turnaround strategy at Tapestry prior to the COVID-19 outbreak triggering store closures around the globe, he now has that to work on and employee safety to worry about. Right along that is work being done by him and his executive team to safely reopen stores around the world. Oh, and the company has to still come up with hot new handbag and accessories designs at Coach, Kate Spade and Stuart Weitzman that hopefully get a nervous world of consumers to splurge once again.
“So my days are similar to a lot of other executives right now — even though you've saved time to the office and back it gets used up with a lot invested in meetings and really trying to make sure we have our arms around the business,” Zeitlin tells Yahoo Finance in an interview.
Zeitlin added, “We started really looking hard at our business by doing a lot of diagnostic work on our brands and operations six to eight months before COVID-19 really hit. And so we had developed a growth agenda for for Tapestry for each of our underlying brands when the storm began. And that's given us a bit of a running start in terms of thinking about our business because we're in the very near term focused on really rightsizing our costs to the current scale of our business.”
Tapestry reported a third fiscal quarter adjusted loss of 27 cents a share, missing analyst forecasts for a loss of 2 cents a share. Net sales came in at $1.07 billion versus estimates for $1.08 billion. Sales declined year-over-year at Coach, Kate Spade and Stuart Weitzman reflecting COVID-19 related store closured across the globe. While Coach managed to eke out an operating profit, Kate Spade and Stuart Weitman notched losses.
The company is taking several actions as it enters liquidity preservation mode amid an uncertain timeline for store re-openings in North America and Japan. The company is canceling inventories for late summer and early fall (expected to save $500 million), reducing capital expenditures by at least $100 million and enacting new cost-cutting measures for corporate and retail workforces.
Tapestry has also drawn $700 million from its $900 million revolving credit facility and suspended its dividend and share repurchase programs.
Yahoo Finance spoke with Zeitlin by phone on Thursday. What follows is an edited and condensed version of the conversation.
Brian Sozzi: Tapestry will reopen 40 stores in North America starting this Friday. How did you select those stores and where are they located?
Jide Zeitlin: It's a mixture. It's both stores that are outdoors, where people can drive right up to the front of the store, as well as stores that are inside enclosed malls. And so we've tried to select a mixture of stores across 10 different states and across our brands, both as a way of testing and learning about what works particularly well in this moment and as a way of also taking some of the learnings that we've gotten from our international footprint.
We have a very big footprint in China, and in South Korea, where we've gone through a reopening process. And so taking some of the learnings from there, and also looking to apply them and learn what works particularly well here in the United States.
Sozzi: How does it work precisely? Say I order a duffle bag online, someone brings it out to my car?
Zeitlin: You will either buy it via telephone or online. And then you'll schedule the time that you will come to pick it up. And so for curbside pickup yes you don't need to get out of your car. You will get it handed to you through the window, or for a storefront pick up in an indoor mall, you'll walk by the store, by the front of the store and it'll get handed to you.
Sozzi: Any sense when the rest of your U.S. stores will reopen?
Zeitlin: We're going to take that location by location. So if you look to our learnings in mainland China, two and a half months ago, we had the substantial majority of our stores were closed. Today, 100% of our stores in mainland China are open, and there is a similar trajectory in South Korea. There was not a light switch moment where we all of a sudden went from being predominantly closed to being totally open. We took it location by location, driven by a set of protocols that put our employees and our customers at the center of that.
Clearly, first of all we need to be in a geography where the local authorities have approved us to be open, but even once they do that, we don't just open the store automatically. We turn to our employees, we listen to our customers. And we see what they are comfortable with. Does that make sense to them, are they prepared to come back into the store and on what timing. And then with that input we begin selecting locations.
Sozzi: Your China stores that have been reopened, what are you seeing in terms of sales?
Zeitlin: In China our experience is that it's not one size fits all. What we've seen is that there has been a gradual increase in business and that it has been a combination of traffic returning. But traffic is still lagging somewhat where it was this time last year with customers increasingly being omni channel.
So some do come into the stores and buy, and some will actually use social media platforms. So, for example, WeChat in China, where they will come to a specific store but digitally, while they're sitting in their living room or somewhere else remotely, and they will engage with a store associate and will look at product and will learn about the product. And then when they choose to make the purchase the store associate will send it to them.
What we're seeing is that our revenues have increased steadily over the last couple of months in China. And then we're also seeing some differences. A large part of the luxury market in China actually took place outside of mainland China often with Chinese tourists in Europe or North America. So as a result what we're seeing is that in some of the geographic regions in China that fewer people from there are traveling abroad as tourists. We're seeing that our sales have come back much more quickly relative to where they were a year ago, or historically, in some of the cities that were more reliant on tourists that have a higher percentage of residents who might otherwise have purchased when they traveled overseas.
And then also remember that in China, you still have a major metropolis where there are still some constraints.
Sozzi: Do you expect a lot of discounting in North America once malls open back up? How will that impact the business?
Zeitlin: One last lesson to be learned from China is that we're actually seeing some margin enhancement in our business in China as opposed to margin degradation. So when we think about our product here in North America we have taken some very strong steps to control our inventory levels. And we talked about that on our earnings call, having canceled our late summer deliveries just completely across all three of our brands. We feel that we're in a strong inventory and balance sheet position, meaning not having that pressure to somehow price products at levels that we hadn't anticipated.
And so our experience is that when you come out of economic downturns our product tends to be even more valued by consumers. That's the good view.
Because our products are handbags and accessories and tend to be worn less than, say, ready to wear we do not have the same pressure to have to simply discount product to sell it. We can allow the quality and the level of innovation in our product really speak for themselves.
Sozzi: What does a recovery look like for Tapestry? How long before you get to the stronger trends seen in 2019?
Zeitlin: It's not just for us to think about. This is going to be a longer, slower recovery than some of the more recent economic downturns. From where we sit we look to plan, whether it's plan our inventory levels, whether it's our cost structure, assuming a longer slower rebound and being more conservative.
If it turns out that it's faster than that we will really benefit from a margin perspective and from a positioning perspective. But our assumption is that this is going to be a longer slower rebound.
Sozzi: Some department stores in the mall won’t reopen after the crisis. How will losing an anchor tenant in the mall impact Tapestry?
Zeitlin: We've got a smaller portion of our business directly tied to wholesale than any of our peers. We're much more closer to a pure play direct-to-consumer business now in terms of both our store network and in our digital footprint. So we don't feel as much vulnerability as some of our peers may feel in that respect. We feel very good about our relationships with those wholesalers who are immediate partners with and we can sell through.
But in terms of the knock on implications of we are in a mall that may lose an anchor, we're very mindful of it. We exist, we work and we thrive in an ecosystem. And we want other participants in that ecosystem to be healthy because that's good for all of us. And by the way, that's one of the discussions that we have with landlords as we think about what is the appropriate risk sharing in terms of our leases, and our rents through this very challenging period. Because to the extent that there's an imbalance in terms of that between the retailer and the landlord it only accelerates the closure of retail stores, which isn't good for anybody.