Why Has Tapestry’s Stock Tanked 60% Since Late 2017 Despite Strong Revenue Growth?

Tapestry stock (NYSE: TPR) has fallen from around $43 at the end of 2017 to just $17 now – a decline of over 60% – despite its revenues for full-year 2019 being a good 33% higher than the figure for full-year 2017. This apparent mismatch in the trend for the apparel company can primarily be attributed to Tapestry’s ill-fated acquisition of Kate Spade. As it turns out, Kate Spade has clearly failed to generate the kind of revenues Tapestry (and its investors) had hoped to achieve after the acquisition. In fact, it has weighed down Tapestry’s performance. Understandably, investors downgraded their expectations about the company’s future growth – leading to a steep contraction in the P/E ratio over the recent years. Our dashboard ‘Why Is There A Mismatch In The Rate At Which Tapestry, Inc.’s Revenues And Stock Price Have Changed? summarizes key factors that drove Tapestry’s stock over the past 3 years.

What Factors Have Contributed To A Fall In Tapestry’s Stock?

[A] Contraction In Net Margin

Between 2017 and 2019, Tapestry’s EPS (earnings per share) improved from $2.11 to $2.22 led by a 33% growth in revenues. Despite an improvement in earnings, Tapestry’s net margins contracted from 13.2% in FY2017 to nearly 10.7% in FY2019 (ending June).

Where did the company go wrong? The acquisition of Kate Spade has been a drag on the profitability of the company.

• Since the acquisition of Kate Spade, Tapestry’s operating margin (revenue less cost of sales and selling expenses) has declined from nearly 17% in fiscal 2017 to below 13% in fiscal 2019.
• Moreover, Kate Spade’s gross margin is lower than that of Tapestry’s largest brand, Coach, implying that Kate Spade is producing goods at a higher cost.
• As a result, Tapestry’s gross margin has contracted by 130 basis points over the same time period. Overall, Kate Spade has resulted in the erosion of Tapestry’s profitability.

[B] Sharp Reduction In P/E Multiple

Driven by a significant jump in Tapestry’s revenues and a slight increase in share count, coupled with nearly a 20% decline in net margin, Tapestry’s EPS (earnings per share) improved from $2.11 per share to $2.22 per share. However, the stock price decreased due to the contraction of the P/E multiple, as the market became skeptical about the company’s future performance. The P/E ratio contracted from over 20x in 2017 to 12x in 2019 – down nearly 40%. Moreover, the soft showing of Tapestry’s Stuart Weitzman brand over this time frame also contributed to the decline. While P/E is down to about 7.8x now given headwinds to the apparel industry from the coronavirus outbreak, we think there is upside with opportunity for P/E to return to its 2019 levels as the outbreak of virus subsides and mall traffic returns to normal.

While Tapestry’s stock has declined despite an increase in revenues, Tapestry’s peer, Ralph Lauren has seen its stock price increase despite declining revenues. Find out more on ‘Why Is There A Mismatch In The Rate At Which Ralph Lauren’s Revenues And Stock Price Have Changed?’

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