Why Is Tapestry Worth $48?

by Trefis Team
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Tapestry Inc (NYSE: TPR) delivered lower-than-expected second-quarter fiscal 2019 results and also downgraded its fiscal 2019 earnings guidance. Management stated that a volatile macroeconomic environment and geopolitical factors contributed to the miss on top- and bottom-line analyst estimates. However, total sales for the quarter rose by 1%, primarily on account of positive comparable sale growth at Coach, led by international out-performance as well as strong growth in the digital platforms. This increase was partially offset by softness in Kate Spade, which saw its quarter-over-quarter revenues decreasing by 1%.

The company’s gross margin for the quarter improved by approximately 10 basis points to reach 67% of total sales. The expansion in the margin was primarily driven by Kate Spade, which rose 120 basis points, fueled by the realization of COGS synergies as well as a 10 basis-point increase in gross margin in Coach. For 2019, the company expects its total revenues to increase at a mid-single-digit rate from fiscal 2018, low-single-digit growth at Coach, and EPS to be in the range of $2.55-2.60. TPR’s stock price has declined by more than 20% since Q2 results and we currently have a price estimate of $48 per share for TPR, which is significantly ahead of the current market price, as we anticipate the company to deliver strong financial performance towards the latter half of fiscal 2019. We have summarized our full year expectations for TPR, based on the company’s guidance and our own estimates, on our interactive dashboard Can Tapestry Rebound After Recent Weakness?  You can modify any of our key drivers to gauge the impact changes would have on its valuation, and see more Trefis Consumer Discretionary Services company data here.

Key Outcomes from Tapestry’s Second Quarter Financial Performance Are Summarized Below:

Coach Brand Continues To Outperform

Coach’s comparable store sales rose by 1% in Q2, led by outperformance in international channels and across e-commerce platforms, with Coach recording its highest ever digital sales in a quarter in North America. The brand also delivered a positive comparable growth in international segment as the brand continued to achieve strong growth in Asian markets, particularly China. Despite uncertain economic environment and volatile tourist trends, notably in North America, Coach delivered a strong financial performance in Q2 and we expect Coach will continue to drive top-line growth of the company in the foreseeable future.

Soft Kate Spade Showing Hampers Performance

Kate Spade’s sales fell short of the company’s expectations with second quarter revenue totaling $428 million, down 1% versus the prior year. Comparable store sales fell by 11%, as online business continued to outperform brick and mortar stores.  Although the brand didn’t perform to the company’s expectation in Q2, the company sees huge potential in this $2.4 billion acquisition and expects the brand to cross $2 billion sales in the coming years. Also, the company plans to open 40 to 50 new stores, notably in international markets where it seeks significant growth opportunities.

Tapestry Continues Global Expansion

Tapestry continues to expand into areas where it feels there is untapped capacity such as Greater China, South East Asia, and Europe. To put things in perspective, TPR expects to add 60-70 new store locations for Kate Spade and another 30 new locations for Stuart Weitzman in 2019, primarily in China, where it sees huge growth potential.  Although, the company didn’t perform as per the expectations in Q2, we expect the company will continue to focus on growing its international operations while improving store experience and rationalizing its wholesale and retail distribution.


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