Coach bags help Tapestry defy U.S. luxury gloom with forecast raise

By Deborah Mary Sophia

(Reuters) -Tapestry Inc raised its annual profit forecast on Thursday, betting that price increases and strong demand for its Coach handbags would shield it from a wider slowdown in U.S. luxury purchases.

Shares of the company shot up 9% in premarket trade as it also surpassed Wall Street targets for third-quarter results, with a 20% jump in revenue from China pointing to a sharp demand rebound from lockdowns.

The company's gross margin also improved to 72.8% from 69.9% last year.

"It's almost outstanding, when you think about what a lot of others are saying in retail right now," Edward Jones analyst Brian Yarbrough said, adding that investors were more nervous about a potential earnings miss and lowered outlook instead.

Fashion houses ranging from LVMH to Gucci owner Kering have reported a slowdown in U.S. demand as consumers paused a post-pandemic splurge on leather goods and jewelry.

U.S. luxury spending in March declined to the lowest monthly rate in nearly three years, credit card data from Citi showed last month.

However, Tapestry's Coach handbags - which typically sell for less than $1,000 - have attracted more Gen Z and millennial consumers with collections such as Tabby and Willow, with the brand's sales jumping 7%.

It also tightened inventories significantly, ending the third quarter with levels just 2% above last year, compared with a 30% jump at the end of the prior quarter.

While lower product stocks could raise the risk of missing out on strong demand, Yarbrough said Tapestry is now in good shape and would much rather stay put than sit on bloated inventories.

Tapestry now expects fiscal 2023 earnings per share of $3.85 to $3.90, compared with $3.70 to $3.75 estimated earlier. It forecast annual revenue would approach $6.7 billion, from previous estimates of about $6.6 billion.

Profit of 78 cents per share beat expectations of 59 cents.

(Reporting by Deborah Sophia in Bengaluru; Editing by Devika Syamnath)