Why Coach’s Success Remains Key To Tapestry’s Growth

Tapestry (NYSE: TPR) sells luxury accessories and lifestyle brands. The company has achieved steady growth in the last couple of years driven by rising comparable-store sales (comps) as well as e-commerce sales for its largest brand, Coach. While the company’s other brands have struggled, Coach’s importance to Tapestry has further increased over the years. Trefis highlights the importance of its Coach brand for Tapestry in an interactive dashboard. You can modify any of our key drivers to gauge the impact changes would have on Tapestry’s valuation.

Why Is Coach So Important To Tapestry?

#1 Coach Contributes Nearly 70% Of Tapestry’s Revenues

• Coach consistently contributes a majority of the company’s revenues, with an average revenue share of more than 80% in the last 4 years.
• The segment grew by 1.2% year-over-year in fiscal 2019 (ending June), contributing nearly $50 million to total incremental revenues.
• We expect the segment to remain the key growth driver for the company, and record $4.3 billion in revenues in FY’20.
• The growth is expected to be driven by strong international growth and increased usage across e-commerce platforms
• Moreover, the brand’s brick-and-mortar business is also expected to thrive, particularly in China, thanks to strong product offerings.

#2 Notably, the contribution of the biggest brands to the top line of Tapestry’s competitors is lower and ranges from 50% to 60%

• Data around trends in the contribution of their biggest brand to the top line of competitors Gap, L Brands, and Abercrombie & Fitch is available in our interactive dashboard.

#3 Coach Has Delivered Positive Comparable Sales Growth Over The Last Couple Of Years

• Coach has seen steady growth in the last few years, with the brand achieving positive comparable sale growth of 1.5% and 2% in FY’18 and FY’19 respectively
• On the other hand, Tapestry’s second-largest brand and latest acquisition, Kate Spade has actually weighed on the company’s performance with the brand delivering negative comparable sales growth of over 7% in the last couple of years.

#4 Coach Has Also Been Operating At A Higher Margin

• Coach’s three-year average operating margin was 17.5%, almost 25% more than that of Tapestry’s total operating margin of 14.2%
• Coach has consistently operated at a margin of over 15% while Tapestry’s margin declined to nearly 11% in 2018 before recovering to 13.5% in 2019. The primary reason for the decline in profitability was the one-time charges related to the integration and acquisition of Kate Spade.

#5 Finally, Average Revenue Per Store of Coach Is More Than 10% Higher Than The Consolidated Figure For Tapestry

• As of 2019, Coach was operating more than 985 stores, with an average per store revenue of $4.3 million
• On the other hand, Tapestry’s total store count stood at 1,540, generating average per store revenue of $3.9 million – almost 10% less than that of Coach’s.

Conclusion

• Coach is Tapestry’s largest brand – accounting for most of the company’s incremental revenue growth.
• With growth fundamentals remaining strong for the brand, particularly in China, we expect Coach to be pivotal to the company’s long-term revenue growth, profitability improvement and enhanced shareholder returns.
• Moreover, Tapestry has made huge investments on its e-commerce platform and Coach should continue to benefit from its development.
• Finally, Tapestry’s latest acquisition, Kate Spade, has clearly failed to generate the kind of success Tapestry had hoped to achieve after the acquisition – increasing the importance of the Coach brand to Tapestry’s long-term growth.

Starting with our forecast for Tapestry’s revenues as detailed above, we estimate the company’s adjusted EPS for full-year 2019 is to be around $2.35. Using this figure with our estimated forward P/E ratio of 12.3x, this works out to a price estimate of $29 for Tapestry’s stock, which is roughly 10% ahead of the current market price.

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