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Are Better Days Ahead for Tapestry?

By Leo Sun - Nov 7, 2019 at 8:59AM

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The parent company of Coach, Kate Spade, and Stuart Weitzman is looking for a rebound after losing nearly 40% of its value over the past 12 months.

Tapestry (TPR 1.42%), the parent company of Coach, Kate Spade, and Stuart Weitzman, has struggled as soft sales growth, contracting margins, and tariff headwinds caused its stock to tumble nearly 40% over the past 12 months. However, Tapestry's stock recently popped after it released its first-quarter earnings report, indicating that better days might be ahead for this unloved luxury stock.

How fast is Tapestry growing?

Tapestry's revenue fell 2% annually (1% in constant currency) to $1.36 billion during the first quarter, missing estimates by $20 million. Its adjusted net income fell 20% to $114 million, or $0.40 per share, which still beat expectations by three cents.

A Coach ad campaign.

Image source: Coach.

Tapestry generated 71% of its sales from Coach, 23% from Kate Spade, and the remaining 6% from Stuart Weitzman during the first quarter. Here's how those three brands fared over the past year.

YOY revenue growth

Q1 2019

Q2 2019

Q3 2019

Q4 2019

Q1 2020

Coach

4%

2%

0%

0%

1%

Kate Spade

21%

(1%)

4%

6%

(6%)

Stuart Weitzman

(1%)

3%

2%

17%

(9%)

Total

7%

1%

1%

2%

(2%)

YOY= year-over-year. Source: Tapestry quarterly reports.

Those growth rates look anemic, but Coach and Kate Spade's comps growth still exceeded analysts' expectations. Coach's comps improved 1%, while Kate Spade's comps fell 16%, beating expectations for 0.8% growth at Coach and an 18% drop at Kate Spade.

Coach remains stable, but the other brands are still laggards

Coach remains Tapestry's core growth engine, with eight straight quarters of positive comps growth buoyed by robust growth across its international and digital channels. However, Coach's adjusted gross margin dipped from 80 basis points annually to 70.2% due to promotions and currency headwinds. Tighter cost controls boosted its operating income 2% to $241 million, and its adjusted operating margin still expanded 30 basis points to 25%.

Kate Spade struggled with poor brick-and-mortar and digital sales, especially in North America, as some shoppers gravitated toward second-hand handbags. Its adjusted gross margin dipped 30 basis points to 63.1%, mainly due to promotions and tariffs hitting ready-to-wear and jewelry products, which were mainly made in China.

Yet Tapestry continues to expand Kate Spade's brick-and-mortar footprint with new store openings. Those investments caused the brand's adjusted operating income to plunge 60% to $19 million, and its adjusted operating margin fell from 14.4% to 6.3%.

A female shopper checks her smartphone while shopping.

Image source: Getty Images.

Stuart Weitzman's adjusted gross margin expanded 550 basis points annually to 55.7%. However, its adjusted operating loss widened from $6 million to $10 million, indicating that Tapestry's smallest brand is still a dead weight on its bottom line.

Kate Spade and Stuart Weitzman's dismal operating profits caused Tapestry's adjusted operating margin to drop 110 basis points annually to 12.3%, but that still exceeded the consensus forecast of 10.2%.

Tapestry's turnaround plans

Tapestry has been refreshing the Coach brand with new collaborations with Disney's various franchises, including Star Wars, the expansion of its men's line, and the introduction of new Tabby, Troupe, and Hadley handbags.

It plans to expand Kate Spade more aggressively into higher-growth overseas markets like China and Japan, broaden its product line with new colors and designs, and launch fresh marketing campaigns with its brand ambassador Anna Kendrick. Stuart Weitzman remains a minor brand, but Tapestry plans to broaden its footwear collection and promote the brand in new markets.

During the conference call, CEO Jide Zeitlin (who took the top role in September) stated that Tapestry was still "in the process of an intensive review of our business," and that its "key focus" was boosting Kate Spade's growth. It also plans to bring products to the market faster and use data-driven analytics to optimize its prices and designs.

Investors shouldn't expect those efforts to pay off right away -- Tapestry only anticipates low-single-digit sales growth for 2020, with low-single-digit comps growth at Coach, a high single-digit comps decline at Kate Spade, and roughly flat comps growth at Stuart Weitzman.

The valuations and verdict

Wall Street expects Tapestry's revenue to rise 2% this year as its earnings dip 1%. By comparison, Tapestry's rival Capri Holdings (CPRI -2.27%) is expected to post 11% sales growth and a 2% earnings drop this year.

Looking ahead into next year's estimates, Tapestry and Capri both look fairly cheap relative to their earnings growth. However, Tapestry pays a dividend, and Capri doesn't.

Company

FY 2021 EPS Growth

Forward P/E

Forward dividend yield

Tapestry

8%

10

5.2%

Capri Holdings

9%

6

N/A

Source: Yahoo Finance, Nov. 6.

Therefore, Tapestry's low valuation, high yield, and turnaround plans for its core brands should set a floor under the stock at these levels. It won't rebound anytime soon, but I believe that better days could be ahead in 2020 and beyond.

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Stocks Mentioned

Tapestry, Inc. Stock Quote
Tapestry, Inc.
TPR
$31.41 (1.42%) $0.44
Capri Holdings Limited Stock Quote
Capri Holdings Limited
CPRI
$41.68 (-2.27%) $0.97

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