How Coach owns Tapestry does it better online than other retailers

Buyers walk past a Coach outlet store.

Luke Sharrett | Bloomberg | Getty Images

Coach and Kate Spade owner Tapestry said Thursday that online sales in the last four years increased a three-digit percentage from a year ago as consumers sat at home during the coronavirus pandemic to their websites cursing for handbags, pajamas and other whimsical accessories.

But when you are in the retail industry and you hear about such impressive growth of e-commerce, you often immediately think of the pressure that in turn is placed on gross margins. Typically, a retailer’s online outlets are less profitable than in-store sales – if you take into account all the extra expenses such as packing, shipping and delivery.

The problem has plagued companies, including Target and Walmart, especially during the pandemic when their digital businesses boomed. The online furniture company Wayfair is not yet useful, as another example.

But that was apparently not the case for Tapestry, which also owns Stuart Weitzman, this quarter.

Gross margins grew to 69.8% during the fiscal fourth quarter, up from 66% a year ago. And management said online sales carry higher margins than in-store sales.

“There are a few reasons why,” Joanne Crevoiserat, the interim CEO of Tapestry, told CNBC in a telephone interview following the earnings report.

“The fixed component of the digital business … that fixed costs are used across a much larger platform of sales. Overall, it’s a lower percentage of each sale versus our brick-and-mortar business.”

She added that the company has been revisiting its promotions over the past few months, selling more at full price.

“It starts with getting closer to the customer, knowing what they want,” she said. If you present a customer with something that meets or exceeds his or her expectations, they will not require a discount, Crevoiserat said.

A thriving online business amid the coronavirus pandemic also means Tapestry is re-evaluating what to do with its real estate. In total, it has 863 locations worldwide across its three markets, according to its website.

As part of its cover plans that were outlined Thursday, Tapestry says it is planning to close stores, but has not said exactly how many doors it will close.

“No-no, we’ll see some reduction in store counts this year,” Coach Chief Executive and Brand President Todd Kahn said in an interview.

Tapestry “raises the bar” for stores, it remains open for business, according to Crevoiserat. “We are re-evaluating the role of the store,” she said. “And we expect the store to be profitable.”

Analysts and investors will be looking to see if this trend can continue, especially during the very important holiday season.

Although Tapestry reported a net loss during its last fiscal quarter, management said the company expects to grow this fiscal year back.

Shares of Tapestry fell more than 2% on Thursday afternoon. The stock is down around 42% from a year ago.