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September 01, 2020 1:41pm
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Is Tapestry a Buy After Beating Sales Estimates?

The high-end fashion company Tapestry (TPR) has gained significant momentum this year. Its shares have surged more than 8% in price on the company’s most recent reported results, which outpaced Wall Street’s expectations. Furthermore, the company has raised its fiscal 2022 sales outlook. However, given that supply chain issues and operational challenges persist, can the stock keep rallying? Read on.

New York City-based fashion retailer Tapestry, Inc. (TPR) provides luxury accessories and branded lifestyle products and operates through three segments: Coach; Kate Spade; and Stuart Weitzman. TPR shares have gained 58.8% in price over the past year and 45.4% year-to-date to close yesterday’s trading session at $45.84.

Despite supply chain challenges and other constraints created by the COVID-19 pandemic, the company reported robust customer engagement and brand demand. TRP also reported accelerated revenue trends compared to pre-pandemic levels, driven mainly by North America, China, and its digital platform. “We’re taking deliberate steps to accelerate inventory growth, and we feel comfortable in our inventory positioning to meet demand,” said TPR’s Chief financial officer Scott Roe.

The high-end retailer’s shares shot up more than 8% on November 11, after the company reported better-than-expected fiscal first-quarter earnings and revenues and raised its fiscal 2022 sales outlook. Its sales for the quarter came in at $1.48 billion, beating analysts’ expectations by 3.1%. Also, TPR reported quarterly earnings of $0.82 per share versus $0.70 per share consensus estimate. The company also hiked its outlook for the fiscal year. TPR now expects EPS in the range of $3.45 - $3.50, while its sales are expected to be $6.6 billion. In addition, TPR approved an incremental $1 billion share repurchase program, doubling the prior $500 million authorization. The decision demonstrates the company’s confidence in the strength of its underlying business and its ability to drive growth.

Here is what could shape TPR’s performance in the near term:

Highly Profitable

TPR’s 71.22% gross profit margin is 98.9% higher than the 35.82% industry average. Also, its net income and levered FCF margins of 13.70% and 15.26%, respectively, are 114.1% and 144.1% higher than the industry averages.

Moreover, TPR’s 29.20%, 10.35%, and 10.91% respective ROE, ROA, and ROT compare with the 7.29%, 6.25%, and 7.65% industry averages.

Solid Year-Over-Year Growth

TPR’s revenues increased 26.3% year-over-year to $1.48 billion in its fiscal first quarter, ended October 2. Coach generated most of TPR’s revenue, which came in at $1.11 billion, indicating a 27% increase year-over-year. Its operating income stood at $295 million, up 45.9% from the same period last year. And its adjusted net income grew 46.2% from its  year-ago value to $235.10 million, while adjusted EPS increased 41.4% year-over-year to $0.82.

Favorable Analysts Estimates

Analysts expect TPR’s revenues to increase 14.8% year-over-year to $6.60 billion in the current year. Its revenue is also expected to increase by 4.8% in the following year. Also, the company’s EPS is expected to rise 1.7% in the current quarter and 15.7% in the next quarter. The Street expects TPR’s EPS to come in at $3.53 in the current year, indicating an 18.9% rise from its year-ago value. TPR’s EPS is expected to grow 8.8% per annum over the next five years.

In addition, the company has an impressive earnings surprise history; it surpassed the Street’s EPS estimates in each of the trailing four quarters.

POWR Ratings Show Promise

TPR has an overall B rating, which translates to Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has an A grade for Quality, consistent with its higher-than-industry profit margins.

TPR has a B grade for Value. This is justified because its 13.11 forward P/E ratio is 24.9% lower than the 17.46 industry average.

Of the 63 stocks in the A-rated Fashion & Luxury industry, TPR is ranked #10.

Beyond what I have stated above, one can also view TPR’s grades for Sentiment, Growth, Momentum, and Stability here.

View the top-rated stocks in the Fashion & Luxury industry here.

Bottom Line

TPR has beaten Wall Street's fiscal first-quarter earnings and sales expectations, despite several operational challenges posed by the pandemic. Furthermore, the company’s management is confident in the company’s ability to meet demand and drive growth. Wall Street analysts see more than 20% upside potential in the stock. So, given TPR’s high-profit margins and favorable analyst expectations, we think the stock could be a quality addition to one’s portfolio now.

How Does Tapestry, Inc. (TPR) Stack Up Against its Peers?

TPR has an overall POWR Rating of B. However, one could also check out these other stocks within the Fashion & Luxury industry with an A (Strong Buy) rating: Genesco Inc. (GCO), Movado Group Inc. (MOV), and Hugo Boss AG (BOSSY).

TPR shares rose $0.10 (+0.22%) in premarket trading Friday. Year-to-date, TPR has gained 48.40%, versus a 26.87% rise in the benchmark S&P 500 index during the same period.

About the Author: Subhasree Kar

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.


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