Kate Spade, Stuart Weitzman troubles weigh on Tapestry results

Handbag maker Tapestry Inc., formerly Coach, reported a drop in third-quarter margins and a steeper-than-expected decline in same-store sales in its Kate Spade business on Tuesday, sending its shares down 11 percent.

The company also said it faced production delays and lower sales of old styles at its high-end Stuart Weitzman footwear brand, expecting those issues to continue through the critical fall/winter season.

Tapestry has been trying to sell more Kate Spade handbags at full price by pulling inventory from department stores, where they are discounted heavily, and cutting down on flash sales - the same strategy that helped Coach regain its brand exclusivity.

That strategy led to a 9 percent decline in same-store sales at Kate Spade - a much bigger drop than analysts’ projection of a 7.24 percent, according to Thomson Reuters I/B/E/S.

Weak margins at the Stuart Weitzman unit dragged down overall gross margins to 68.7 percent from 70.9 percent a year earlier.

Sales of Coach handbags and accessories, however, were a bright spot - rising nearly 6 percent on the back of a 3 percent rise in global same-store sales.

“Results were driven by continued growth at Coach, where comparable store sales rose, led by outperformance in North America,” Chief Executive Victor Luis said in a statement.

Net income rose to $140.3 million, or 48 cents per share, in the third quarter ended March 31, from $122.2 million, or 43 cents per share, a year earlier.

Excluding one-time items, the fashion house reported a profit of 54 cents in the latest quarter, beating estimates by 4 cents, according to Thomson Reuters I/B/E/S.

Net sales rose that rose by a third to $1.32 billion also beat estimates.

The stock was down nearly 11 percent at $48 in premarket trading.