Tapestry, the fashion retailer formerly known as Coach, has taken back operational control of its Kate Spade China joint ventures in Hong Kong, Macau, Taiwan and the mainland.

CEO Victor Luis described the move as “an important business development initiative” and part of a plan by the group to assume greater direct control over its international distribution.

The company has also entered into a purchase agreement to acquire the Stuart Weitzman business in Northern China from its distributor.

“These transactions are in keeping with our strategic priority to maximise the opportunity with Chinese consumers globally across our brands,” said Luis.

“In addition, we are excited to announce the buyback of the Coach business in Australia and New Zealand from our distributor, with an expected closing in the third fiscal quarter. As a result, we will be creating a Tapestry hub and center of excellence in Sydney to drive growth across our portfolio, further unlocking the value of a multi-brand operating model.”

The news was included in the company’s second quarter results announcement in which Tapestry revealed a 35 per cent increase in sales, largely fuelled by the addition of the Kate Spade operations to its figures after its acquisition last July.

Net sales totalled $1.79 billion for the second quarter, up from $1.32 billion in the prior year, while net income was $63 million.

Luis said the second quarter performance exceeded the company’s expectations, with a return to growth for Coach, improved sales at Stuart Weitzman and the contribution of Kate Spade which continued to make progress after its integration into the business.

A “significant step forward”

Neil Saunders, MD of GlobalData Retail, said after removing the Kate Spade data from Tapestry’s comparable sales numbers, a modest growth rate of 2.2 per cent was achieved, which was still a “a significant step forward for the group”.

“Most pleasing is the return to growth of the Coach brand which has, for some time, seen revenue slide as the result of a pullback from a number of sales channels, including department stores. The 2.2 per cent increase signals that this period of painful adjustment is mostly over and that Coach has a stable platform from which to expand. A more disciplined approach to discounting and promotions helped margins at the brand, which flowed through to some healthy gains in operating income. In short, Coach’s game plan of becoming less ubiquitous and selling more at higher price points is now delivering.”

Saunders said Coach deserves credit for an on-trend holiday line up, a compelling marketing campaign, and great in-store execution.

“However, we also believe that gains were aided by a confident consumer and flattered by a very soft prior year comparative. Both factors were particularly influential in the key North American market.

This leads us to be a bit more cautious about prospects over the upcoming quarters, especially as comparatives become tougher and gifting sales are less significant.”

But he said any softness in the North American market can be offset by a more aggressive and coordinated approach to international expansion.

“On this front, we are encouraged that Tapestry is taking back direct control of the Coach business in Australia and New Zealand and believe that this will help to improve the brand’s presence and influence in the region.”

Looking beyond Coach, Tapestry’s newest brand, Kate Spade performed less well. Global comparable sales declined by 7 per cent over the period, driven in part by a fall in e-commerce.

“As much as this looks disastrous, the dip is mostly the result of a deliberate change in strategy, with Tapestry pulling back from the flash sales and heavy discounting that Kate Spade previously used to drive revenue. Predictably, this has resulted in a dramatic volume decline and waning interest among some consumer segments.

“The intention is clear: Tapestry wants to take Kate Spade through the same process used to rebuild Coach. This is a necessary step to bolster brand value as Kate Spade had become too value-oriented and overly reliant on excessive, and margin depleting, promotions to drive results. We are conscious that weaning Kate Spade off the discounting drug will be far from easy and better numbers will only come through over the medium to longer term.”