(Reuters) -Tapestry's efforts to protect margins against tariffs, a leaner Kate Spade product line and strong Gen-Z demand at full-price for Coach's Tabby handbags helped the company lift its annual profit and sales targets on Thursday.

Its shares still fell about 7% in premarket trading, after having surged nearly 70% for the year so far.

Affordable luxury companies are leaning into demand from wealthier Gen-Z consumers who are spending selectively on nice-to-have things, while brands serving more low-income shoppers are seeing a pullback due to economic uncertainty and issues such as the return of student loan repayment.

Tapestry, which imports from tariff-hit countries such as India, Vietnam and Cambodia, has also navigated pressures from the levies without price hikes, thanks to demand for its higher-margin Tabby bags that retail for up to $750, CEO Joanne Crevoiserat told Reuters.

While North America still makes up a majority of its total sales, Tapestry is also trying to drive more demand in key markets such as China, where sales rebounded to 19%, and Europe, which saw a 32% jump in the quarter.

The company raised its annual margin target and reported a 200-basis-point rise in adjusted operating margins in the first quarter. It stuck to its earlier expectation of a roughly 230 basis points impact on its annual operating margin from tariffs.

Tapestry now expects adjusted earnings per share for fiscal 2026 in the range of $5.45 to $5.60, compared with its earlier target of $5.30 to $5.45.

THE HANDBAG EFFECT

Sales at Tabby-maker Coach, which accounts for nearly 85% of Tapestry's total revenue, jumped 21% on a constant currency basis, following a 13% rise in the prior three-month period.

At Kate Spade, where sales have fallen for nearly three years, Tapestry is cutting the number of handbags it offers by about 30%, but is investing in fresher product lines such as the cross body bags in its fall collection this year, priced at over $300.

In the first quarter, net sales dropped 9% at Kate Spade, but improved sequentially.

"We're being disciplined on discounting (at Kate Spade). We know that erodes brand health and brand desire, and we know that will impact the top line, but we're ... taking the steps necessary to reset the foundation of the brand," CEO Crevoiserat said.

Excluding the Stuart Weitzman brand, which it sold to Caleres this year, Tapestry expects annual revenue growth of 7% to 8%, above its earlier target of an increase at a mid-single-digit rate.

Quarterly net sales came in at $1.70 billion, beating estimates of $1.64 billion, according to data compiled by LSEG.

Adjusted earnings per share of $1.38 also surpassed estimates of 1.26.

(Reporting by Juveria Tabassum in Bengaluru; Editing by Devika Syamnath)