Tapestry lifts forecast as Coach bags defy U.S. luxury gloom

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

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Shares of the company rose about 8% as it also surpassed market estimates for third-quarter results, with a 20% jump in China revenue after lockdowns lifted in the major luxury market.

Tapestry's gross margin 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.

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.

Credit-card data from Citi had also shown that U.S. luxury spending in March fell to the lowest monthly rate in nearly three years, but Tapestry managed to outperform as its Coach handbags - which typically sell for less than $1,000 - attracted more Gen Z and millennial consumers.

It added 400,000 new customers in North America - its biggest market - while spend per customer also increased.

Still, trends softened heading into April, with CEO Joanne Crevoiserat flagging "a more cautious consumer". Tapestry expects a mid-single-digit decline in fourth-quarter North America sales.

It also tightened inventories significantly, with end-quarter levels just 2% above last year. Yarbrough said the levels are now in good shape and not at risk of missing out on demand.

Tapestry now expects fiscal 2023 per-share earnings of $3.85 to $3.90, compared with $3.70 to $3.75 estimated earlier. The company also raised its annual revenue forecast to near $6.7 billion, from about $6.6 billion.