Brand Investments Will Fortify Customer Engagement In Europe And Greater China

Key Takeaways

• Targeting Gen Z and millennials, alongside strategic brand investments, aims to boost long-term growth and customer retention through elevated revenues.
  
• Cost efficiencies and product line expansion intend to enhance gross margins and market share, supporting diversified growth across Tapestry's brand portfolio.
  
• Strategic challenges at Kate Spade and Stuart Weitzman, coupled with rising expenses, may hinder Tapestry's growth and earnings trajectory.

Catalysts

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

• Tapestry is focusing on acquiring new customers, particularly Gen Z and millennials, which should drive long-term revenue growth as these cohorts show high retention rates and higher average unit revenues (AUR).
  
• The company's emphasis on elevating its gross margin through higher AUR, combined with cost management and efficiencies in supply chain, is expected to expand net margins and drive earnings growth.
  
• Tapestry's brand-building investments, including increased marketing spend and strategic product innovation, are expected to fortify customer engagement and future revenue growth, particularly for under-exploited markets like Europe and Greater China.
  
• Expansion and refinement of product lines, such as the successful rollout of new handbag families like the Tabby and Brooklyn, aim to sustain high AUR and expand both market share and unit sales.
  
• Strategic steps to revitalize and refocus the Kate Spade and Stuart Weitzman brands are expected to unlock further growth potential, contributing positively to Tapestry's overall earnings and driving a diversified revenue stream across its brand portfolio.

Tapestry Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Tapestry's revenue will grow by 3.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.7% today to 16.4% in 3 years time.
• Analysts expect earnings to reach $1.2 billion (and earnings per share of $6.3) by about March 2028, up from $795.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.2x on those 2028 earnings, down from 19.5x today. This future PE is lower than the current PE for the US Luxury industry at 17.2x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.14%, as per the Simply Wall St company report.

Tapestry Future Earnings Per Share Growth

Risks

• The sluggish performance and strategic reset at Kate Spade, including declining revenue and the need for multiquarter recovery, may cause pressure on the top-line growth and weigh on shareholder value creation in the near term.
  
• Stuart Weitzman's declining sales, particularly in Greater China and North America, and a challenging wholesale environment could negatively affect overall revenue and dampen Tapestry’s earnings trajectory.
  
• The increasing SG&A expenses for marketing and brand investments, especially at Kate Spade, could compress operating margins if the associated revenue growth does not materialize as planned.
  
• Dependence on key product families like Tabby within Coach may present risks if consumer preferences shift or if failure to innovate results in brand fatigue, potentially impacting sales growth and gross margins.
  
• External economic factors, such as potential new tariffs on goods imported from China, though considered to have an immaterial impact, could still contribute to unforeseen cost increases affecting net margins.

Valuation

• The analysts have a consensus price target of $89.292 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 $110.0, and the most bearish reporting a price target of just $59.84.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $7.5 billion, earnings will come to $1.2 billion, and it would be trading on a PE ratio of 15.2x, assuming you use a discount rate of 8.1%.
  
• Given the current share price of $74.92, the analyst price target of $89.29 is 16.1% 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.