Buy, Sell, Or Hold Tapestry At $14?

After almost a 47% decline in Tapestry’s (NYSE: TPR) stock since the beginning of this year, we believe that Tapestry’s stock is likely oversold at the current price of $14 per share and it has a significant upside. Our belief stems from the fact that Tapestry’s stock is still 55% lower than it was at the beginning of 2019 and over 67% lower than it was at the start of 2018, a little over two years ago. Our dashboard ‘What Factors Drove -67% Change In Tapestry Stock Between 2017 And Now?‘ provides the key numbers behind our thinking, and we explain more below.

Some of the stock price decline over the last 2 years is justified by the roughly 19% fall seen in Tapestry’s net income margin from 13.2% in 2017 to 10.7% in 2019. This decline was exacerbated by a 3% increase in share count over the same time period. Despite this, Tapestry’s earnings per share basis grew by more than 5.2% mainly due to a 34.3% jump in the company’s revenues, which partially mitigated the fall in the company’s stock price. The primary reason for the jump in Tapestry’s revenue was the company’s acquisition of Kate Spade in 2017.

However, a sizable drop in Tapestry’s P/E multiple more than offset the rise in the company’s earnings. The company’s P/E multiple dropped from 20.4x at the end of 2017 to 12x by the end of 2019. Moreover, Tapestry’s P/E is down to about 6.4x now, given the volatility of the current situation. This reflects a 69% decrease in P/E multiple from December 2017 to March 2020. We believe there is a potential upside for Tapestry’s multiple when compared to levels seen over recent years – P/E of 23x at the end of 2018, and 20x as recent as in late 2017.

How Is Coronavirus Impacting Tapestry’s Stock?

The Coronavirus crisis has hit the apparel industry hard. The companies have had to temporarily shutter their stores and it remains unclear as to when they can open them again, as the pandemic continues to spread, particularly in Europe and the U.S., which are the largest markets for apparel companies. Moreover, people are just not going out to shop for luxury or even basic apparel. In addition to store closures, the company has suspended its quarterly cash dividend beginning in the fourth quarter and its share repurchase program. In its fiscal Q2 earnings (ending December), Tapestry anticipated a hit of $200-$250 million to its sales in the second half of 2020. However, the impact is likely to be much higher as the effect of the outbreak increases. Notably, the company derives a bulk of its revenues from the US, which has become the new epicenter of the outbreak, with the country recording the largest numbers of COVID-19 cases across the globe.

Although Tapestry’s revenues are likely to witness a steep fall in FY2020, the company has taken some strong measures in cutting costs that could help the company preserve its profits. Moreover, Tapestry has reopened its stores in Mainland China which is likely to mitigate the impact on the company’s top-line. If there are early signs of abatement of the crisis, the company’s stock could see a modest uptick.

Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

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