85% Upside For Tapestry’s Stock Post Covid-19?

by Trefis Team
+16.16%
Upside
16.36
Market
19.00
Trefis
TPR
Tapestry
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Based on a comparison of Tapestry’s stock (NYSE: TPR) trajectory over recent months with that around the 2008 recession, we believe that the stock can potentially gain 85%, to reach almost $25 once fears surrounding the coronavirus outbreak are put to rest. A detailed comparison of Tapestry’s performance vis-à-vis the S&P 500 is available in our interactive dashboard analysis, How Did Tapestry Stock Fare vs. The S&P 500 In 2008 and Now?

The World Health Organization (WHO) declared a global health emergency at the end of January in light of the coronavirus spread. The rally in the equity market continued till February 19 with the S&P 500 reaching a record high, but the trend reversed sharply over the following weeks. Tapestry stock lost 62% of its value (vs. about a 34% decline in the S&P 500) between February 19 and March 23. A bulk of the decline came after March 6th, when an increasing number of Coronavirus cases outside China fueled concerns of a global economic slowdown. Notably, though, the multi-billion dollar stimulus package announced by the U.S. government has helped the stock price recover 26% over recent weeks (vs. about 46% gain in the S&P 500) to its current level around $13. Despite these gains, the stock is still down 50% since the beginning of the year.

The Sharp Movements In Tapestry’s Stock Were Triggered By Several Underlying Factors

The decline in Tapestry’s stock is understandable, considering the impact that the outbreak and a broader economic slowdown are having on consumer spending and on the global apparel industry in particular. The company’s third-quarter was adversely impacted due to the outbreak of coronavirus, which has forced people to stay indoors, resulting in a steep decline in the demand for the company’s products. Moreover, dwindling consumer demand reduced discretionary spending, and stay-at-home orders resulting in stores remaining closed continue to take their toll on the company’s stock. The effects of Covid-19 were clearly evident in the company’s Q3 2020 earnings (ending March) resulting in the company’s revenues falling by 20% y-o-y to $1.07 billion. We expect the impact on the company’s business to be steeper in Q4 2020 as the stores were closed for the majority of the quarter. However, gradual store openings and a rebound in discretionary spending have provided a boost to the company’s stock movement.

But How Does The Movement This Time Around Compare With The Trend During The 2008 Downturn?

  • We see Tapestry stock declined from levels of around $37 in October 2007 (the pre-crisis peak) to levels of around $11 in March 2009 (as the markets bottomed out) – implying the company’s stock lost as much as 70% from its approximate pre-crisis peak -higher than the broader S&P, which fell by about 51%.
  • However, Tapestry stock recovered strongly post the 2008 crisis to about $29 in early 2010 – rising by almost 163% between March 2009 and January 2010. In comparison, the S&P bounced back by about 48% over the same period.

Will Tapestry’s Stock Recover Similarly From The Current Crisis?

Keeping in mind the fact that Tapestry stock fell 62% from the market peak on February 19 to the low on March 23 compared to the 70% decline during the 2008 recession, we believe it can potentially recover by 85% to levels of $25 once economic conditions begin to show signs of improvement. This marks a partial recovery to the $27-level the stock was at before the coronavirus outbreak gained global momentum.

That said, the actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus. Further, our dashboard -28% Coronavirus crash vs 4 Historic crashes builds a more complete macro picture and complements our analyses of Coronavirus impact on a diverse set of Tapestry’s multinational peers – from Coronavirus effect on L Brands to impact of coronavirus on competitor Columbia Sportswear and Coronavirus effect on URBN stock. The complete set of coronavirus impact and timing analyses is available here.

Want out-performance? Try guessing the % returns for our Pershing-inspired portfolio – based on billionaire Bill Ackman’s firm Pershing Square – vs. the S&P over the last 1 week, 1 month, 3 months, YTD or even 3 years. Our portfolio combines high growth, quality, and risk mitigation criteria in an interesting way.

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