Improved Performance Across Brands Drives Tapestry’s Q3 Results

by Trefis Team
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Tapestry (NYSE: TPR) recently released its third quarter results. The apparel retailer’s revenues came in at $1.3 billion, up 1% YoY on a reported basis (and 2% on a constant-currency basis) thanks to growth across its brands. Notably, gross margins rose 30 basis points for the quarter to 69.2% as a result of a notable improvement in margins at Kate Spade as well as Coach. Per Trefis estimates, Tapestry’s shares have a fair value of $45 which is about 45% ahead of  the current market price. We attribute the sizable upside to a strong financial performance by the company over subsequent quarters from its ongoing focus on expanding its international presence. We have summarized our key expectations from the company in our interactive dashboard – How Did Tapestry In Q3 And What Can We Expect From Fiscal 2019?  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 Takeaways From Tapestry’s Q3:

  • Coach’s comparable store sales rose by 1% in Q3, led by strong international growth and increased usage across e-commerce platforms. The brand’s brick-and-mortar business also did very well thanks to a strong product offering which drove traffic.
  • Coach has achieved sustained growth in the Chinese market over recent years thanks to strong consumer demand. This trend continued in Q3, with strong domestic consumption in China helping sales outperform that from other regions.
  • 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.
  • China has emerged as the second-largest luxury market in the world according to Euromonitor, and we expect the country to continue to drive growth for Coach, and Tapestry, over the foreseeable future.

Kate Spade Delivers A Strong Performance

  • Kate Spade delivered a strong performance in Q3, with the brand witnessing an eight percentage point sequential improvement in comparable store sales growth. Total sales were up 4% on a reported basis due to new store distribution as well as the acquisition of the brand’s operations in Asia.
  • Tapestry sees huge potential in its $2.4-billion acquisition of Kate Spade, and expects the brand to cross $2 billion in sales over coming years. Also, the company plans to open 40 to 50 new stores, particularly in international markets where it seeks significant growth opportunities.

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 locations.
  • 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 are expected to accelerate international growth and drive brand awareness, thus providing decent near-term upside opportunities.

Tapestry Remains Well Positioned In Growing Industry

  • Tapestry estimates that the men’s and women’s premium handbag and accessories market (which is now over $45 billion), grew at a high single-digit rate globally in the March quarter. Moreover, the global men’s and women’s premium footwear (market size of roughly $30 billion) and the premium outerwear category ($12 billion market size) are poised for steady growth. Given Tapestry’s core capabilities and differentiated offering, the company remains uniquely positioned to capture the various opportunities that exist in the growing global accessories, footwear and outerwear markets.

Full-Year Outlook

  • For 2019, the company expects its total revenues to increase at a mid single-digit rate from fiscal 2018 with EPS being in the range of $2.55-2.60.
  • Based on our forecast, Tapestry’s adjusted EPS for full-year 2019 is likely to be around $2.45. Using this figure with our estimated forward P/E ratio of 18x, we arrive at our price estimate of $45 for TPR’s shares, which is about 45% ahead of the current market price.

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