Kate Spade Addition To Result In Increased Revenues For Tapestry

Tapestry Inc. (NYSE:TPR), formerly known as Coach Inc., is set to report its second quarter results on February 6, wherein a rise in both revenues and earnings is expected. The addition of Kate Spade to the company’s business can be cited to be the main factor resulting in a rise in revenues by a third, aided by the increased sale of full-price items. The Coach brand should return to positive global and North American comps growth in Q2, after a tough first quarter. The gross margin, on the other hand, can remain pressured as a result of the costs associated with the integration of Kate Spade into Tapestry. While in the first quarter, Tapestry incurred integration costs of $188 million, the figure for the whole year is estimated to total $230 million. On the positive side, synergy savings from the merger are expected to come in at $30 to $35 million, which will help in improving the operating income.

We have a $49 price estimate for Tapestry (Coach Inc), which is higher than the current market price. The charts below have been made using our new, interactive platform. You can click here to modify the different drivers to see their impact on Tapestry’s EPS and price estimate.

Kate Spade Acquisition

• The acquisition of Kate Spade is expected to give a nice bump to Coach’s revenues in FY 2018, with a modest organic growth of low single digits to be boosted by $1.2 billion of revenues from the newly acquired company.
• Kate Spade has had great success with millennial customers, who have been the driving force behind the high growth rates the company has achieved.
• Approximately 60% of Kate Spade’s clientele are millennials, compared to just over 30% for Coach. Hence, this acquisition would give Coach access to a younger clientele.
• Furthermore, the brand has significant potential to grow internationally, where it does not have much of a presence. One key market identified has been Japan, the second largest handbag and accessory market in the world, where the brand is present currently but is underpenetrated. Growth opportunities also exist in markets such as China and Europe. Tapestry expects 20 to 25 net openings for Kate Spade in FY 2018.
• Tapestry will be curtailing the number of surprise sales and pulling back on its wholesale channel for the Kate Spade brand, similar to the steps it has taken for Coach.
• However, this good news is accompanied by the fact that operating margins of Tapestry are expected to be pressured as the company carries on with the integration.
• Revenue growth is projected to increase by 30%, while operating income growth is slated to come in at 22% to 25%.
• Elevated expenses will only be partially offset by savings from the merger, resulting in a 10% to 12% growth in the earnings.

Coach Brand Transformation And Elevation

• Tapestry has been working hard to transform its brand in recent years, in the wake of market share loss to Michael Kors and other rivals, who also employed the former’s strategy of selling luxury products at affordable prices.
• The company hired a new designer, Stuart Vevers, who introduced higher-end products, and undertook to remodel the stores into a new luxury format, with such stores noting especially strong growth.
• The retailer has also recruited Selena Gomez to be their new face, in order to appeal to the younger shoppers.
• Tapestry has also rationalized its department store distribution, taking its door count down by 25% to just over 750 by end of FY 2017 (year ended June 2017).
• Promotional events in the channel, in terms of days on sale, were also reduced by 35% in FY 2017, a strategy that the company expects to continue this year.

See our complete analysis for Tapestry here

Have more questions on Tapestry? See the links below:

• Consolidation Continues In The Luxury Retail Industry
• Kate Spade Integration Weighs On The Margins For Tapestry
• Why Are We Bullish On Coach Inc.?

See our complete analysis for Tapestry