TPR Tapestry Inc

By Allison Prang 

The owners of Coach and Michael Kors have tried to expand beyond their core handbag brands, but their strategy to build U.S. luxury conglomerates has yet to bear fruit.

Capri Holdings Ltd., which acquired Versace and Jimmy Choo to accompany Kors, reported lower profits in its latest quarter. Executives put much of the blame on the turmoil in Hong Kong, a key market for luxury sellers.

Coach owner Tapestry Inc., which bought rival Kate Spade and boot maker Stuart Weitzman, posted lower quarterly sales and profits on Tuesday, due in large part to problems at its acquired brands.

Shares of Capri fell 1.8% Wednesday morning and are down 12% year to date. Shares of Tapestry dropped 3.7%, and have declined 23% in 2019.

Executives at both companies defended their strategies to diversify, despite the lackluster latest results. They said they are on track to revamp their operations and reaffirmed their revenue and earnings forecasts for the full year.

"We believe the power of our three fashion luxury houses keep us on track to accelerate growth over the long term," Capri Chief Executive Officer Jon Idol said on the company's call Wednesday.

Capri reported a profit of $73 million, down by almost half from the comparable quarter a year earlier. The company's earnings per share missed Capri's own expectations as a result of higher costs and challenges in Hong Kong.

The Michael Kors division reported a slight increase in comparable sales adjusting for moves in currency. Comparable sales -- an important measure of sales growth in the retail industry that looks at performance at stores usually open at least a year -- were flat at Versace and fell for Jimmy Choo, both after adjusting for moves in currency.

Michael Kors brings in most of Capri's revenue, but revenue from the brand fell in the most recent quarter. Capri's total revenue was $1.44 billion, up 15%, reflecting the addition of Versace, which had $228 million in quarterly sales.

Versace sales in China were also hurt by controversy over a Versace T-shirt that listed Hong Kong as both a city and a country. It sparked a backlash on Chinese social media. The company and designer Donatella Versace issued public apologies in August. "We're slowly seeing that subside," Mr. Idol said, but the company lowered its forecast for Versace sales in China for the balance of the year.

Tapestry, a day earlier, reported $20 million in quarterly profit, down from just over $122 million a year earlier. Net sales fell and selling, general and administrative costs rose.

At Tapestry, only the Coach brand increased sales, which increased 1% to $966 million for the period that ended Sept. 28. Sales at Kate Spade and Stuart Wetizman fell 6% and 8% respectively.

Tapestry CEO Jide Zeitlin said he still believes in owning multiple brands. Mr. Zeitlin, who serves as the company's chairman, replaced Victor Luis as CEO in September.

"One of the things that clearly we're very focused on is how to unlock even further benefits of our multibrand model," Mr. Zeitlin said on the company's call. "I very much believe that our brands are stronger together."

The U.S. companies have been building holding companies to mirror European luxury houses like LVMH. But they have so far struggled to show that owning multiple brands pays off. LVMH, meanwhile, has made a bid for Tiffany & Co., looking to add a U.S. brand to its portfolio.

Write to Allison Prang at allison.prang@wsj.com

(END) Dow Jones Newswires

November 06, 2019 11:58 ET (16:58 GMT)

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