Why Tapestry Inc. Is Worth $59

by Trefis Team
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Tapestry Inc. (NYSE:TPR) had a strong end to its FY 2018 (year ended June 2018), with the addition of Kate Spade providing a boost to the company’s results. Moreover, a pullback on flash sales, and hence, an increased sale of full-price items, together with a reduced exposure to the wholesale channel for Coach and Kate Spade, has eased the pressure on the margins, and consequently, improved profitability. We expect these trends to continue for Tapestry in the current financial year as well, together with the lowering of the corporate tax rate, which should help in a significant improvement of the EPS. The company achieved its synergy guidance target (from the merger with Kate Spade) of $45 million in FY 2018, and anticipates synergies of $100 to $115 million in FY 2019. For FY 2019, Tapestry is projecting sales to increase by a mid-single-digit rate to $6.1 billion to $6.2 billion, including low single-digit growth at Coach and double-digit improvement at Kate Spade, and the EPS to be in the range of $2.70 to $2.80.

We have a $59 price estimate for Tapestry (Coach Inc), which is higher than the current market price. The charts have been made using our new, interactive platform. You can click here for our interactive dashboard on Our Outlook For Tapestry Inc. In FY 2019 to modify the different drivers to see their impact on Tapestry’s price estimate.

We have arrived at a $59 price estimate for Tapestry Inc. based on revenue projections of $6.2 billion for FY 2019, net income of $805 million, a P/E multiple of 21, and a share count of 288.6 million. The market price stood at $43.80 as of October 11, 2018, implying our price estimate is higher by 30%.

The revenue and margin forecasts have been based on the following:

1. Problems at Stuart Weitzman: While the company reported a rise in sales in the segment in Q3 2018, it was noted that the brand’s supply chain in Spain was unable to handle “the level of complexity and new development.” Consequently, the company is in the process of adding infrastructure and capacity to support the brand and ensure quality on-time deliveries. As a result of this, the segment faced disruption in the fourth quarter, with a return to growth projected in the second quarter of FY ’19, faster than Q3 expected earlier.

2. 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. This factor resulted in a 3% drop in Kate Spade’s comparable sales in the fourth quarter. While the company will continue to hold back on the discounting in FY 2019, easier comparisons and increased full-price sales should result in double-digit growth for the brand.

3. Acquisition of Businesses: Tapestry took operational control of the Kate Spade joint venture from Mainland China, Hong Kong, Macau, and Taiwan, an area which has been generating strong results. This step would give Kate Spade an additional 50 stores. The success of Coach in the region gives the company an immense opportunity to leverage its relationship with suppliers and distributors for the Kate Spade brand. The company has also entered into purchase agreements to acquire Kate Spade’s operations in Singapore, Malaysia, and Australia, as well as Stuart Weitzman’s business in Southern China. These locations are expected to transition to TPR brand’s management in the September-October time frame. In addition, 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.

4. New Initiatives: Tapestry launched its platform called Coach Create in the second quarter of 2018, which has now been extended to over 250 stores, resulting in increased volume and traction by millennials. Moreover, the brand has its monogramming service in about 50% of its global direct retail fleets. The retailer has also recruited Selena Gomez to be the new face of the Coach brand, in order to appeal to the younger shoppers. The collaboration has also been extended to ready-to-wear, which was launched in the fall.

5. International Expansion: 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 60 to 70 stores globally in FY 2019, including those that will be acquired in Australia, Malaysia, and Singapore.

6. 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.

7. Industry Growth: Tapestry estimates the men’s and women’s premium handbag and accessories market, which is now over $45 billion, grew at a low double-digit rate globally in the June quarter, benefiting in part from the weaker U.S. dollar. On an organic basis, the global category rose high single digits, similar to the March quarter. The strong fourth quarter number drove the trailing 12-month growth rate to a low double-digit rate in U.S. dollars and high single-digit on an organic basis. Moreover, the global men’s and women’s premium footwear (market size of roughly $30 billion) and the premium outerwear category ($12 billion) grew at a high single-digit rate in constant currency. Positive global macroeconomic factors, including strong consumer confidence, low unemployment, rising consumer spending, and stock markets near all-time highs, drove consumer demand, benefiting Tapestry’s performance. With these trends expected to continue in the near term, it may continue to aid Tapestry’s performance.

8. Lower Tax Rate: As a result of the lowering of the corporate tax rate in the U.S., from 35% to 21%, Tapestry’s tax rate in FY 2019 is expected to be a little over 21%, as opposed to over 33% in FY 2017. This should help in considerably improving the net income margin, and consequently, the earnings.

See our complete analysis for Tapestry here


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