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How Tapestry Could Deliver a Stock Price Recovery

- By Robert Stephens, CFA

Having fallen 35% in the last year, Tapestry Inc. (TPR) could now offer recovery potential. The owner of several fashion brands, which include Coach, Kate Spade and Stuart Weitzman, is implementing a refreshed strategy that focuses on innovation as well as greater investment in its digital capabilities.

The company will also seek to become more efficient, while investing in improving the customer experience. This could help to differentiate it from rivals at a time when there are concerns surrounding the growth potential of the Chinese economy.


Since the stock has a relatively low price-earnings ratio and an improving profit outlook, it could deliver a successful turnaround following its recent decline.

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Investing in growth

The company is seeking to improve its efficiency through harnessing the power of its multibrand model. It is aiming to record further synergies after making progress in this area in the most recent quarter; Tapestry is on track to achieve run-rate synergies from both cost of goods sold and selling, general and administrative expenses of up to $100 million in fiscal 2019, up from $45 million in 2018.

The company has made progress in building a scalable shared services model, while successfully deploying the first phase of its enterprise resource planning (ERP) implementation. This is set to streamline its organizational structure and lead to incremental efficiencies.

Investments in its stores included 40 net new stores across its various brands in the second quarter. Store openings have been focused on international markets, shifting to direct-to-consumer operations. This allows for greater control over the customer experience, as well as provides a higher level of execution in terms of the delivery of brand experience.

Improving strategy

Tapestry will also improve its digital offering, seeking to develop its omnichannel capabilities. Its data labs team is focused on strengthening and integrating its customer database platform, as well as supporting its customer relationship management programs. The company will also seek to utilize advanced analytics to optimize processes such as product allocation and promotion planning, as well as to improve business insights across its brands.

The company has also rolled out a new homepage design on its website, which has increased customer engagement levels. It offers enhanced personalization functionality through product recommendations, which is driving improved conversion rates.

Tapestry's increasing focus on innovation could allow it to differentiate itself to a greater extent from industry peers. Key to this is a flexible supply chain, which allows the company to innovate with greater frequency. It also offers customers greater scope for customization, which now includes footwear and outerwear in addition to leather goods. Customization is expected to boost engagement among younger customers, who have reacted positively to the wider variety of personalization options.

Risks

Slowing retail sales growth in China could act as a headwind on Tapestry's growth prospects. The country's retail sales growth slowed to its lowest level in 15 years in the final quarter of 2018, while factory output was its weakest in three years. In response, the government is reducing taxes, though it expects 2019 to be a challenging year. With the company seeking to expand its presence through opening new stores and investments in online initiatives, it may fail to have the level of impact on group sales that is currently being anticipated.

Tapestry remains optimistic about China's long-term prospects. It believes further investment in domestic markets such as China could be the most effective hedge against the volatility which occurs within the tourist market on a fairly regular basis. Its brands have been outperforming their peers in recent quarters, while the country's attempts to drive domestic demand could benefit the areas in which the company is investing for the long term.

Verdict

While Tapestry had a disappointing year, it could offer turnaround potential. The company is putting in place a sound strategy that includes increasing innovation and investing in its digital opportunities. Increased efficiency may also support improvements in its financial performance.

The price-earnings ratio of 13 indicates investors have factored in the potential risks posed by a slowing Chinese economy. With earnings per share forecast to rise 10% in fiscal 2020, the stock seems to offer growth at a reasonable price. Tapestry's wide range of brands, increasing competitive advantage and ability to differentiate itself from peers could lead to improving long-term growth.

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This article first appeared on GuruFocus.