Tapestry (TPR) Last Update 1/28/21
Related: AEO ANF GPS NKE
% of Stock Price
Revenue
Gross Profits
Free Cash Flow
Tapestry
STOCK PRICE
DIVISION
% of STOCK PRICE
Coach
81.0%
$26.02
Kate Spade
15.6%
$4.99
Net Debt
8.7% $2.81
TOTAL
100%
$32.12
$29.31
Yours
Trefis Price
N/A
$41.50
Market
 
Top Drivers for Period
Key Drivers
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RECENT NEWS AND ANALYSIS

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Tapestry Company

VALUATION HIGHLIGHTS

  1. Coach constitutes 81% of the Trefis price estimate for Tapestry's stock.
  2. Kate Spade constitutes 16% of the Trefis price estimate for Tapestry's stock.

WHAT HAS CHANGED?

  1. Latest Earnings Q1'21
Tapestry's reported a strong performance in the fiscal first quarter (ending September), with the company coming ahead of its expectations on earnings and revenues. Overall, total sales for the quarter fell by 14% to $1.17 billion, while gross margin came in at 70.8% as compared to 67.3% reported in the year-ago quarter. Tapestry reported a profit of $0.83 per share as compared to a profit of $0.07 per share in Q1 2020. Moreover, Tapestry drove strong e-commerce growth, with the company's digital sales increasing in triple digits. Tapestry didn't provide a detailed outlook for FY'21 as the management stated that the potential financial impact of COVID-19 on Tapestry's business cannot be accurately projected.

  1. Impact Of COVID-19
Tapestry stock has lost a bulk of its value since the outbreak of coronavirus. Moreover, the company has temporarily shuttered stores in North America and Europe, as a result of continued measures to help slow the spread of COVID-19. The company has also suspended its dividends and share repurchase program for the foreseeable future. In its fiscal Q2 earnings (ending December), Tapestry anticipated a hit of $200-$250 million to its sales in the second half of 2020. However, we believe the impact could be much higher as the impact of the outbreak increases.

  1. Pullback from Wholesale Channel and Flash Sales
Tapestry has been curtailing the number of surprise sales and pulling back on its wholesale channel for the Kate Spade brand, similar to the steps it has taken for Coach, to ease the pressure on the margins. While the company will continue to hold back on the discounting in FY 2020, easier comparisons and increased full-price sales should result in double-digit growth for the brand. In FY 2019, Kate Spade's gross margin expanded 40 basis points versus the prior year, reflecting the realization of COGS synergies.

  1. Acquisition of Businesses
Tapestry took operational control of the Kate Spade joint venture from Mainland China, Hong Kong, Macau, and Taiwan, an area that has been generating strong results. This step would give Kate Spade an additional 50 stores. The success of Coach in the region provides the company with an immense opportunity to leverage its relationship with suppliers and distributors for the Kate Spade brand. The company also completed the buybacks of Kate Spade's operations in Singapore, Malaysia, and Australia, as well as Stuart Weitzman's business in Southern China. Also, Tapestry acquired its Stuart Weitzman business from its distributor in Northern China in mid-February and completed the buyback of the Coach business in Australia and New Zealand from its distributor in early March. By controlling these businesses directly, TPR will be able to accelerate its international expansion.

BUSINESS SUMMARY

Tapestry, Inc. is a leading New York-based house of modern luxury accessories and lifestyle brands. Tapestry owns the Coach, Kate Spade, and Stuart Weitzman brands. The Company’s primary product offerings, manufactured by third-party suppliers, include women’s and men’s bags, small leather goods, footwear, ready-to-wear including outerwear, watches, weekend and travel accessories, scarves, eyewear, fragrance, jewelry, and other lifestyle products.

The Coach segment includes worldwide sales of Coach brand products to customers through Coach-operated stores, including the Internet, concession shop-in-shops, and sales to wholesale customers and independent third-party distributors. The Kate Spade segment includes worldwide sales primarily of Kate Spade New York brand products to customers through Kate Spade operated stores, including the Internet, concession shop-in-shops, independent third-party distributors, and to wholesale customers. The Stuart Weitzman segment includes worldwide sales of Stuart Weitzman brand products primarily to wholesale customers, numerous independent third-party distributors, and through Stuart Weitzman operated stores, including the Internet.

KEY TRENDS

Demand for luxury goods is correlated with economic growth

Demand for luxury, fashion goods can be an indicator of flourishing economies. It is observed that during boom times, consumers with higher incomes tend to consume more high-end goods like leather handbags, designer clothes, branded watches, etc. Luxury goods are cyclical and correlate with GDP in specific regions, often exaggerating the up- and down-swings in the economy. As the global economy recovers, we expect the luxury goods market to return to pre-recessionary growth levels of 7-8% per year.

Increasing demand for luxury goods in China and other emerging markets

Luxury consumption in China has seen double-digit growth in recent years as a result of rapid economic growth and rising standards of living. Despite weak macroeconomic conditions globally and a threat to China's economy from surging inflation, luxury goods sales continue to grow strong in China. China is poised to become the second-largest luxury market by 2019, according to Euromonitor, and the Chinese, the biggest spenders on luxury goods worldwide, now account for 30%-50% of global luxury sales, with 80% of their purchases made abroad.

Emerging markets will see the highest growth in new openings of directly-operated stores in the coming years. Tapestry is aiming for expansion into areas where it feels it is underpenetrated, such as Greater China, South East Asia, and Europe. To this end, TPR expects to add 30 to 40 Kate Spade stores globally in FY 2020, including those that will be acquired in Australia, Malaysia, and Singapore.

Return of the Logo Trend

The trend for logos had fallen out of fashion in the recent past, but this seems to be reversing now, benefiting a brand like Coach. Keeping this in mind, the company successfully relaunched its Signature pattern in Q3 2018. Coach has plans to build upon this, including an expanded range of small leather goods, which should ensure growth for the brand.

Consumer shift to affordable luxury

Affordable luxury brands and private labels have held up solidly during the current market conditions, while luxury and premium end companies, including Louis Vuitton and Hermes, have all reported slowing sales. The luxury market has been hit by a renewed sense of consumer ethics, which has seen some consumers turning away from luxurious lifestyles to take on a "less is more" approach.

This trend was observed even before the economic downturn, with consumers shying away from luxury items, hinting that consumers may not return to buy luxury goods in the near future and may opt for more understated choices.