Tapestry Earnings: Coach’s Brand Strength Endures Despite Tough Environment; Shares Undervalued
Overcoming slowing consumer spending in North America, sales outperformance by Coach allowed Tapestry TPR to surpass expectations in its (March-ended) fiscal 2023 third quarter. Reflecting this result, the firm lifted its full-year EPS guidance from a range of $3.70-$3.75 to $3.85-$3.90. We expect to lift our EPS forecast (currently at $3.71) to be closer to this range, which should boost our $55 fair value estimate by a low-single-digit percentage. Although Tapestry’s shares jumped by a high-single-digit percentage on the report, we still view them as significantly undervalued. While there are near-term concerns about economic weakness in North America and the pace of the economic recovery in China, we think Coach’s brand value, the source of our narrow moat rating, provides Tapestry with a competitive edge.
Tapestry posted 5% (9% constant currency) sales growth against our flat estimate in the third quarter, fueled by 7% (11% constant currency) sales growth from Coach (76% of the quarter’s sales). The brand benefited from the end of virus-related restrictions in China but also appears to be performing admirably in North America, where we think it is outperforming peer brands. Tapestry has raised Coach’s average unit retail prices by 30% over the past three years, which we attribute to the brand’s popularity and solid demand for handbags (over 50% of Coach’s sales). Meanwhile, Tapestry’s smaller Kate Spade (20% of sales) and Stuart Weitzman (5% of sales) brands basically matched our estimates with a sales decline of 1% and growth of 7%, respectively.
Tapestry achieved gross and operating margins of 72.8% and 15%, respectively, beating our estimates by 270 and 250 basis points. The gross margin was bolstered by declining shipping costs and Coach’s performance. In the long run, we model Tapestry’s gross and operating margins at about 70% and 19%, respectively, with Coach accounting for more than 80% of its operating profit for at least the next decade.
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