Omnichannel Investments And New Products Will Attract Gen Z Shoppers

Key Takeaways

• Investment in digital and omnichannel capabilities is boosting margins and attracting younger customers, driving revenue and profit growth.
  
• Focus on strong product innovation and expanded marketing enhances brand awareness and revenue potential in new and existing markets.
  
• Revenue declines in key markets and legal challenges on acquisitions could hinder growth, while inventory and supply chain issues pose additional risks to margins and cash flow.

Catalysts

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

• Tapestry's investment in digital channel capabilities and omnichannel experiences is paying off, with digital sales growing at a high single-digit pace. This channel is accretive to margins, suggesting future growth potential in revenue and net margins.
  
• The company is focused on acquiring new, younger customers, particularly Gen Z and millennials, who transact at higher average unit retail (AUR) prices. This strategy is likely to drive future increases in revenue and strengthen profit margins.
  
• Tapestry is maintaining strong profitability with a record first-quarter gross margin, partly due to an agile supply chain. Continued innovation and product excellence, particularly in core categories like handbags, present opportunities for both revenue growth and further margin expansion.
  
• The introduction and success of new product lines such as the New York family, along with existing strong performers like the Tabby family, suggest future revenue growth potential driven by product innovation and AUR gains.
  
• Tapestry has committed to increasing top-of-funnel marketing investments, which are expected to enhance brand awareness and desirability. This focus is anticipated to improve customer engagement and revenue growth, particularly in underpenetrated regions such as Europe.

Tapestry Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Tapestry's revenue will grow by 2.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.1% today to 16.0% in 3 years time.
• Analysts expect earnings to reach $1.1 billion (and earnings per share of $5.12) by about December 2027, up from $807.6 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 15.8x on those 2027 earnings, down from 18.4x today. This future PE is lower than the current PE for the US Luxury industry at 18.8x.
• Analysts expect the number of shares outstanding to decline by 1.25% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.59%, as per the Simply Wall St company report.

Tapestry Future Earnings Per Share Growth

Risks

• Revenue in Greater China declined by 5%, signaling potential challenges in a key market, which could pressure overall revenue growth if the Chinese market continues to underperform.
  
• The North American market saw a 1% revenue decline, partially due to anticipated wholesale decreases, indicating potential risks to overall revenue stability if this trend continues.
  
• The proposed acquisition of Capri is facing legal challenges, creating uncertainty around strategic expansion plans, which could impact revenue forecasts and capital expenditures.
  
• Although Kate Spade is making strategic changes, it experienced a revenue decline as expected, which could affect overall net margins and earnings if turnaround efforts do not succeed.
  
• Inventory levels increased by 9%, with ongoing supply chain navigation efforts; any disruption could lead to inventory management issues, impacting net margins and free cash flow.

Valuation

• The analysts have a consensus price target of $63.1 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 $75.0, and the most bearish reporting a price target of just $50.0.
• 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 $1.1 billion, and it would be trading on a PE ratio of 15.8x, assuming you use a discount rate of 8.6%.
• Given the current share price of $63.81, the analyst's price target of $63.1 is 1.1% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.