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Tapestry's (TPR) Fundamentals, Valuation Make it a Solid Pick

Zacks Equity Research

Investors are likely to remain on the sidelines considering Tapestry, Inc.’s TPR sluggish run on the bourses. However, a closer introspection may change that perception. A meticulous analysis may reveal the reasons as to why it might be the right time to buy the stock.

Shares of this luxury accessories and lifestyle brands have fallen 9.4% in the past three months, compared with the industry’s decline of 18%. This might have just made valuations look attractive. Further, investors can’t ignore the stock’s Zacks Rank #2 (Buy) that is a testament to its sound fundamentals.

Stock Looks Well Poised

Tapestry looks quite disciplined in its approach of tackling prevailing headwinds in the retail landscape — soft store traffic, stiff competition from online retailers and aggressive pricing strategy. The company has undertaken transformational initiatives revolving around products, stores and marketing, which are likely to drive the top line. It also plans to undertake strategic measures involving, upgrading of core technology platforms and enhancement of international supply chain. These along with transformational initiatives are expected to enable the company to return to double-digit operating income and earnings per share growth in fiscal 2020.

The company’s long-term growth drivers include expansion of global distribution model, venturing into under-penetrated markets, enhancement of digital and data analytics capabilities and cost containment. Tapestry is undergoing a brand transformation and is introducing modern luxury concept stores in key markets. The acquisition of Stuart Weitzman and Kate Spade has been accretive to its performance and is being viewed as a significant step toward becoming a multi-brand company.

Going forward, management anticipates positive comparable-store sales at both Coach and Kate Spade, and enhanced profitability at Stuart Weitzman in the final quarter of fiscal 2019 as well as years ahead. Tapestry envisions fiscal 2019 sales growth at a low-to-mid-single-digit rate on a year-over-year basis.

Further, management has undertaken initiatives to have direct control over international distribution. The company concluded the buybacks of the Kate Spade operations in Singapore, Malaysia and Australia. It also completed the buyback of the Stuart Weitzman business in Southern China. The company also acquired the Stuart Weitzman business in Australia from its distribution partner. Such moves aid the company to directly operate these businesses, look for growth opportunities in international markets and enhance brand development.

 

Valuation Perspective

A brief glance at some valuation metrics seems to indicate that Tapestry has enough room to run in bourses. Further, the company’s Value Score of A indicates the same.

Tapestry with a price to book ratio of 2.5 compared with that of industry’s 3.4 indicates that the stock has enough upside potential. It also looks attractive with respect to a forward price-to-earnings multiple of 10.6x versus industry’s 13.8x. Over the last five years, the stock has traded as high as 22X and as low as 10.03X, with the median being at 17.04X.

Clearly, you can see from above that there are plenty of reasons to be optimistic about the stock going into the second-half of 2019.

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