Brand Building And Omnichannel Strategy Propel Revenue And Margin Growth

Key Takeaways

• Tapestry's strategy focuses on targeting younger demographics and expanding their customer base for future revenue growth, alongside significant growth in digital sales.
  
• Emphasizing high-margin products and effective cost management is expected to improve net margins and earnings, with strategic acquisitions aimed at driving long-term growth.
  
• Tapestry faces challenges including underperforming acquisitions, macroeconomic issues in China, intense competition in North America, brand revival efforts, and supply chain risks impacting its financial health.

Catalysts

Provides luxury accessories and branded lifestyle products in North America, Greater China, rest of Asia, and internationally.

• Tapestry's emphasis on brand building and creating emotional connections with consumers, specifically targeting younger demographics such as Gen Z and millennials, is expected to enhance brand loyalty and drive revenue growth. This approach, along with the acquisition of over 6.5 million new customers in North America, indicates a strategy to fuel future revenue growth through expanding the customer base.
  
• The company's focus on omnichannel experiences and digital sales, with digital sales more than tripling pre-pandemic levels and representing nearly 30% of revenue at accretive margins, suggests an operational strategy aimed at increasing revenue while also potentially improving net margins through higher margin digital sales.
  
• Tapestry's record gross margin delivery, the highest in over 15 years, along with its focus on product innovation and excellence, particularly evident in Coach's performance, is expected to impact earnings positively. Continued emphasis on high-margin products and effective cost management can lead to further net margin and earnings improvements.
  
• The proactive leadership changes and strategic hires, along with the emphasis on growth across its portfolio, including accelerating growth at Kate Spade and Stuart Weitzman, signal operational strategies aimed at reinvigorating brands that may have underperformed, impacting revenue and earnings positively through renewed brand momentum and efficiency.
  
• The planned acquisition of Capri and the subsequent integration plans indicate a strategic move expected to create value through synergies, enhancing Tapestry's brand portfolio, and driving long-term profitable growth. This could impact revenue and margins by expanding the company's market share and leveraging operational efficiencies.

Assumptions

• Analysts are assuming Tapestry's revenue will grow by 2.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.2% today to 16.8% in 3 years time.
• Analysts expect earnings to reach $1.2 billion (and earnings per share of $5.06) by about October 2027, up from $816.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.7x on those 2027 earnings, up from 12.5x today. This future PE is lower than the current PE for the US Luxury industry at 18.4x.
• Analysts expect the number of shares outstanding to grow by 0.76% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 9.02%, as per the Simply Wall St company report.

Risks

• Risks related to the disappointing decline and underperformance of Capri, recently acquired by Tapestry, which could affect the integration process and expected synergies, potentially impacting future earnings and cash flow.
  
• Macroeconomic headwinds in China affecting consumer spending, which could hinder revenue growth and market expansion efforts in the region, impacting Tapestry's overall revenue and net margins.
  
• Increasing competition in North America, where Tapestry’s brands, especially Coach, face intense competition that could affect their ability to grow or maintain market share, potentially impacting revenue and margins.
  
• Execution risks associated with reviving the Kate Spade brand, where despite efforts for a turnaround, top-line results were challenged, indicating potential ongoing challenges in achieving sustainable, profitable growth, affecting revenue and net margins.
  
• Potential supply chain disruptions, as hinted by navigating the Red Sea disruption with only modest impact, could pose a risk to inventory management and cost control, potentially affecting gross margins and profitability if not managed effectively.

Valuation

• The analysts have a consensus price target of $49.44 for Tapestry based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $60.0, and the most bearish reporting a price target of just $40.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $7.2 billion, earnings will come to $1.2 billion, and it would be trading on a PE ratio of 12.7x, assuming you use a discount rate of 9.0%.
• Given the current share price of $43.93, the analyst's price target of $49.44 is 11.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.