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Tapestry Inc TPR

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Morningstar’s Analysis

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We Think Tapestry is Undervalued as it Has Competitive Strengths in Very Profitable Categories

David Swartz Equity Analyst

Analyst Note

| David Swartz |

We believe a series of self-inflicted wounds and the coronavirus have created an opportunity to invest in Tapestry at an attractive price, as it trades well below our fair value estimate of $37.50 per share. We assign a narrow moat rating to the company based on the brand intangible asset of Coach, which we forecast will provide most of its operating income for the next decade and record 72% gross margins, on par with those of luxury firms. Tapestry has problems, including management turnover and disappointing results from Kate Spade and Stuart Weitzman, but it also has strengths, such as its exposure to the high-margin handbag space, which accounted for 53% and 56% of sales for Coach and Kate Spade, respectively, in fiscal 2020. Due to its pricing power and exposure to this category, we believe the Coach brand can achieve sustainable operating margins above 27%. Another advantage for Tapestry is its position in China, the world’s fastest-growing luxury market, and other parts of Asia. Despite the pandemic, the region accounted for $1.6 billion in sales (32% of its total) last year, and, by the end of the decade, we expect it will generate $2.8 billion (38% of total) in annual sales.

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Company Profile

Business Description

Coach, Kate Spade, and Stuart Weitzman are the fashion and accessory brands that comprise Tapestry. The firm’s products are sold through about 1,500 company-operated stores, wholesale channels, and e-commerce in North America (62% of fiscal 2020 sales), Europe, Asia (32% of fiscal 2020 sales), and elsewhere. Coach (71% of fiscal 2020 sales) is best known for affordable luxury leather products. Kate Spade (23% of fiscal 2020 sales) is known for colorful patterns and graphics. Women’s handbags and accessories produced 68% of Tapestry's sales in fiscal 2020. Stuart Weitzman, Tapestry's smallest brand, generates nearly all (98%) of its revenue from women’s footwear.

10 Hudson Yards
New York, NY, 10001
T +1 212 946-8400
Sector Consumer Cyclical
Industry Luxury Goods
Most Recent Earnings Sep 30, 2020
Fiscal Year End Jun 27, 2021
Stock Type Cyclical
Employees 17,300