Digital Adoption And Rising Middle Class Will Open Luxury Markets

Key Takeaways

• High retention of younger customers and strong digital growth create a compounding effect on revenue and margin expansion beyond current market forecasts.
  
• Rapid global market expansion and disciplined capital allocation position Tapestry for superior long-term earnings growth and outsized shareholder returns.
  
• Heavy reliance on Coach, trade barriers, discounting, offline store focus, and digital competitors pose risks to growth, margins, and brand positioning.

Catalysts

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

• Analyst consensus recognizes the strong growth from Gen Z and millennial customer acquisition, but this is likely underestimated given Tapestry's ability to consistently generate high retention rates and repeat transactions from these cohorts, suggesting a flywheel effect that could deliver compounding revenue and higher lifetime value well above current market assumptions.
  
• While analysts broadly agree on gross margin expansion through higher average unit revenue and supply chain efficiencies, Tapestry's structurally higher direct-to-consumer mix and accelerating digital channel growth provide runway to drive operating margins toward industry-leading levels, further amplified as tariff mitigation and pricing power fully materialize.
  
• Rapid expansion in key international markets, especially Europe and Greater China, is unlocking exponential addressable market growth as rising middle class populations seek affordable luxury, which will drive outsized revenue growth and long-term earnings acceleration beyond what current guidance implies.
  
• Tapestry's omnichannel strategy-leveraging advanced data analytics, AI-driven personalization, and immersive retail experiences-positions its brands to outcompete peers in customer experience, resulting in superior customer retention, higher full-price selling, and improved net income.
  
• Active portfolio management and disciplined capital allocation, supported by robust free cash flow, enable Tapestry to pursue meaningful share repurchases and potential synergistic M&A, underpinning a long-term increase in earnings per share and greater shareholder value than currently reflected in the stock price.

Tapestry Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Tapestry compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Tapestry's revenue will grow by 2.2% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 2.6% today to 16.9% in 3 years time.
• The bullish analysts expect earnings to reach $1.3 billion (and earnings per share of $6.31) 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 bullish analyst cohort, the company would need to trade at a PE ratio of 35.9x on those 2028 earnings, down from 108.5x today. This future PE is greater than the current PE for the US Luxury industry at 19.4x.
• Analysts expect the number of shares outstanding to grow 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 8.82%, as per the Simply Wall St company report.

Tapestry Future Earnings Per Share Growth

Risks

• Rising tariffs and the abrupt end of de minimis exemptions on e-commerce imports are causing a significant margin headwind this year, and continued escalation in global trade barriers could further raise costs and depress operating margins and earnings over the long term.
  
• The core brand portfolio relies heavily on Coach for growth, while Kate Spade is amidst a multi-year turnaround with recent revenue declines, heightened investment requirements, and a substantial noncash impairment charge, indicating risk of prolonged underperformance for the overall company's revenue and profits.
  
• Systemic discounting and outlet expansion, even when positioned as "full price" product drops in nontraditional formats, may lead to brand dilution over time, weakening pricing power and resulting in lower gross margins in future years.
  
• The company's renewed focus on physical store expansion, particularly in North America, may not align with the long-term trend towards digital-first consumption, potentially creating higher fixed costs and pressure on net margins if consumer traffic shifts further online.
  
• Competitive pressures from new direct-to-consumer digital-first luxury brands and slower luxury market growth in China could reduce Tapestry's ability to sustain international expansion and top line growth, while softening demographic demand shifts may further limit revenue potential.

Valuation

• The assumed bullish price target for Tapestry is $139.0, which is the highest price target estimate amongst analysts. 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 bullish 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 $64.0.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $7.5 billion, earnings will come to $1.3 billion, and it would be trading on a PE ratio of 35.9x, assuming you use a discount rate of 8.8%.
  
• Given the current share price of $95.69, the bullish analyst price target of $139.0 is 31.2% 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.