Company Reports

Coach’s high profitability allowed narrow-moat Tapestry to overcome subpar sales for each of its brands in its (March-ended) fiscal 2024 third quarter. The results were something of an afterthought following the news that the US Federal Trade Commission intends to block the firm’s proposed acquisition of no-moat Capri (see our April 23 note). Our assumption remains that Tapestry and Capri will prevail in court as there is little precedent for antitrust action in the apparel and accessories industry. We do not expect to make any material change to our $60 per share fair value estimate on Tapestry, which is based on a post-merger model. Shares are attractive at 50% upside to our valuation.

The US Federal Trade Commission is challenging narrow-moat Tapestry’s acquisition of no-moat Capri on antitrust concerns. In its complaint, the FTC cites the direct competition between Coach, Kate Spade, and Michael Kors in handbags. We had anticipated that this aspect of the merger would be a problem as these brands are among the largest in the affordable part of the luxury handbag market. In addition, the FTC has concerns regarding employment losses and lower wages in the apparel and accessories space and Tapestry’s possible pursuit of further acquisitions. In response, both Tapestry and Capri issued statements to dispute the FTC’s claims and affirm their intention to close the deal. Unfortunately, the FTC’s position seemingly leaves little room for negotiation, which likely means a long delay until a trial.

We believe Coach (74.5% of fiscal 2023 revenue) has the brand strength and pricing power to provide a narrow moat for Tapestry. The firm has turned Coach around through store closures, restrictions on discounting, and increased e-commerce, the last of which took off during the pandemic. The brand is a leader in the attractive handbag category and consistently generates gross margins above 70%. Further, we expect growth in complementary categories like footwear and fashion. We anticipate China to be a key growth region for Coach, as according to Bain, Chinese consumers will make up 38%-40% of worldwide luxury goods spending in 2030, up from 33% in 2019. We forecast Coach’s Greater China sales to reach $1.3 billion in fiscal 2033 (20% of sales), up from $897 million in fiscal 2023 (18% of sales).

Led by Coach, Tapestry’s sales and non-GAAP earnings surpassed our expectations in its (December-ended) fiscal 2024 second quarter. These results support our narrow moat rating on Tapestry, which is based on Coach’s brand value. Tapestry’s shares have rallied strongly over the past three months but remain well below our $60 fair value estimate, which we do not expect to change materially. As we anticipate the Capri acquisition will close in 2024 as planned, our valuation is based on a combined Tapestry and Capri model.

We believe Coach (74.5% of fiscal 2023 revenue) has the brand strength and pricing power to provide a narrow moat for Tapestry. The firm has turned Coach around through store closures, restrictions on discounting, and increased e-commerce, the last of which took off during the pandemic. The brand is a leader in the attractive handbag category and consistently generates gross margins above 70%. Further, we expect growth in complementary categories like footwear and fashion. We anticipate China to be a key growth region for Coach, as according to Bain, Chinese consumers will make up 38%-40% of worldwide luxury goods spending in 2030, up from 33% in 2019. We forecast Coach’s Greater China sales to reach $1.3 billion in fiscal 2033 (20% of sales), up from $897 million in fiscal 2023 (18% of sales).

Powered by Coach’s 3% sales growth, narrow-moat Tapestry’s fiscal (September-ended) 2024 first-quarter profitability eclipsed our expectations despite demand challenges for its smaller Kate Spade and Stuart Weitzman brands. Tapestry continues to work toward its acquisition of no-moat Capri for $57 per share, expected in calendar 2024. Although Tapestry’s shares have been very weak since the deal was announced in August (down by about 33%), we believe the acquisition price is a fair one and that the addition of Capri’s brands will bolster Tapestry’s standing in midprice handbags and luxury. We do not expect to make any change to our $60 fair value estimate, leaving Tapestry’s shares very attractive. Our valuation is based on a model that combines Tapestry and Capri as we expect the deal to close.

We think Tapestry has successfully restructured Coach (74.5% of its fiscal 2023 revenue) but needs to prove the value of Kate Spade and Stuart Weitzman. All three of Tapestry’s brands suffered sales and operating profit declines during the pandemic, but results have been improving rapidly as it implements its Acceleration Program strategy to cut costs and improve margins and as handbag pricing has risen.

Narrow-moat Tapestry’s results fell slightly short of our expectations in its June-ended fiscal 2023 fourth quarter, as its North America sales dropped 8%. In addition, the firm’s fiscal 2024 guidance for sales of nearly $6.9 billion and EPS of $4.10-$4.15 is shy of our preearnings-call respective estimates of $7.04 billion and $4.36. Tapestry’s report came one week after it announced that it will buy no-moat Capri, which reported a 10% decline in its quarterly sales, for $57 per share (see our previous notes). Despite an expected reduction in our fiscal 2024 estimates to incorporate Tapestry’s new guidance, we expect to lift our fair value estimate to about $60 from $57 as it is buying Capri at a discount to our valuation. We believe investors are underestimating the benefits of the deal and view Tapestry’s shares as attractive.

We view Capri's acquisition by Tapestry as an excellent result for Capri's shareholders given that the $57 per share deal price provides more than 50% upside from recent levels and is less than 10% shy of our $62 fair value estimate. We also think the deal makes strategic sense for Capri as we do not think it has a long-term competitive edge as a standalone company (hence our no-moat rating). Thus, as we expect the deal will close at the offered price, we intend to lower our fair value estimate on Capri to $57 per share.

We think Tapestry has successfully restructured Coach (74% of fiscal 2022 revenue) but needs to prove the value of Kate Spade and Stuart Weitzman. All three of Tapestry’s brands suffered sales and operating profit declines during the pandemic, but results have been improving rapidly as it implements its Acceleration Program strategy to cut costs and improve margins and as handbag pricing has risen.

Overcoming slowing consumer spending in North America, sales outperformance by Coach allowed Tapestry to surpass expectations in its (March-ended) fiscal 2023 third quarter. Reflecting this result, the firm lifted its full-year EPS guidance from a range of $3.70-$3.75 to $3.85-$3.90. We expect to lift our EPS forecast (currently at $3.71) to be closer to this range, which should boost our $55 fair value estimate by a low-single-digit percentage. Although Tapestry’s shares jumped by a high-single-digit percentage on the report, we still view them as significantly undervalued. While there are near-term concerns about economic weakness in North America and the pace of the economic recovery in China, we think Coach’s brand value, the source of our narrow moat rating, provides Tapestry with a competitive edge.

We think Tapestry has successfully restructured Coach (74% of fiscal 2022 revenue) but needs to prove the value of Kate Spade and Stuart Weitzman. All three of Tapestry’s brands suffered sales and operating profit declines during the pandemic, but results have been improving rapidly as it implements its Acceleration Program strategy to cut costs and improve margins and as handbag pricing has risen.

Despite a challenging period for its industry in North America and China, Tapestry delivered holiday results that were consistent with our expectations. Moreover, unlike no-moat Capri, it did not lower its outlook for the first half of calendar 2023. We do not expect to make any material change to our $54 fair value estimate on Tapestry's shares and view them as undervalued. Our narrow-moat rating on Tapestry is based on brand value of Coach, a view that is supported by recent price increases on its handbags that have been accepted by the market.

We think Tapestry has successfully restructured Coach (74% of fiscal 2022 revenue) but needs to prove the value of Kate Spade and Stuart Weitzman. All three of Tapestry’s brands suffered sales and operating profit declines during the pandemic, but results have been improving rapidly as it implements its Acceleration Program strategy to cut costs and improve margins and as handbag pricing has risen.

Boosted by higher average retail prices, Tapestry met our expectations in its (September-ended) fiscal 2023 first quarter. Although the firm slightly lowered guidance for the rest of the fiscal year due to the strong U.S. dollar, some impact on sales in North America from slower consumer spending, and ongoing virus-related restrictions in China, we think demand for accessories and luxury goods is holding up relatively well. We do not expect to make any material change to our $54 fair value estimate and view Tapestry as very undervalued. Our narrow moat rating on the company is based on the value of the Coach brand, which we think has helped it overcome the many challenges that have faced accessories and apparel firms over the last few quarters.

We think Tapestry has successfully restructured Coach (74% of fiscal 2022 revenue) but needs to prove the value of Kate Spade and Stuart Weitzman. All three of Tapestry’s brands suffered sales and operating profit declines during the pandemic, but results have been improving rapidly as it implements its three-year Acceleration Program strategy to cut costs and improve margins and as handbag pricing has risen.

Narrow-moat Tapestry largely met our expectations for its fiscal 2022 fourth quarter despite lockdowns in China, high shipping costs, concerns about soft consumer spending, and a stronger U.S. dollar. Although its initial guidance for fiscal 2023 of $6.9 billion in sales and $3.80-$3.90 in earnings per share is slightly below our estimates of $7 billion and $4.10, respectively, the difference is attributable to currency movement, not to any demand weakness. We expect to make no material change to our $53 fair value estimate and view Tapestry, trading at about 11 times trailing adjusted EPS, as very attractive. We think investors are overly concerned about near-term issues and overlooking the progress that the company has made in strengthening its brands.

We think Tapestry has successfully restructured Coach (74% of fiscal 2021 revenue) but needs to prove the value of Kate Spade and Stuart Weitzman. Due to the pandemic, all three of Tapestry’s brands suffered sales and operating profit declines in parts of the last two fiscal years, but results have been improving rapidly as it implements its three-year Acceleration Program strategy to cut costs and improve margins and as handbag pricing has risen.

Narrow-moat Tapestry exceeded our expectations for its March-ended fiscal 2022 third quarter as each of its brands recorded double-digit sales growth despite virus-related restrictions in China, low international tourism, and ongoing shipping woes. While the China situation and tariff costs will impact fourth-quarter results, we believe underlying demand for Coach and Kate Spade is healthy in key regions. Thus, we do not expect to make any material change to our $52 per share fair value estimate and view Tapestry as very attractive despite a low-teens percentage jump in its share price on the report. At its current price, Tapestry trades at less than 10 times expected fiscal 2022 EPS of about $3.45. We believe investors are overly concerned with the impacts of inflation, the war in Ukraine, and the lingering pandemic on consumer spending while overlooking the brand value in Coach and the strong recovery in handbag (Tapestry’s largest category) sales and pricing.

We think Tapestry has successfully restructured Coach (74% of fiscal 2021 revenue) but needs to prove the value of Kate Spade and Stuart Weitzman. Due to the pandemic, all three of Tapestry’s brands suffered sales and operating profit declines in parts of the last two fiscal years, but results have been improving rapidly as it implements its three-year Acceleration Program strategy to cut costs and improve margins.