Rising Tariffs And Shifting Tastes Will Undercut Future Prospects

Key Takeaways

• Shifting consumer trends and digital-native competition threaten Tapestry's core brands with relevance challenges, rising customer acquisition costs, and weakened pricing power.
  
• Escalating trade, regulatory, and compliance pressures risk higher costs, margin compression, and reputational harm as stakeholder expectations intensify.
  
• Strong brand momentum, global diversification, and consumer-focused investments position Tapestry for sustainable profit growth and improved shareholder returns.

Catalysts

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

• The accelerating rise of conscious consumerism and anti-consumption behaviors among younger generations threatens to undermine Tapestry's strategy of targeting Gen Z and millennials, potentially resulting in stagnating customer acquisitions and slowing revenue growth even as marketing investments rise.
  
• Growing geopolitical instability and worsening trade protectionism have already triggered tariff shocks, including the abrupt elimination of de minimis exemptions; this is set to increase costs by $160 million for the year, compressing gross margins and directly eroding net earnings over the long term, particularly as trade relations remain unpredictable.
  
• Digital disruption is intensifying, with agile direct-to-consumer and social media-native competitors rapidly gaining market share, which could increasingly marginalize established brands like Coach and Kate Spade, weaken pricing power, and drive up customer acquisition costs, ultimately leading to shrinking margins and pressured profitability.
  
• Brand fatigue and declining cultural relevance for established labels such as Coach and Kate Spade remain an ever-present risk; even as Tapestry touts recent growth from brand heat, heritage labels face the danger of trending out of favor, leading to longer-term revenue and margin contraction as consumer preferences shift.
  
• Persistently high compliance costs and reputational risks from new regulatory scrutiny around supply chain sustainability and labor practices may substantially raise SG&A expenses, and failure to keep pace with stakeholder expectations could result in damaged brand equity, stricter sales restrictions, and additional financial penalties.

Tapestry Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Tapestry compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Tapestry's revenue will grow by 2.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 2.6% today to 17.5% in 3 years time.
• The bearish analysts expect earnings to reach $1.3 billion (and earnings per share of $6.8) by about August 2028, up from $183.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 13.7x on those 2028 earnings, down from 112.3x today. This future PE is lower than the current PE for the US Luxury industry at 19.9x.
• 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 8.86%, as per the Simply Wall St company report.

Tapestry Future Earnings Per Share Growth

Risks

• Tapestry is showing strong momentum with Coach, achieving double-digit revenue growth and significant customer acquisition, especially among Gen Z and millennials, which supports continued revenue and earnings growth over the long term.
  
• The company's direct-to-consumer and omnichannel strategy is driving both higher average unit retail and unit growth, boosting gross margins and providing sustainable profit expansion.
  
• International expansion, particularly in China and Europe, is yielding above-industry growth rates, providing Tapestry with geographic diversification and reducing its reliance on the U.S. while opening up further revenue opportunities.
  
• Management is proactively investing in digital marketing, store experiences, and consumer data analytics, leading to higher brand relevance and customer retention, which may translate into higher lifetime customer value and stronger top-line resilience.
  
• The company's disciplined capital allocation, robust free cash flow, ongoing share repurchases, and planned dividend increases reinforce financial stability and may support higher long-term total shareholder returns.

Valuation

• The assumed bearish price target for Tapestry is $84.57, which represents two standard deviations below the consensus price target of $114.56. This valuation is based on what can be assumed as the expectations of Tapestry's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $139.0, and the most bearish reporting a price target of just $66.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $7.6 billion, earnings will come to $1.3 billion, and it would be trading on a PE ratio of 13.7x, assuming you use a discount rate of 8.9%.
• Given the current share price of $98.87, the bearish analyst price target of $84.57 is 16.9% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.