Can Tapestry Navigate Around China Headwinds To Grow Revenues This Year?

by Trefis Team
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Tapestry
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Tapestry (NYSE: TPR) sells luxury accessories and lifestyle brands. The company has achieved steady revenue growth in the last couple of years, with its revenues of $6 billion in fiscal 2019 (ending June) representing a 2.5% increase thanks to growth across all brands. Trefis captures trends in Tapestry’s Revenues over recent years in an interactive dashboard along with our forecast for the current year. We expect the company to report growth in revenues for the year despite the impact of the U.S.-China trade war on its performance over recent months primarily due to sustained growth in its cornerstone Coach division. You can view the Trefis interactive dashboard to better understand the revenue trends and division-wise revenue performance, and alter our assumptions to arrive at your own estimate for the company’s revenues. In addition, here is more Trefis Textiles, Apparel and Luxury Good Industry Data

A Quick Look at Tapestry’s Revenues

Tapestry reported $6 billion in Total Revenues in Fiscal 2019. This included 3 revenue streams:

  • Coach: $4.3 billion in FY 2019 (71% 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: $1.36 billion in FY 2019 (23% 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: $389 million in FY 2019 (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

How Has Tapestry’s Historical Revenue Trended? 

  • Tapestry has added more than $1.5 billion to its top line since 2016 at an average annual rate of 10% thanks to steady growth across all three brands.
  • Notably, the acquisition of Kate Spade has been the largest growth driver, accounting for roughly 90% of the company’s growth over this period.
  • Keeping in mind current industry-wide headwinds for the apparels market, we expect Tapestry’s revenues to increase by 2.1% to about $6.2 billion in FY 2020.

A Detailed Look At Tapestry’s segment performance and revenue change over the years:

Coach Is Tapestry’s Largest Brand

  • Tapestry’s Coach consistently contributes a majority of its revenues, with an average revenue share of more than 80% in the last 4 years.
  • However, the segment’s share has declined from above 92% in 2016 to nearly 71% in 2019 due to the acquisition of Kate Spade.
  • The segment grew by 1.2% year-over-year in fiscal 2019, contributing nearly $50 million to total incremental revenues.
  • We expect the segment to remain the key growth driver for the company, and record $4.3 billion in revenues this year.
  • The growth is expected to be driven by strong international growth and increased usage across e-commerce platforms
  • Moreover, the brand’s brick-and-mortar business is also expected to thrive, particularly in China, thanks to a strong product offerings.

Kate Spade’s Acquisition Has Provided A Boost To Revenues

  • Kate Spade has achieved nominal growth in the last couple of years, with revenues increasing from $1.28 billion in 2018 to more than $1.36 billion in FY 2019
  • Notably, the acquisition of Kate Spade boosted Tapestry’s growth in FY 2019, with the brand contributing $82.1 million to total revenue, or approximately half the growth in the company’s consolidated total revenue
  • However, Kate Spade’s entire revenue growth in fiscal 2019 was due to an increase in the number of stores, with the brand delivering negative comp sales growth for the year.
  • We expect this segment’s revenues to increase by 4.5% in FY’20 primarily due to accelerated store openings. Moreover, the segment’s contribution to total revenues has steadily increased over the years, which is expected to continue in the foreseeable future.

Stuart Weitzman Has Grown At A Steady Pace Over The Past Few Years

  • Stuart Weitzman has added roughly $45 million to total revenues since 2016, and has grown at an average annual rate of 4%.
  • This growth can be attributed to new product offerings as well as additional store openings, particularly in China.
  • We expect segment revenues to improve in the mid single-digit range likely to be driven by new product offerings of handbags and accessories and continuous expansion of the international segment.

Based on our forecast, Tapestry’s adjusted EPS for fiscal 2020 is likely to be around $2.45. Using this figure with our estimated P/E ratio of 12.5x, this works out to a price estimate of $30 for Tapestry’s stock, which is roughly 20% ahead of the current market price.

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