Note: Tapestry’s FY’23 ended on July 1, 2023.
Tapestry (NYSE: TPR), a luxury goods retailer of handbags, shoes, and accessories, currently trades at $27 per share, around 45% below its level of $49 seen on May 7, 2021 (pre-inflation shock high), and has the potential for gains. TPR saw its stock trading at around $28 on October 2, 2022, when the Fed kept increasing rates, and now remains down by about 5% from those levels. 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 below $30 in the weeks that followed. Consequently, 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. That said, 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. Also, Coach has a more significant physical presence in China – where the 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.
TPR stock has seen a decline of 15% from levels of $30 in early January 2021 to the current levels, vs. an increase of about 15% for the S&P 500 over this roughly 3-year period. However, the decrease in TPR stock has been far from consistent. Returns for the stock were 31% in 2021, -6% in 2022, and -29% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 12% in 2023 (YTD) – indicating that TPR underperformed the S&P in 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Consumer Discretionary sector including AMZN, TSLA, and TM, and even for the megacap stars GOOG, MSFT, and AAPL. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could TPR face a similar situation as it did in 2023 and underperform the S&P over the next 12 months – or will it see a recovery?
Returning to the pre-inflation shock level means that TPR will have to gain about 82% from here. While it has the potential to recover to those levels, we estimate TPR’s Valuation to be around $41 per share, almost 51% higher than the current market price. Our detailed analysis of Tapestry’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022 and compares these trends to the stock’s performance during the 2008 recession.
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2022 Inflation Shock
Timeline of Inflation Shock So Far:
- 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers were unable to match up.
- Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt the supply
- April 2021: Inflation rates cross 4% and increase rapidly
- Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process
- June 2022: Inflation levels peak at 9% – the highest level in 40 years. S&P 500 index declines more than 20% from peak levels.
- July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline
- October 2022 – July 2023: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses
- Since August 2023: Fed keeps interest rates unchanged to quell fears of a recession, although another rate hike remains in the cards.
In contrast, here’s how TPR stock and the broader market performed during the 2007/2008 crisis.
Timeline of 2007-08 Crisis
- 10/1/2007: Approximate pre-crisis peak in S&P 500 index
- 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
- 3/1/2009: Approximate bottoming out of S&P 500 index
- 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)
TPR and S&P 500 Performance During 2007-08 Crisis
TPR stock declined from nearly $47 in October 2007 (pre-crisis peak) to around $14 in March 2009 (as the markets bottomed out), implying that TPR stock lost almost 70% of its pre-crisis value. It recovered from the 2008 crisis to levels of around $37 in early 2010, rising roughly 161% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.
TPR Fundamentals Over Recent Years
TPR revenues grew from around $5.0 billion in FY 2020 (year ended July 2020) to about $5.7 billion in FY 2021, due to the impact of Covid-19. Further, sales rose to $6.7 billion in FY 2022, as demand picked up further. It should be noted that the company’s sales remained flat in FY 2023, largely due to Covid-related pressures in the first half of FY 2023 in Greater China. Earnings per share grew from around -$2.34 in FY 2020 to $3.00 in FY 2021 and to $3.24 in FY’22. Earnings further rose to $3.96 in FY’23, driven by continued buybacks.
With the Fed’s efforts to tame runaway inflation rates helping market sentiment, we believe TPR stock has the potential for strong gains once fears of a potential recession are allayed.
It is helpful to see how its peers stack up. TPR Peers shows how Tapestry’s stock compares against peers on metrics that matter. You will find other useful comparisons for companies across industries at Peer Comparisons.
|S&P 500 Return||3%||12%||92%|
|Trefis Reinforced Value Portfolio||1%||19%||509%|
 Month-to-date and year-to-date as of 11/2/2023
 Cumulative total returns since the end of 2016