Note: Tapestry’s FY’23 ended on July 1, 2023.
After a 26% fall year-to-date (YTD), at the current price of around $29 per share, we believe Tapestry (NYSE: TPR), a luxury goods retailer of handbags, shoes, and accessories could see long-term growth. TPR stock has declined from around $38 to $28 YTD, compared to an 11% rise in the S&P index. Tapestry’s organic improvements haven’t resulted in increased share prices due to the compression of valuation multiples. To add to this, the company announced the acquisition of Capri Holdings, formerly known as Michael Kors, in a transformative deal. But the deal was not taken well by the market. Tapestry plans to finance the $8.5 billion deal in debt, with its own net debt reported around $900 million, for a $9.4 billion pro forma net debt load. Upon the announcement of the deal, TPR shares fell from the low-forties to $35, and then further to $30 in the weeks that followed. That said, we expect TPR’s stock price to be pressured in the short-term, due to a lot of uncertainty and debt concerns for the upcoming period.
It should be noted that Coach has a more significant physical presence in China, which is expected to be the key beneficiary of China’s reopening. China’s luxury market is rapidly recovering from the pandemic with greater strength and resilience. It is expected to reach around $112 billion by 2025, or approximately 25% of the total global spending. The Tapestry- Capri deal will create a huge portfolio of luxury brands as Tapestry’s Coach, Kate Spade, and Stuart Weitzman brands will be combined with Capri’s Versace, Jimmy Choo, and Michael Kors brands. The deal creates a pro forma $12 billion global luxury empire to create more diversified operations, brands, and geographical coverage. This comes as Tapestry’s $6.7 billion revenue base is complemented by the $5.5 billion revenue base of Capri.
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Notably, TPR stock had a Sharpe Ratio of 0.1 since early 2017, which is much lower than the figure of 0.6 for the S&P 500 Index over the same period. Compare this with the Sharpe of 1.2 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.
In fiscal 2023, TPR reported sales of $6.66 billion – flat year-over-year (y-o-y). In addition, earnings of $3.88 per share were up 22% y-o-y during the year. For the full year 2024, the retailer expects revenue approaching $6.9 billion, up 3% to 4% versus the prior year on both a reported and constant currency basis. Earnings per diluted share are expected to total between $4.10 to $4.15, representing approximately 6% to 7% growth compared to the prior year. The outlook assumes no revenue or earnings contribution related to the proposed acquisition of Capri Holdings, which is expected to close sometime in 2024.
We forecast Tapestry’s Revenues to be $6.9 billion for the fiscal year 2024, up 4% y-o-y. Looking at the bottom line, we now forecast EPS estimates to come in at $4.15. Given the changes to our revenues and EPS forecast, we have revised Tapestry’s Valuation to $41 per share, based on a $4.15 expected EPS and a 9.8x P/E multiple for the fiscal year 2024. That said, the company’s stock appears significantly cheap at the current price.
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