Up 8% This Year, How Will Tapestry Stock Trend Post Q2 Results?

-13.59%
Downside
46.96
Market
40.58
Trefis
TPR: Tapestry logo
TPR
Tapestry

Note: Tapestry’s FY’23 ended July 1, 2023.

Tapestry (NYSE: TPR), a luxury goods retailer of handbags, shoes, and accessories, is scheduled to report its fiscal second-quarter results on Thursday, February 8. We expect the apparel retailer’s stock to trade lower post the fiscal Q2 release with revenues and earnings missing expectations. Tapestry plans to acquire Capri Holdings, formerly known as Michael Kors, by financing the $8.5 billion deal in debt, with its own net debt reported at around $900 million, for a $9.4 billion pro forma net debt load. 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.

In Q1, the Coach nameplate had a strong quarter, with sales up 3% year-over-year (y-o-y). But sales at Kate Spade were down 6% y-o-y and the 19% sales decline at Stuart Weitzman was even worse. That said, the Coach brand accounts for roughly 75% of the company’s revenues. Geographically, sales in the U.S. were flat y-o-y and fell 1% in Europe. The company’s international revenue growth was fueled by gains of 12% in Japan and 9% in Greater China. Notably, only two countries drove Tapestry results, and that too only one brand in Q1. Coach has a 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 shown strong gains of 35% from levels of $30 in early January 2021 to around current levels, vs. an increase of about 30% for the S&P 500 over this roughly 3-year period. However, the increase in TPR stock has been far from consistent. Returns for the stock were 31% in 2021, -6% in 2022, and -3% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – 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 HD, 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 strong jump?
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Our forecast indicates that Tapestry’s valuation is around $35 a share, which is 15% lower than the current market price. Look at our interactive dashboard analysis on Tapestry’s Earnings Preview: What To Expect in Fiscal Q2? for more details.

(1) Revenues expected to be below consensus estimates

Trefis estimates TPR’s Q2 2024 revenues to be around $2 Bil, slightly below the consensus estimate. In Q1 2024, TPR reported sales of $1.51 billion – up 0.7% year-over-year (y-o-y). Excluding a 130 basis point headwind from currency due to the appreciation of the U.S. dollar, revenue increased approximately 2% y-o-y during the quarter. Looking ahead, Tapestry expects full-year revenue of $6.7 billion and sees EPS of $4.10 to $4.15. It also expects a free cash flow of approximately $1.1 billion for the full year, excluding deal-related costs.

2) EPS likely to miss the consensus estimates marginally

TPR’s Q2 2024 earnings per share (EPS) is expected to be $1.45 per Trefis analysis, slightly below the consensus estimate. The company’s gross margin improved by 250 basis points y-o-y in Q3. Consequently, its adjusted earnings of $0.93 per share were up 18% y-o-y during the third quarter.

(3) Stock price estimate lower than the current market price

Going by our Tapestry’s Valuation, with an EPS estimate of around $4.15 and a P/E multiple of close to 8.5x in fiscal 2024, this translates into a price of $35, which is 15% lower than the current market price.

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.

Returns Feb 2024
MTD [1]
Since start
of 2023 [1]
2017-24
Total [2]
 TPR Return 6% 8% 17%
 S&P 500 Return 2% 29% 121%
 Trefis Reinforced Value Portfolio 0% 38% 607%

[1] Returns as of 2/7/2024
[2] Cumulative total returns since the end of 2016

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