VALUATION HIGHLIGHTS

1. Coach constitutes 74% of the Trefis price estimate for Tapestry's stock.
2. Kate Spade constitutes 22% of the Trefis price estimate for Tapestry's stock.

WHAT HAS CHANGED?

1. Tapestry Tops Q1 Estimates

Tapestry reported strong fiscal 2025 Q1 results, outperforming expectations with revenue of $1.51 billion, in line with the previous year. The company achieved a record non-GAAP diluted EPS of $1.02 (up from $0.93 year-over-year) and a significant gross margin expansion of 280 basis points.

The Coach brand showed a 2% growth, while Kate Spade saw a 7% decline in the quarter. The company demonstrated strong international performance, particularly in Europe (+27%), despite a slight decrease in the Asia Pacific region (-2%) and North America (-1%).

Based on these results, Tapestry raised its fiscal 2025 outlook, expecting revenue of over $6.75 billion and EPS of $4.50 to $4.55.

Note: Tapestry's FY'24 ended on June 29, 2024. Q1 FY'25 refers to the quarter that ended on September 28, 2024

2. Capri -Tapestry Deal Blocked

US District Judge Jennifer Rochon granted the Federal Trade Commission's motion for a preliminary injunction to block the combination - mentioning that the deal could eliminate competition between Coach, Kate Spade, and Michael Kors, specifically in the market for "accessible luxury". Tapestry and Capri argued that the FTC's market definition of "accessible luxury" is not a relevant market and that the handbag retailers compete with hundreds of other handbag makers and new entrants all the time. Tapestry (TPR) plans to appeal the decision, consistent with its obligations under the merger agreement,

Tapestry announced the acquisition of Capri Holdings, formerly known as Michael Kors, in 2023. Tapestry plans to finance the $8.5 billion deal in debt, with its own net debt reported around $900 million, for a $9.4 billion pro forma net debt load. The Tapestry- Capri deal will create a huge portfolio of luxury brands as Tapestry's Coach, Kate Spade, and Stuart Weitzman brands will be combined with Capri's Versace, Jimmy Choo, and Michael Kors brands. The deal creates a pro forma $12 billion global luxury empire to create more diversified operations, brands, and geographical coverage. This comes as Tapestry's $6.7 billion revenue base is complemented by the $5.5 billion revenue base of Capri.

BUSINESS SUMMARY

Tapestry, Inc. is a leading New York-based house of modern luxury accessories and lifestyle brands. Tapestry owns the Coach, Kate Spade, and Stuart Weitzman brands. The Company's primary product offerings, manufactured by third-party suppliers, include women's and men's bags, small leather goods, footwear, ready-to-wear including outerwear, watches, weekend and travel accessories, scarves, eyewear, fragrance, jewelry, and other lifestyle products.

The Coach segment includes worldwide sales of Coach brand products to customers through Coach-operated stores, including the Internet, concession shop-in-shops, and sales to wholesale customers and independent third-party distributors. The Kate Spade segment includes worldwide sales primarily of Kate Spade New York brand products to customers through Kate Spade-operated stores, including the Internet, concession shop-in-shops, independent third-party distributors, and wholesale customers. The Stuart Weitzman segment includes worldwide sales of Stuart Weitzman brand products primarily to wholesale customers, numerous independent third-party distributors, and through Stuart Weitzman-operated stores, including the Internet.

KEY TRENDS

Demand for luxury goods is correlated with economic growth

Demand for luxury, and fashion goods can be an indicator of flourishing economies. It is observed that during boom times, consumers with higher incomes tend to consume more high-end goods like leather handbags, designer clothes, branded watches, etc. Luxury goods are cyclical and correlate with GDP in specific regions, often exaggerating the up-and-down swings in the economy. As the global economy recovers, we expect the luxury goods market to return to pre-recessionary growth levels of 7-8% per year.

Increasing demand for luxury goods in China and other emerging markets

Luxury consumption in China has seen double-digit growth in recent years as a result of rapid economic growth and rising standards of living. Despite weak macroeconomic conditions globally and a threat to China's economy from surging inflation, luxury goods sales continue to grow strong in China. It should also be noted that Coach has a more significant physical presence in China, which is expected to be the key beneficiary of China's reopening. China's luxury market is rapidly recovering from the pandemic with greater strength and resilience. It is expected to reach around $112 billion by 2025, or approximately 25% of the total global spending.

Emerging markets will see the highest growth in new openings of directly-operated stores in the coming years. Tapestry is aiming for expansion into areas where it feels it is under-penetrated, such as Greater China, South East Asia, and Europe.

Consumer shift to affordable luxury

Affordable luxury brands and private labels have held up solidly during the current market conditions, while luxury and premium end companies, including Louis Vuitton and Hermes, have all reported slowing sales. The luxury market has been hit by a renewed sense of consumer ethics, which has seen some consumers turning away from luxurious lifestyles to take on a "less is more" approach.

This trend was observed even before the economic downturn, with consumers shying away from luxury items, hinting that consumers may not return to buy luxury goods in the near future and may opt for more understated choices.