Is Tapestry Stock A Buy?

Is Tapestry Stock A Buy? A great direct-to-consumer distribution system, improving profitability, and strong brand recognition makes Tapestry stock worthy of your attention.

Tapestry, Inc. [NYSE: TPR], formerly Coach, Inc., is an American multinational luxury fashion holding company, which provides luxury accessories and branded lifestyle collections in the US and across the globe.

Tapestry, Inc. was founded in 1941 and is headquartered in New York, New York. The company is the parent company of three major brands: Coach New York, Kate Spade New York and Stuart Weitzman.

The apparel and accessories firm offers handbags, leather goods, wallets, money pieces, travel accessories, backpacks, bracelets, necklaces, fragrance, jewelry, watches, outer wear, ready-to-wear, gloves, scarves, hats and business cases, stationery and time management pieces along with several other similar items.

Originally named Coach, Inc., the business changed its name to Tapestry on October 31, 2017.

Tapestry Share Price Took A Beating

Owner of Coach and Kate Spade brands, Tapestry set aside the chaos created by the sudden departure of its CEO, Jide Zeitlin, amidst allegations of improper behavior, to beat quarterly results estimates, as the company benefitted from rebounding demands for luxury handbags and apparel in its key market, China. 

The luxury accessories retailer reported $0.58 earnings per share (EPS) for the quarter ending Sept. 26, more than double of what analysts were expecting. Management refrained from issuing a forward guidance, though it says it expects better revenue and bottom-line growth in fiscal 2021.

The decline in Tapestry’s share price has been ugly, with the stock crashing to a historic low of just under $11 at one point, lower than what it fell during the great recession of 2008. The pandemic battered the stock as the demand for its high-end handbags, apparels, footwear, and accessories plunged amidst closure of retail outlets across the globe.

However, Tapestry’s stock price has been in a comeback mode, particularly since the start of October, as the sale of its apparels and accessories rebounded in China from pandemic-inflicted lows.

Overall, shares of Tapestry rose 16.1% in 2020 as sales gained momentum, mostly in the fourth quarter of the year, with gradual opening up of the economy.  The rallying back indicates investors’ renewed optimism over the luxury retailer’s growth prospects.

Tapestry Financials Are Looking Better

The company reported sales of $1.17 billion during the quarter, against analysts’ expectations of $1.06 billion. It topped estimates, but was still down 13.8% in comparison to the same quarter last year, owing to the pandemic.

The company, however, could draw heart from its performance in its main market China where it posted double-digit year-over-year revenue growth. 

If we look at revenue across the three brands, Stuart Weitzman was the worst performer, declining 35%. Kate Spade fell 21%, while Coach, the company’s largest division, witnessed a more modest fall of 9%.

In-store sales of Tapestry, as well as its rivals, have been battered by the pandemic, but the company has been increasingly focusing on online sales to compensate for the falling retail sales.

And it has enjoyed considerable success here, clocking a second consecutive quarter of triple-digit e-commerce growth, with its e-commerce channel accounting for nearly 25% of its quarterly sales, and leading to net profits rocketing 11 times higher than the year-ago period.

Why Are Gross Margins Rising?

The top management is also focusing on what it calls its acceleration program.

A part of this is more vigorous data collection and analysis which, in turn, helped the company gain more knowledge of the products in demand.  This allowed for better inventory management, which, in part, helped Tapestry evade hefty discounting to lure customers to its products.

As a result, the company’s gross margin rose more than 3 percentage points year over year to around 71%. This, together with other strategic cost-cutting measures and higher-margin online sales, drove up the company’s adjusted operating income by 37% to $228.8 million.

Results, no doubt, have been encouraging but the company still has a long way to go. Trimming expenses by shuttering stores is the easier part of the job; the more important part is to devise a considerably accurate mechanism to better comprehend a customer’s needs and wants.

Tapestry Getting Better At Data Analytics

The company has been gravitating towards data analytics to better know its present and potential customers, and then offer merchandise that could take care of a customer’s unfulfilled need.

The company has also initiated loyalty programs to attract and retain customers.

These are noteworthy efforts and could help accelerate its sales. However, the million-dollar question still remains as to how these strategies will help Tapestry steal a march over its rivals, given the fact that they are adopting the same strategies in these trying times.

However, there’s one area where it enjoys significant advantage over its competitors. Some 40% of Tapestry’s stores are outlets, and most of those are in outdoor retail settings that have seen more customer traffic than traditional enclosed malls.

Close to half of its retail outlets are in outdoor retail settings, a boon during the pandemic, as there has been a huge decline in customer traffic in malls which are more enclosed.

With the country currently in the throes of another deadly Covid wave, it is highly unlikely that customers will be inclined to visit malls, while Tapestry’s robust outlets can keep contributing to its sales.

The stock has tripled from its historic March lows, and possesses all the potential for a significant upside. Unwavering focus on gathering and analyzing data to serve its customers better, growing strength of its e-commerce segment and development of internal strategies to become nimbler and more responsive gives a lot of optimism about this luxury products company.

Risks Of Investing In Tapestry

While there’s encouraging news on the vaccine front, and strict lockdown measures have been lifted to a significant extent, investors are still worried about the precipitously rising Covid cases in the US and across the globe.

The number of cases around the world has passed 100 million, and the United States, with 25 million confirmed cases, remains the country with the largest outbreak.

This is forcing officials to re-introduce restrictions at some places. This could hurt Tapestry sales as shoppers would refrain from going to the company’s stores.

It is, however, of less concern right now, as the company would be more worried about its ripple effect on the economy. After all, with economy going downhill, consumers are less inclined to spend on luxury goods, which are nice to have, but can be certainly done without.

On the other hand, people will continue to spend money on daily life essentials like food, hygiene products, and cosmetics, irrespective of the state of the economy. Companies selling products that people buy when they have some extra cash to splurge belong to the consumer discretionary sector.

On the other side, companies like Procter & Gamble (PG), Kroger (KR) and Colgate-Palmolive (CL), that make every day essential items, belong to the consumer staples sector.

Luxury goods are economically sensitive, which means a downbeat economy would lead to lower consumption and consumer spending, which may affect luxury brands such as Tapestry.

The luxury retail company is no stranger to this phenomenon, having suffered greatly during the recession of 2008 when its yearly sales grew a meagre 2%, while its adjusted operating income tumbled 15% to $1 billion.

Tapestry Pays No Dividends

Another negative for the company is that it is not currently paying any dividends. Given the economic uncertainty, the board of directors suspended the 33.8 cents quarterly dividend in May, along with its stock buyback program.

This is a move investors cannot criticize in the current economic environment, but it still would have been nice for investors to lay hands on a regular income while waiting for things to return to normal.

Tapestry has improved its profitability in the current quarter, but we still are unsure about how the Covid crisis is going to play out over the next few quarters. As such, a few investors may be disinclined to buy the company’s stock till they are convinced the economy is on a firmer ground.

Also, the resignation of CEO Jide Zeitlin (replaced by Joanne Crevoiserat), who abruptly left his post as CEO in July, has not adversely affected the brand, but the situation may take a turn for the worse if additional wrongdoing is found. 

Are Tapestry Competitors A Threat?

Capri Holdings Limited [NYSE: CPRI] (formerly Michael Kors Holdings Limited) is one of the top competitors of Tapestry, which offers investors both, the prospect of profit growth and an appealing share price.

Capri Holdings Limited is a global fashion luxury group which sells women’s and men’s accessories, footwear and apparel, as well as watches, jewelry, eyewear, fragrance, handbags and other accessories. Best known for its designer handbags, Capri Holdings also owns Jimmy Choo and Versace.

The company delivered a better-than-expected second-quarter earnings report, irrespective of the challenges posed by the pandemic. The revenue fell around 28% to $1.11 billion, which was still better than estimates of $925.88 million as its e-commerce sales gathered speed and sales in China improved. 

The luxury lifestyle company reported $0.90 EPS for the quarter, against expectations of $0.83 despite the Covid headwinds. Jimmy Choo was the best-performing of its three brands, witnessing a modest revenue decline of 2.4%.

CEO John Idol said in a statement, “Our performance demonstrates the power and desirability of the Versace, Jimmy Choo and Michael Kors brands.”

The company has been actively adopting measures to trim its costs, including reduced advertising expenditure. The company’s e-commerce platform, akin to Tapestry, has seen robust expansion, and the company can derive a lot of optimism over improving economic environment in its key market China.

Vera Bradley, Inc., [NASDAQ: VRA] together with its subsidiaries, designs, manufactures, and sells fashion accessories for women, including women’s handbags, luggage, travel and leisure items, eyewear, and stationery and gifts.

The company’s revenue for its latest quarter came in at $124.80 million, compared to analyst estimates of $129.99 million. However, it reported $0.30 earnings per share, which topped expectations.

Vera Bradley’s e-commerce revenue doubled year over year, as the company switched over its e-commerce sites to a cloud-based Shopify Plus platform. 

The luggage and accessories company has also been spending heavily on customer data science and digital marketing, having upgraded its business intelligence and order management systems.

The company has also been quick to adjust to the current market situation, shifting its attention from categories such as travel to items which are currently in high demand such as washable masks.

The company acquired accessories company Pura Vida in 2019, which further strengthened its online sales. Overall, the American bag and luggage company, despite slipping on the revenue front, is poised for stronger growth with investment in Vera Bradley’s e-commerce site and infrastructure.

Is Tapestry Stock A Buy? The Bottom Line

Tapestry has been aggressively taking steps to set its house in order, and recover quickly from the battering the luxury and apparel industry, in general, has taken from the pandemic.

The company’s top- and bottom-line numbers exceeded expectations in its latest quarter with both, revenue and earnings, coming above estimates.

For the fiscal quarter ending Dec 2020, the luxury retailer is expected to report $0.98 EPS, while the consensus revenue forecast for the quarter is 1.62 billion. All these will boost investors’ confidence by assuring them that the worst is over and the company is steadily moving on the road to recovery. 

CEO Joanne Crevoiserat highlighted two key areas that played an important part in the company’s recovery. The first was an incredible triple-digit growth on the company’s digital channels, which made up one-fourth of the company’s total revenue. Also, operating margins are higher in case of online sales.

Another important aiding in its rebound was the company’s efficient marketing strategies in its largest market, China. For example, Coach was ranked as the No. 1 handbag brand on Tmall, a Chinese e-commerce website operated by Alibaba Group Holding.

The company has been taking concrete action to cut expenses and improve its operating margin to allay the impact of Covid-19. It has reduced its expenses by trimming its global corporate headcount across its brands.

The luxury accessories retailer, in order to streamline costs, has also been reducing cash compensation for the directors as well as corporate employees above a certain pay threshold. The company is also taking the help of technology to expand its digital capabilities as well as offer a safe shopping experience such as “virtual queues” in certain North American stores to its customers. 

Tapestry has announced plans to reduce Capex (capital expenditure) by at least $100 million in fiscal 2021.

It plans to either delay or altogether cancel opening of new stores, while prioritizing investment in high-return projects, notably in digital. Tapestry’s decision to suspend dividends and share buyback program is expected to save the company around $700 million annually. The company’s gross margin, as mentioned above, expanded on a year-over-year basis, while inventory declined in comparison to the same period last year. More importantly, the company can boast of a solid balance sheet, having ended the year with an impressive cash balance of approximately $1.4 billion.

Moreover, the company’s stock is trading at a low valuation with significant upside potential. To put it in perspective, Tapestry’s stock is trading at a price that is still lower than what it was at the beginning of 2019 and at the start of 2018.

All in all, Tapestry, with a strong brand recognition, a heathy balance sheet and unwavering focus on tapping into global digital opportunity for all its three brands, is a consumer discretionary stock that should be worthy of your investment.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.