Tapestry Inc Fundamental Analysis
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Tapestry Inc
Last Updated: 04 Mar 2023
NYSE: TPR
GICS Sector: Consumer Cyclical
Sub-Industry: Luxury Goods
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Table of Contents
You can download a summary of Tapestry Inc's fundamental analysis in PDF here.
Management
CEO: Joanne Crevoiserat
Tenure: 2.4 years
The Tapestry Inc’s management team has an average tenure of 2.7 years. It is considered experienced.
Source of Revenue
Founded in 1941, Coach, Inc., the predecessor to Tapestry Inc, was incorporated in the state of Maryland in 2000. During fiscal 2015, the company acquired Stuart Weitzman Holdings LLC, a luxury women's footwear company. During fiscal 2018, the company acquired Kate Spade & Company, a lifestyle accessories and ready-to-wear company. Later in fiscal 2018, the company changed its name to Tapestry Inc.
Tapestry Inc provides luxury accessories and branded lifestyle products in the United States, Japan, Greater China, and internationally.
The company sells various women's accessories, including handbags, wallets, wristlets, cosmetic cases, and more. They also offer bag collections, small leather goods, footwear, watches, fragrances, sunglasses, and ready-to-wear for both men and women. Additionally, they provide women's footwear, seasonal lifestyle apparel collections, and cold weather accessories, as well as housewares and home accessories for kids and stationery and gifts.
Tapestry Inc operates in three segments: Coach, Kate Spade, and Stuart Weitzman.
Corporate, which is not a reportable segment, represents certain costs that are not directly attributable to a brand. These costs primarily include administrative and information systems expenses.
Coach
This segment includes global sales of Coach products to customers through Coach-operated stores, including e-commerce sites and concession shop-in-shops, and sales to wholesale customers and through independent third-party distributors.
Coach store count
The company has a wholesale business that accounts for about 10% of its total segment net sales, and they work with its partners to ensure a consistent product presentation. As of 2 July 2022, Coach sells its products in about 1,700 wholesale and distributor locations worldwide, and no single customer accounts for more than 10% of the segment’s total net sales.
Kate Spade
Kate Spade includes global sales primarily of Kate Spade New York brand products to customers through Kate Spade-operated stores, including e-commerce sites and concession shop-in-shops, sales to wholesale customers and through independent third-party distributors.
Kate Spade store count
As of 2 July 2022, Kate Spade's products are sold in about 1,000 wholesale and distributor locations, mainly in the U.S., Canada, and Europe. The wholesale business for Kate Spade makes up around 11% of the segment’s total sales, and no single customer accounts for more than 10% of the segment’s total net sales.
Stuart Weitzman
Stuart Weitzman includes global sales of Stuart Weitzman brand products primarily through Stuart Weitzman-operated stores, sales to wholesale customers, e-commerce sites and independent third-party distributors.
Stuart Weitzman store count
Stuart Weitzman products are sold primarily through around 900 wholesale and distributor locations worldwide, including multi-brand boutiques. As of 2 July 2022, the wholesale business for Stuart Weitzman accounts for approximately 34% of the segment’s total sales, and no single customer accounts for more than 10% of their sales.
Additionally, Tapestry Inc licenses rights to market and distribute its tech and soft accessories, jewellery, watches, eyewear, and fragrances under the Coach brand. Tapestry Inc also licenses tableware and housewares, fashion beddings, tech accessories, watches, sleepwear, eyewear, stationery and gifts, and fragrances under the Kate Spade brand.
Products made under license are, in most cases, sold through stores and wholesale channels and, with the company's approval, the licensees have the right to distribute products selectively through other venues. The company licensing partners generally pay royalties on their net sales. Such royalties currently comprise approximately 1% of Tapestry Inc's total net sales. The licensing agreements generally give its brands the right to terminate the license if specified sales targets are not achieved.
Tapestry Inc Reportable Segment Revenue FY2022
Tapestry Inc Economic Moat
Tapestry Inc Economic Moat
Economic Moat: Narrow
There are many ways to identify Tapestry Inc’s economic moat, but I focus on the above 5 types. The rating is purely subjective and based on my in-depth understanding and analysis of Tapestry Inc. Please check my summary to understand more about the economic moat.
Performance Checklist
Is Tapestry Inc’s revenue growing YoY for the past 5 years consistently? Inconsistent.
Is the net income growing YoY for the past 5 years consistently? No.
Is the cash flow from operating activities growing YoY for the past 5 years consistently? Inconsistent.
Is the free cash flow positive for the past 5 years? Yes.
Is the gross margin % consistent/ growing for the past 5 years? Inconsistent.
Is the EPS growing for the past 5 years? Inconsistent.
Tapestry Inc Revenue, Net Income, Operating Cash Flow, and FCF (USD Million)
Is the free cash flow per share growing for the past 5 years? Inconsistent.
Tapestry Inc FCF per Share
Management Effectiveness
Is Tapestry Inc’s ROE consistently at 12%-15% YoY for the past 5 years? Inconsistent.
Tapestry Inc Return on Equity
Is the ROIC consistently at 12%-15% YoY for the past 5 years? Inconsistent.
Tapestry Inc Return on Invested Capital vs Weighted Average Cost of Capital
The trendline for the number of shares outstanding is declining, which is something that an investor would be pleased to see.
Tapestry Inc Shares Outstanding (Million Shares)
Tapestry Inc Financial Health
Tapestry Inc Financial Health (USD Million)
Current Ratio: 1.9 (pass my requirement of >1.0)
Debt-to-EBITA: 2.6 (pass my requirement of <3.0)
Interest Coverage: 26.0 (pass my requirement of >3.0)
Debt Servicing Ratio: 0.1% (pass my requirement of <30.0%)
Dividend
Tapestry Inc Stock Performance
The following graph compares the cumulative total stockholder return (assuming reinvestment of dividends) of the company's common stock with the cumulative total return of the Standard & Poor's ("S&P") 500 Stock Index and the S&P 500 Apparel, Accessories & Luxury Goods Index over the five-fiscal year period ending July 2, 2022, the last day of Tapestry Inc’s most recent fiscal year. The graph assumes that $100 was invested on July 1, 2017, at the per share closing price in each of Tapestry Inc’s common stock, the S&P 500 Stock Index and the S&P 500 Apparel, Accessories & Luxury Goods Index, and that all dividends were reinvested. The stock performance shown in the graph is not intended to forecast or be indicative of future performance.
During fiscal 2022, the company moved to use the S&P 500 Apparel, Accessories & Luxury Goods Index.
Tapestry Inc Stock Performance
Tapestry Inc Valuation
Estimated intrinsic value: $50.39
Value is calculated using discounted cash flow method (taking into account their cash and debt) and scenario planning.
Average free cash flow used: USD$690M
Projected growth rate: 7% - 11%
Beta: 1.5
Discount rate: 9.1%
Date of calculation: 4 Mar 2023
Free cash flow used is a weighted average that is rounded to the nearest tens. In some instances, I used a more realistic number to represent the free cash flow.
Total debt and cash and short-term investments are last quarter figures that are rounded to the nearest tens. In some instances, I used more realistic numbers to represent them.
Tapestry Inc EV-to-EBITA vs its peers
Tapestry Inc Price-Earnings Ratio vs its peers
Tapestry Inc Historical Price-Earnings Ratio
Additional Resources
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My Top Concern
One of my concerns is how the economic conditions can affect Tapestry Inc’s business.
Tapestry Inc's financial performance is influenced by various macroeconomic factors that are beyond its control. For example, consumer confidence and spending levels, tax rates, levels of unemployment, and consumer credit availability can impact the demand for Tapestry Inc's products. In addition, raw material costs, fuel and energy costs, global factory production, supply chain operations, and the commercial real estate market can affect Tapestry Inc's cost structure and profitability.
The COVID-19 pandemic has had a severe impact on many of these macroeconomic factors, and Tapestry Inc's financial performance has not been immune to its effects. The pandemic has caused significant disruptions in global supply chains, reduced consumer confidence, and led to periods of high unemployment, making it more challenging for consumers to afford discretionary luxury items.
Furthermore, the demand for Tapestry Inc's products is also influenced by broader trends in the premium handbag, footwear, and accessories categories. During periods of economic recession or high unemployment, disposable income tends to be lower, and consumer purchases of discretionary luxury items tend to decline.
These unfavourable economic conditions, such as an economic recession, downturn, periods of inflation or uncertainty, could materially adversely affect Tapestry Inc’s financial condition and profitability.
Another concern, expanding on my point about the COVID-19 situation, is that the pandemic has caused significant disruptions to the company's global business operations, resulting in temporary closures of the majority of its directly operated stores globally. Although most of the stores have reopened, some locations have experienced temporary re-closures or operated under tighter restrictions.
The pandemic has also caused ongoing supply chain challenges, logistic constraints, the closure of certain third-party manufacturers and increased freight costs. The impact of the pandemic on the company's business will depend on future developments, which are highly uncertain and cannot be predicted. Several factors may continue to adversely impact the company's business, including disruptions in the supply chain, reduced consumer confidence and discretionary spending, reduced store and mall traffic, and increased costs for the shipment or delivery of products. All these factors may continue to have a material adverse impact on Tapestry Inc’s business.
Summary for Tapestry Inc
Tapestry’s economic moat primarily comes from its intangible brand asset. Although Tapestry owns three brands, Coach, Kate Spade New York, and Stuart Weitzman, I am going to focus solely on Coach as it is the only brand that help strengthens Tapestry’s economic moat.
Coach is considered the category leader in the mass premium handbag market in North America and other markets. Women see Coach as a prestige brand, making them willing to pay more for its bags despite the availability of competing products. Due to its brand's strength, Coach manages to charge higher prices in the affordable luxury part of the market. The brand achieves high gross margins and is estimated by Euromonitor to be the sixth-largest brand in terms of retail sales in the $44 billion handbag market in 2022.
Coach has a wholesale operation but became too reliant on outlets and discount-heavy stores. Since fiscal 2014, Coach has reduced wholesale distribution and closed stores to support the value of the brand. This restructuring stabilised the brand's gross margins and allowed for increased control over distribution and pricing, leading to reduced discounting. Coach's high gross margins reflect its brand intangible asset as consumers view its products as fashionable and high-quality, willing to pay extra for them in a crowded market.
Coach's brand strength outside North America is considered part of its economic moat due to its growing international sales in about 55 countries. Coach's international sales have grown from 28% in fiscal 2011 to 37% in fiscal 2022, with 64% of its stores located outside North America. The brand's recent international growth has mainly come from China.
I do not think that both Kate Spade and Stuart Weitzman contribute to Tapestry Inc's economic moat. Kate Spade lacks the pricing power and long-term popularity of Coach, and its previous management damaged the brand through frequent discounting and online flash sales. Similarly, Stuart Weitzman has significant fashion risk, limited scale, and high production costs, which lead to low gross margins. While Tapestry is implementing turnaround plans for both brands, they still need to show more progress before being considered part of Tapestry Inc's moat.
Overall, I also do not think Tapestry has any other source of economic moat except for its brand. Its high profits are due to its good pricing, not low costs. Coach does not have an advantage in producing its products because it outsources them to factories just like other companies. The company also does not have any special advantage in getting high-quality leather. Henceforth, I will only assign a narrow economic moat for Tapestry.
Tapestry Inc has experienced inconsistent revenue and operating cash flow over the past 5 years. Furthermore, the COVID-19 pandemic caused a significant decline in net income, leading to negative territory in 2020. Despite this, the company has maintained positive free cash flow over the past 5 years. While the gross margin is above the industry average, it has also been inconsistent. These mixed results suggest that Tapestry Inc has had some success in managing its finances but has faced challenges in achieving consistent growth and profitability in recent years.
Tapestry Inc's management effectiveness can be measured by its ROE and ROIC. Although ROE has been inconsistent over the past 5 years, it is twice as high as the industry average. Similarly, ROIC has also been inconsistent but is twice as high as its weighted average cost of capital. However, in 2020, both ROE and ROIC turned negative due to the impact of the COVID-19 pandemic on the company's operations, resulting in most of its shops being closed. Overall, Tapestry Inc has demonstrated relatively strong management effectiveness but still required monitoring.
Tapestry Inc's financial health is reflected in its impressive balance sheet, which has passed all four requirements for a healthy balance sheet. The current ratio is above the industry average, indicating that the company has enough current assets to cover its current liabilities. Its net debt-to-equity ratio is also considered satisfactory, which suggests that the company has a manageable level of debt. Additionally, the company's debt-to-equity ratio has been reduced by more than 20% over the past 5 years. Other financial ratios also indicate that the company's debt is well covered by operating cash flow and interest payments are well covered by earnings. All these factors demonstrate that Tapestry Inc is in good financial health.
Investing in Tapestry Inc can be quite uncertain, given its narrow economic moat, unpredictable performance, and mixed management effectiveness. To mitigate this uncertainty, it's prudent to have a wide margin of safety of 40%. With an estimated intrinsic value of $50.39, this margin of safety would bring the price range down to $31.00. This approach allows for a significant cushion against any potential downside risk and provides a more impactful strategy for investors looking to invest in Tapestry Inc.
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