What To Expect From Tapestry In Q2

Tapestry Inc. (NYSE: TPR) has had a solid start to fiscal 2019 (year ending June 2019), as the company managed to grow both its revenue and adjusted earnings by nearly 7% and 14%, respectively, and we expect the company to sustain this growth momentum when it reports its Q2’19 results on February 7. We expect much of its growth to be driven by Coach and international expansion of Kate Spade. The robust Q1 performance was driven by better than expected sales at Coach as a result of enhanced digital efforts. In addition, a 21% improvement in Kate Spade – driven by new store openings and the consolidation of the China business – further fueled this growth. We expect these trends to continue for Tapestry in the current financial year, together with the lowering of the corporate tax rate, which should boost EPS. The company achieved its synergy guidance target (from the merger with Kate Spade) of $45 million in FY 2018, and anticipates synergies of $100 to $115 million in FY 2019. For FY 2019, Tapestry is projecting sales to increase by a mid-single-digit rate to $6.1 billion to $6.2 billion, including low single-digit growth at Coach and double-digit improvement at Kate Spade, and EPS to be in the range of $2.70 to $2.80.

We have a $57 price estimate for Tapestry, which is significantly higher than the current market price. The charts have been made using our new, interactive platform. You can click here for our interactive dashboard on Tapestry Inc.’s Performance In Q2 And FY 2019 to modify the different drivers to see their impact on Tapestry’s price estimate.

Factors That May Impact Performance

1. Problems at Stuart Weitzman: In Q3’18, the company reported that the brand was hit by supply chain issues in Spain. As a result, the segment continued to face slight disruption in Q1’19. The company noted that the brand’s supply chain in Spain was unable to handle “the level of complexity and new development.” Consequently, the company is in the process of adding infrastructure and capacity to support the brand and ensure quality on-time deliveries. We expect the segment to provide a decent near-term benefit with a return to growth projected in the second quarter of FY ’19, faster than previously expected. In addition, the company is also aiming to increase its offerings and expand internationally – with a focus on Chinese consumers, which should provide for decent medium term potential.

2. Pullback from Wholesale Channel and Flash Sales: Tapestry has been reducing 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, to ease the pressure on margins. While the company will continue to hold back on the discounting in FY 2019, easier comparisons and increased full-price sales should result in double-digit growth for the brand. We expect another decent quarter for Kate Spade aided by margin expansions.

3. Acquisition of Businesses: Tapestry took operational control of the Kate Spade joint venture from Mainland China, Hong Kong, Macau, and Taiwan, an area which has been generating strong results. This step would give Kate Spade an additional 50 stores. The success of Coach in the region gives the company an opportunity to leverage its relationship with suppliers and distributors for the Kate Spade brand. Further, the company also completed the buybacks of Kate Spade’s operations in Singapore, Malaysia, and Australia, as well as Stuart Weitzman’s business in Southern China. In addition, Tapestry acquired its Stuart Weitzman business from its distributor in Northern China in mid-February and completed the buyback of the Coach business in Australia and New Zealand from its distributor in early March. By controlling these businesses directly, TPR will be able to accelerate its international expansion.

4. New Initiatives: Tapestry launched its Coach Create platform in Q2’18, which has now been extended to over 250 stores, resulting in increased volume and traction by millennials. Moreover, the brand has its monogramming service in nearly half of its global direct retail fleets. The retailer has also recruited Selena Gomez to be the new face of the Coach brand in order to appeal to younger shoppers. The collaboration has also been extended to ready-to-wear, which was launched in the fall. These new initiatives should provide for decent near-term opportunities.

5. International Expansion: Tapestry is aiming for expansion into areas where it feels it is underpenetrated such as Greater China, South East Asia, and Europe. To this end, TPR expects to add 60 to 70 stores globally in FY 2019, including those that will be acquired in Australia, Malaysia, and Singapore.

6. Industry Growth: Tapestry estimates the men’s and women’s premium handbag and accessories market, which is now over $45 billion, grew at a high single-digit rate globally in the September quarter on an organic basis, similar to the June quarter. In U.S. dollars, the growth rate was also high single digits, although it was a slight deceleration from the prior period given the appreciation of the dollar. Moreover, the global men’s and women’s premium footwear (market size of roughly $30 billion) and the premium outerwear category ($12 billion) is also likely to have remained strong. Positive global macroeconomic factors – including strong consumer confidence, low unemployment and rising consumer spending – drove consumer demand, and in turn boosted Tapestry’s performance.

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