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.