Will Coach Continue To Drive Growth For Tapestry In Q3?

by Trefis Team
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Tapestry Inc (NYSE: TPR) is set to announce its fiscal third quarter 2019 results on May 9, followed by a conference call with analysts. Consensus estimates for the company’s revenues for the quarter are close to $1.34 billion, which indicate a marginal increase in revenues year-on-year. Revenue growth is likely to come from its Coach and Kate Spade brands, driven by international expansion as well as strong growth in the e-commerce platform. Per Trefis estimates, TPR’s shares have a fair value of $48 which is roughly 35% ahead of the company’s current share price. The significant price difference can be attributed to the weaker-than-expected performance by the company over the last two quarters, coupled with a soft guidance for the near future.

We believe that these near-term headwinds do not take away from Tapestry’s long-term value. We have summarized our key expectations from the upcoming earnings announcement in our interactive dashboard – How Is Tapestry Likely To Have Fared In Fiscal Q3?  In addition, here is more Trefis Textiles, Apparel and Luxury Good Industry data.

A Quick Look at Tapestry’s Revenue Sources

Tapestry reported $5.9 billion in Total Revenues in Fiscal 2018. This included 3 revenue streams:

  • Coach: $4.2 billion in FY 2018 (72% of Total Revenues). This segment includes global sales of Coach brand products to customers through Coach operated stores, including the Internet and concession shop-in-shops.
  • Kate Spade: $1.3 billion in FY 2018 (22% of Total Revenues). This segment includes global sales primarily of Kate Spade New York brand products to customers through Kate Spade operated stores, including the Internet and concession shop-in-shops.
  • Stuart Weitzman: $374 million in FY 2018 (6% of Total Revenues). This segment includes global sales of Stuart Weitzman brand products primarily through Stuart Weitzman operated stores including the Internet to wholesale customers and also through independent third-party distributors.

Key Factors To Watch for In Q3

Coach Will Continue To Drive Growth For Tapestry

  • Coach’s comparable store sales rose by 1% in Q2, led by strong growth in international channels and across e-commerce platforms. In fact, Coach recorded its highest-ever digital sales in a quarter in North America for the fiscal second quarter. International growth was driven by gains in Asian markets, particularly China.
  • This brand has achieved sustained growth in the Chinese market over recent years thanks to strong consumer demand. With China emerging as the second-largest luxury market in the world according to Euromonitor, we expect the country to continue to drive growth for Coach, and Tapestry, over the foreseeable future.

International Expansion

  • Tapestry is focusing its growth on regions where it feels it is under-penetrated such as Greater China, Southeast Asia, and Europe. To put things in perspective, the company aims to add 60 to 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 well as expected 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. This should have a positive impact on the company’s top line as well as bottom line in the long run.

Digital Sales Channel Will Continue To Thrive

  • Customer shopping patterns have been shifting from brick-and-mortar locations to digital channels, and customers are increasingly more likely to shop across multiple channels that work in tandem to meet their needs. One of the main objectives of the company has been to advance their digital and data analytics capabilities. Tapestry’s digital sales were strong in Q2 2019 driven by superior results across all three brands. We expect this trend to continue in the near future, with growth in digital-channel sales outpacing the retail store sales for the foreseeable future.

New Initiatives Present An Upside Potential

  • Tapestry launched its Coach Create platform in the first half of 2018, and has now extended it to over 250 stores – helping increase volume and traction among millennials. Moreover, the brand offers its monogramming service in nearly half of its global direct-retail fleets.
  • Additionally, the company is focused on launching new and innovative products across categories and channels supported by bold marketing campaigns and unique collaboration. These initiatives will likely accelerate international growth and drive brand awareness, thus providing decent near-term upside opportunities.

Trefis Price Estimate

  • Based on our forecast, Tapestry’s adjusted EPS for full-year 2019 is likely to be around $2.58. Using this figure with our estimated forward P/E ratio of 19x, this works out to a price estimate of $48 for the company’s shares, which is about 35% ahead of the current market price.
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